Leading Chicago business group proposes raising income taxes and taxing retirement income to fix Illinois’ finances

Feb. 06--A group of Chicago business leaders is calling for $8 billion in tax hikes and spending cuts and a revamped pension funding plan to fix Illinois' financial mess.

In a report issued about two weeks before Democrat Gov. J.B. Pritzker is set to unveil his first budget proposal, the Civic Committee of the Commercial Club of Chicago on Tuesday called for increasing the state's individual income tax rate to 5.95 percent from 4.95 percent and the corporate tax rate to 8 percent from 7 percent. The plan also calls for starting to tax both retirement income and some consumer services.

Meanwhile, the Civic Committee suggests requiring state employees to pay a larger share of their health insurance costs, creating a less generous retiree health insurance plan for new workers, and cutting an additional $1 billion from the $38 billion state budget.

The new governor didn't back the committee's major tax ideas during his campaign, and they'll be controversial at a time when Pritzker and lawmakers have talked about legalizing recreational marijuana and sports betting to raise more state money. Taxing retirement income has long been a third-rail issue in Springfield, and lawmakers just raised state incomes taxes less than two years ago. Instead, Pritzker has proposed changing the state's flat tax to a federal-style graduated system.

Still, Civic Committee members say their proposal could help restore confidence in Illinois and attract businesses and jobs to the state.

"The state has tremendous assets, and right now the narrative and the uncertainty around the fiscal issues is holding the state back," said Jay Henderson, a Civic Committee member who serves on the boards of Illinois Tool Works, Northern Trust Corp. and other companies. "And if we're able to solve for that issue, we think the assets of the state will grow and generate tremendous economic growth."

Also on Tuesday, bond ratings agency Moody's Investors Service in a report pointed to many of the same issues the Civic Committee highlights: "massive unfunded pension liabilities, chronic budget deficits causing bill payment delays, and subpar economic and demographic trends." It also says new money likely will be required to balance the budget.

The Civic Committee estimates taxing retirement income would bring in $1.9 billion in new revenue annually. Increasing the personal income tax by 1 percentage point would bring in $3.7 billion, and a corresponding increase in the corporate income tax rate would bring in $300 million. About $495 million of that new revenue would be offset by eliminating the state's estate tax and the franchise tax paid by corporations, which the report also recommends.

The state could bring in an additional $500 million in revenue by applying sales tax to consumer services, the report says, though it stops short of suggesting which services should be taxed. In the past, for example, observers have pointed out that Illinois taxes the oil purchased to put in a car but not the labor costs charged when a driver gets an oil change.

To try to soften the blow of a tax on retirement income, the Civic Committee proposes lessening the burden on retirees by increasing the income tax exemption for taxpayers 65 and older from $1,000 to $15,000.

Taken together, the tax proposals would increase Illinois' annual revenue by nearly $6 billion and are intended to put Illinois on more equal footing with other states, the report's authors say. In addition to using the new revenue to cover budget deficits and pension costs, the report calls for devoting $1.5 billion annually toward paying off the state's $7.8 billion backlog of bills over five years. An additional $1 billion annually would be funneled into a rainy day fund.

"We're all going to have to contribute," said Scott Santi, chairman and CEO of Illinois Tool Works. "There are sacrifices to be made."

Pritzker campaigned on shifting from the current flat tax structure required by the Illinois Constitution to a system in which higher earners would pay higher tax rates. But that change would require a constitutional amendment, which couldn't be approved by voters until November 2020. The Civic Committee focused its recommendations on changes that could be implemented immediately.

"Illinois will need years to dig out of the fiscal mess this administration inherited, and as we recover we must invest in critical areas like education so that our state can grow and thrive," Pritzker spokeswoman Jordan Abudayyeh said in a statement. "We appreciate the recommendations the Civic Committee is making as we begin this journey, and we will continue to listen to and work with all stakeholders as we move forward."

On the spending side, the committee's most concrete proposal for cutting costs is requiring state employees to pay more for their health insurance, which the report estimates would save the state $500 million annually. For example, the state could offer plans where workers pay no premiums but have higher out-of-pocket costs like deductibles and copays, or they could pay higher premiums to keep their current plans. This was a matter of serious contention between former Republican Gov. Bruce Rauner in his long contract dispute with unions.

Any large-scale changes to state employee health insurance would have to be negotiated with the unions that represent state workers. The state's largest contract, with the American Federation of State, County and Municipal Employees, went unsettled for years under Rauner, and it's unclear whether Pritzker, who was elected with strong union support, would push for such a change in contract negotiations.

The report also calls for revamping the plan for paying down the state's more than $130 billion in unfunded pension liabilities.

The so-called 2+2 Plan would require the state to raise its annual pension contributions, which currently total about $8.5 billion, by 2 percent per year -- compared with 3.3 percent on average under the current plan. The state would then dedicate an additional $2 billion to pensions each year until the plans are 90 percent funded in 2045. The remaining unfunded liability would be paid off over the following decade.

As for other spending cuts, which the report says should total $1 billion annually, the committee takes a pass on getting specific.

"We look to the legislature and the state leadership to identify the specifics," Henderson said.

dpetrella@chicagotribune.com

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