The state of the State

By DIANE ROSS

Revenues: measured and found wanting

THE TAX pendulum may have swung to the left with California's Proposition 13, but it has swung back to the right in Illinois government with the national economy in recession and President Reagan proposing cuts in federal spending so he can allow federal tax relief.

With one quarter of its revenue coming from federal aid that Reagan has proposed be reduced in the federal budget, Illinois can't afford to tinker further with another quarter of its revenue — the sales tax. Gov. James R. Thompson is determined to balance yet another budget, but inflation will push expenditures up $600 million, and he says the recession will allow revenue to go up only $400 million.

Assuming his projections are correct, Thompson must jettison $200 million in expenditures — or salvage another $200 million in revenue — if he is to balance the budget again. With Reagan's proposed cuts on the horizon, Thompson had no choice but to ask the Illinois General Assembly to roll back tax relief in 1981.

A penny from heaven?
Thompson wants the General Assembly to postpone further sales tax relief on food and nonprescription drugs. That would prevent the loss of another $40 million in fiscal 1982 and keep the increase in revenue intact at $400 million.

Two years ago, the governor defeated the Democrats' plan to phase out the tax on a four-year schedule. With the help of Chicago Mayor Jane Byrne, Thompson proposed his own so-called "penny compromise" to cut one of the four cents each year the state could afford it. In 1979, the General Assembly cut the first penny; in 1980, the second. In 1981 . . .?

In fiscal 1980, this sales tax relief cost Illinois $35 million in lost revenue; in fiscal 1981, it's expected to quadruple to $140 million. If the General Assembly does not enact the third-penny cut, food and medicine sales tax relief will still cost Illinois $224 million, nearly seven times the original cost, in fiscal 1982. But if the legislature cuts the third penny, it may cost Illinois $266 million in lost revenue in fiscal 1982. If the General Assembly passes a third-penny cut, it's almost a sure bet that Thompson will veto it.

Mene mene tekel upharsin
Thompson also wants the General Assembly to roll back the third part of the four-stage sales tax relief on manufacturing machinery, which took effect January 1, 1981. That roll back would restore $140 million in revenue in fiscal 1982 — nearly three quarters of the additional $200 million Thompson needs to balance the budget. With this change, the increase in revenue for fiscal '82 would be $540 million.

This tax relief was a concession to business and was designed to thaw Illinois' frozen business climate. The General Assembly in 1978 granted manufacturers an exemption from the four-cent state sales tax on machinery used exclusively for manufacturing. The tax was to be phased out over four years, and the first stage began January 1, 1979, at a cost to state government revenue of $59 million in fiscal 1980.

The exemption warmed relations between the manufacturers and the then pro-labor General Assembly, but it did little to thaw Illinois' overall business climate. The manufacturers complained that the rules enforcing the law defined machinery so narrowly that the exemption had little effect. In a corrective measure passed in 1979, the General Assembly expanded the exemption by definition to encompass machinery used primarily, but not exclusively, for manufacturing. Thompson's Bureau of the Budget (BOB) first estimated the expanded machinery exemption would cost Illinois $67 million in lost revenue in fiscal 1981. But by the end of the first quarter, it was clear it would cost at least twice that. The BOB now estimates the cost at $156 million in fiscal 1981. Under those projections, the cost will climb to at least $272 million in fiscal 1982. But if the General Assembly rolls back the third phase, the cost could stop at $132 million.

The manufacturers, however, are still savoring their juicy tax break. And business, led by the powerful Illinois State Chamber of Commerce, may squeeze more concessions — exemptions, credits and deductions on the income tax — before it will concede to a rollback.

Thompson did not ask in February for a rollback of the second half of tax relief on agricultural machinery, scheduled to take effect September 1, 1980, But he may have to; he may need the restoration of revenue it could provide to balance the budget.

In 1980, the General Assembly granted farmers an exemption similar to the one for manufacturers. The four-cent state sales tax on new or used farm machinery costing $1,000 or more and on repair or replacement parts costing $1,000 or more is scheduled to be phased out over two years, beginning September 1, 1980. The BOB estimates the farmers' exemption will cost Illinois $16 million in lost revenue in fiscal 1981. Under BOB projections for fiscal 1982 are at least $43 million in lost tax revenue. But the farmers' tax break, like the manufacturers', may prove even more costly, which might prompt Thompson to ask for a rollback.

That would give farmers a pretty tough row to hoe. They settled for the sales tax exemption last year, when what they really wanted was another revision in the formula for assessing farmland for property taxes.

While the problem for the president and Congress is curtailing deficit spending in the federal budget, the problem for the governor and the General Assembly is to avoid any deficit.

And the major political decision to back a tax increase to generate new state revenue has not been made by anyone in state government and politics.

April 1981/Illinois Issues/2