- Illinois: Governor approves bond issue, objects to a gas tax increase, restores EDGE tax credit
- November 8, 2017 | Authors: Michelle Rood Gearity; David D. Ebersole; David M. Kall
- Law Firms: McDonald Hopkins LLC - Cleveland Office; McDonald Hopkins LLC - Columbus Office
It was just two months ago that Illinois passed a budget, the first new one in two years. As we described then, it included historic increases in personal income and corporate tax rates. Lawmakers overrode Governor Rauner’s veto and passed the budget into law, which was not enough to stem speculation that Illinois’s credit rating was veering dangerously close to junk status.
Earlier this month, the Illinois News Network reported that Standard & Poor’s “latest Illinois report removed the Land of Lincoln from a negative to a stable outlook” because of the budget and its $5 billion tax hike. But, with a credit rating of BBB -, “Illinois still has the lowest credit rating of all U.S. states.”
Despite these developments, the state’s backlog of unpaid bills remains a significant problem. In early September, Gov. Rauner announced a borrowing plan that would pay down these obligations, and “help fix Illinois’ budget,” which is still out-of-balance by more than $1 billion. To this end, Illinois will issue $6 billion in bonds; “[w]e're choosing to exercise borrowing authority because it's better to have Wall Street carry our debt than Main Street Illinois,” reasoned the governor.
Besides the size of the debt itself, the interest penalties, “at rates of up to 12 percent annually,” represent a significant portion of the backlog. Thus, a part of the budget package contained an amendment to the General Obligation Bond Act, authorizing the $6 billion bond sale by the end of this year, “for the purpose of paying vouchers incurred by the State prior to July 1, 2017.” The governor’s announcement explained that “[b]onds issued under this authority must be paid within 12 years from the date of the sale and require level principal payments each year. For example, a $6 billion issuance would require 12 annual principal payments of $500 million, plus interest payments depending on the interest rate.”
The announcement further explains that even though the budget contemplated the bond sale, it “did not account for the increase in debt service costs to cover the bill backlog bond issuance.” Accordingly, “[t]he governor's office is identifying several hundred million dollars in possible spending reductions to address this budgetary shortfall. [He] also would like the General Assembly to return to Springfield this fall to work with him to balance the budget and enact structural reforms that could save much more.”
A late August Reuters piece, titled “Why selling bonds to pay overdue bills could protect Illinois' credit rating,”asserts that the new bond issue could produce “net fiscal savings [that] Illinois can ill-afford to pass up given its weakened financial position, even if the additional debt service adds incrementally to its operating deficit.” Late payment penalties on existing debt are growing by $2 million per day. Even though S & P has stated that the plan will not help Illinois’ credit rating, the move may provide a small cushion.
Another solution being mulled over is a gas tax increase. A different Illinois News Network article observed that lawmakers may be in the mood for such a thing, citing a number of them that could get behind the idea. The governor is not one of them, having recently stated that he would rather borrow for infrastructure improvements. Likewise, Rep. Jeanne Ives does not like it; a gas tax increase would be another instance in which “Illinoisans feel like their pockets are being picked all the time. This is just another example. An idea of increasing the gas tax after you just increased the income tax when there's been zero reform on property taxes?"
Restoration tax credit
A less dire situation for the state is its Economic Development for a Growing Economy Tax Credit Program (EDGE), the website for which shows that the program was due to expire on April 30, 2017. However, thanks to HB162, which took effect on September 18, 2017, EDGE has now been extended through June 30, 2022.
EDGE offers special tax incentives designed to encourage companies to locate or expand their operations in Illinois. The tax credits are equal to the amount of state income taxes withheld from the salaries of employees in newly created jobs. Non-refundable credits can be used against corporate income taxes to be paid.
2. The location of the project;
3. The estimated value of the credit;
4. The number of new jobs and, if applicable, retained jobs pledged as a result of the project; and
5. Whether or not the project is located in an underserved area.
This last point is relevant because the tax credit is more generous for projects in underserved locations.
The governor’s press release quotes several lawmakers attesting to the EDGE program’s importance. Likewise, the director of the Illinois Department of Commerce and Economic Opportunity characterized it as a “critical local economic development too that incentivizes job creation, growth and competitiveness in the state.”However, not everyone is in love with the incentive program. Illinois Policy opined that “the big-picture results of this massive state investment have been dubious, as Illinois’ jobs growth has been poor even with EDGE in effect. Between June 2016 and June 2017, Illinois’ jobs growth was 40 percent slower than the national average and slower than all of Illinois’ neighboring states.” The group would prefer to see “pro-growth policies[,] such as workers’ compensation reform or comprehensive property tax reform. Signing agreements with select companies to hire and retain employees, one deal at a time, is no way to sustainably grow a state economy.”