Make No Small Plans: Governor’s Proposed 2008 Fiscal Year Budget

Gov. Rod Blagojevich’s proposed 2008 fiscal year budget would offer affordable, quality health insurance to all Illinois residents, reform our system for financing public education, and tackle Illinois’s looming pension indebtedness. The governor would pay for most of this by creating a new Gross Receipts Tax (GRT) on business projected to raise $6 billion in sustainable annual revenue. The governor’s health care proposal is described in, “Health Care for All: The Time is Now,” in this issue of POVERTY ACTION REPORT. The rest of his major initiatives are described here.

Education Reform
Governor Blagojevich’s proposed 2008 fiscal year budget includes $1.5 billion in additional state funding for preschool to 12th grade education. His overall plan calls for $10 billion in increased funding over the next four years. This funding would be derived from the proposed new GRT.

The governor’s proposed budget includes

• increasing the minimum per-pupil spending amount by $686 per student;

• full funding of “mandated categorical” programs including special education programs (the proposed budget includes $209 million to increase the reimbursement rates for special education teachers by nearly 65 percent, their first rate update in more than 20 years);
• $60 million to expand the state’s early childhood programs through the Preschool For All program and an additional $9 million to provide cost-of-living adjustments and other enhancements in this program;
•  $100 million to support various strategies to raise student success including after-school tutoring, professional development, improving curriculum and materials, and offering longer school days;
• $40 million to encourage quality teachers to go to or remain in hard-to-staff or underperforming schools;
• $10 million for a rural learning initiative that includes distance learning technology, tools to attract and retain teachers, and other resources;
• additional resources for the state’s textbook loan program to encourage books to be replaced on a six-year cycle; and
• funding to help districts convert from part-day to full-day kindergarten.
  

The governor’s proposed capital budget includes $1.5 billion for the school construction program, $150 million for the school maintenance program, and $30 million for a new early childhood expansion program as part of Preschool For All.

Pension Indebtedness
Illinois has the largest public employee pension indebtedness in the country, with an underfunded liability of $40 billion. This amount looms over the state budget process and threatens funding for all vital state services. The principal amount owed is so great that the state’s recent efforts to pay down its indebtedness have been offset by annual growth in the interest due. The governor’s proposal would attack this situation by making a substantial dent in the principal owed.

To do this, the governor would issue $16 billion in pension obligation bonds and lease the state lottery for an estimated $10 billion. If the governor’s proposals are approved by the General Assembly, the principal indebtedness on the pension would fall to approximately $15 million.

Gross Receipts Tax
The new GRT with which Governor Blagojevich proposes to finance his ambitious agenda is projected to net $6 billion annually. The GRT is a broad-based tax that would be imposed at each stage in the distribution chain for goods and services and would apply to every business in the state with Illinois sales in excess of $1 million annually, including service businesses. Because of its broad base, the GRT is set at a low rate compared to other taxes. The GRT rate would be 0.5 percent of total revenue on goods and 1.8 percent of total revenue from services. The corporate income tax would be repealed.

The governor’s primary justification for the GRT is that it is the fairest way to raise needed new revenue because it would impose taxes on the many large corporations that are doing business in Illinois and are now paying little or nothing in state taxes. Governor Blagojevich has steadfastly refused to support an increase in the state income or sales taxes; he contends that this would not be fair to the middle class.

There would be several exemptions to the GRT. In addition to small businesses with less than $1 million in annual Illinois sales, nonprofit organizations would be exempt. Retail food and drugs also would be exempt from the GRT.

Illinois would seek to maintain its competitive position vis-à-vis other states by exempting from the GRT any goods manufactured in Illinois for export to other states or countries and by imposing the GRT on imports from other states or countries.

Five other states already have GRTs. Ohio and Texas recently adopted GRTs. Washington State, Hawaii, and Delaware have had GRTs for decades.

In proposing the GRT, Governor Blagojevich has picked some powerful enemies. In addition to the Chamber of Commerce and manufacturers’ associations that typically oppose any increase in business taxes, powerful associations of professionals such as lawyers and accountants are expected to oppose the governor’s proposal fiercely.

For more information, contact Dan Lesser, danlesser@povertylaw.org.