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Governor Quinn Signs Income Tax Increase Into Law

By  Brian Day

Governor Quinn signed SB 2505 into law on Thursday, January 13 as P.A. 96-1496. The General Assembly had previously approved the tax and budget bill on Tuesday, January 11, 2011.

Below is information contained from the General Assembly Passes Income Tax Increase article posted 01/11/11.


The new tax and budget law increases State income taxes and contains a number of other provisions concerning State spending. Under the legislation, Illinois municipalities would not get a share of the increased tax rates through LGDF distributions. More troublesome, however, is that the legislation contains provisions that could interfere with the current levels of LGDF distributions.

SB 2505 House roll call.
SB 2505 Senate roll call.

Full index of SB 2505.

The following are the provisions that are most relevant to municipalities.

I. INCOME TAX INCREASE AND DISTRIBUTIONS

A. New Tax Rates:
The current income tax rates are 3% for individuals and 4.8% for corporations. The legislation includes a number of increased tax rates:
  • In 2011 - 2014, the individual tax rate increases from 3% to 5%; and the corporate rate increases from 4.8% to 7%:
  • In 2015 - 2024, the individual rate is 3.75%, and the corporate rate is 5.25; and
  • In 2025 and thereafter, the individual rate is 3.25%, and the corporate rate is 4.8%.

Legislative language for the personal income tax rates.
Legislative language for the corporate rates.

B. LGDF Distributions:
The legislation does not provide municipalities with any share of the increased taxes. Click here for an estimate of the amount of revenue that municipalities will lose as a result of not receiving a full 10% share of the income tax increase. The legislation does, however, seek to maintain the shared revenues at their current levels. The distributions to LGDF are as follows:

  • From February, 2011 through January, 2015, the distribution is 6% of the net revenue received from the 5% individual rate and 6.86% of the net revenue received from the 7% corporate rate;
  • From February, 2015 through January, 2025, the distribution is 8% of the net revenue received from the 3.75% individual rate and 9.14% of the net revenue received from the 5.25% corporate rate; and
  • From February 2025 and thereafter, the distribution is 9.23% of the net revenue received from the 3.25% individual rate and 10% of the net revenue received from the 4.8% corporate rate.

A potential problem is that this distribution scheme fails to account for a situation where the income tax rates could be reduced by State spending limits. The legislation attempts to maintain the status quo for LGDF distributions. It gives municipalities a lower distribution percentage of a higher tax rate in an effort to maintain the same level of funding. The legislation also provides for a mechanism for the tax rates to revert to current levels if the State overspends, but it does not provide for a mechanism to restore the LGDF distributions to their current levels. Therefore, if the tax rates fall due to the State's overspending, then municipalities will have a lower distribution percentage of a lower tax rate. For example, if the individual tax rate reverts to 3%, then instead of receiving 10% of the 3% rate (under the status quo), municipalities would receive only 6% of the 3% rate. In that case, municipalities will lose out on LGDF money.

Legislative language concerning LGDF deposits.

II. STATE SPENDING LIMITS

There are two provisions of the legislation that are aimed at curbing State spending.

A. State Spending Limit:
The legislation sets limits on the level of State funding. The spending limits for the State are:

  • For FY 2012, $36,818,000,000;
  • For FY 2013, $37,554,000,000;
  • For FY 2014, $38,305,000,000;
  • For FY 2015, $39,072,000,000; and
  • For FY 2016 and thereafter, there is no spending limit.

The Auditor General is required to make various spending reports and, if the State spending exceeds the limits, then the General Assembly or Governor may act to reduce State spending to the authorized spending level. If the General Assembly or Governor does not Act, then the income tax rates revert back to their present levels of 3% for individuals and 4.8% for corporations.

Potentially troubling for municipalities is the fact that the definition of "State spending" appears broad enough that it may include shared revenue to municipalities. The legislation caps State spending at specified dollar amounts. The definition of "State spending" could be broad enough to include the payments for State shared revenues through LGDF, sales tax collections, or MFT. If that is the case, if the State spends too much on other items, it may be prohibited from making the tax sharing distributions to municipalities.

Additionally, the legislation allows the Governor to declare a contingency reserve of moneys that would exceed the State spending limit for that year. If the definition of State spending includes State shared revenues, then, the Governor appears to be authorized to reduce or delay the amount of shared revenues to local government.

Legislative language for the state spending cap.

B. State Mandate Funding:
The legislation provides that, through FY2015, with respect to any statutory mandate that is not designated as being subject to appropriation, the Governor may reduce the amount of funds appropriated to "some or all of those statutory mandates" in an amount that he or she deems to be necessary to accommodate budgetary limitations while attempting to implement the mandates. The provision does not include a definition of "mandate".

A potential problem for municipalities is that this provision allows the Governor to reduce the amount of money appropriated by "statutory mandates". The legislation is silent as to what constitutes a "statutory mandate". If that term could be defined broadly enough to include State shared revenues, then it would appear that the Governor would have the power to unilaterally reduce the amount of money paid to local government.

Legislative language concerning statutory mandates.


III. NEW STATE INCOME TAX DEDICATED FUNDS
While the General Assembly was unable to find any additional money for municipalities from the increased taxes, it did create three additional funds that receive money from the new revenue. The legislation creates the Fund for the Advancement of Education and the Commitment to Human Services Fund as special funds in the State Treasury.

A. Education:
The Advancement of Education Fund is a special fund in the State Treasury, and any deposits in the Fund must be appropriated to provide financial assistance for educational programs. There are no directions or procedures set forth as to how or when this money is spent.

The fund receives its money from deposits of income tax collections. Beginning in 2015, the Fund receives 1/30 (3.333%) of the income tax proceeds. In 2025 and thereafter, the fund receives 1/26 (3.846%) of the income tax proceeds.

B. Human Services:
The Commitment to Human Services Fund is a special fund in the State Treasury. The moneys in the Fund must be appropriated to provide financial assistance for community-based human service providers and for State funded human service programs. Again, there are no directions or procedures set forth as to how or when this money is spent.

The fund receives its money from deposits of income tax collections. Beginning in 2015, the Fund receives 1/30 (3.333%) of the income tax proceeds. In 2025 and thereafter, the fund receives 1/26 (3.846%) of the income tax proceeds.

Legislative language concerning the new special funds.