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State Government

Quinn proposes keeping 67 percent income-tax increase

CHICAGO – Illinois Gov. Pat Quinn proposed keeping an income-tax increase that expires at year end, to avoid making cuts in education.

The Democrat made the recommendation Wednesday as part of his fiscal 2015 budget, ending months of speculation about his plans for the 67 percent increase approved in 2011 and that would, if allowed to expire, leave a $2 billion hole.

"We cannot stand by and allow savage cuts to our education and to these critical services to unravel the progress that we have made over the last five years," Quinn said in a speech to a joint session of the General Assembly.

The proposal sets up an election-year fight over tax policy in the nation's lowest-rated state, which is saddled with a $100 billion pension shortfall and almost $5 billion in unpaid bills. No Republicans voted for the levy in 2011, and their party's governor nominee, private-equity executive Bruce Rauner, has said it should end, although he has not detailed where cuts would be made.

Even as states emerge from the recession in stronger economic condition and some project surpluses for the coming year, Illinois, the nation's fifth-most-populous state, is digging out of a hole created by years of pension underfunding. The state was ahead of only five others in tax revenue growth in the 12 months through June, according to the Bloomberg Economic Evaluation of States.

Debt sold by the state and its municipal issuers reflects the situation. It has returned 3.54 percent so far this year, according to S&P Dow Jones Indices. That compares with only 3.17 percent for the broader municipal market as investors prefer riskier debt to make greater gains.

While Quinn, 65, said his plan would include property-tax relief for homeowners in the budget that begins July 1, it faces uncertain prospects as all legislators are up for re-election in November. There are also competing proposals, including one from Democratic House Speaker Michael Madigan that would impose a higher levy on those earning more than $1 million.

The Civic Federation, a Chicago-based nonprofit that studies government finance, has called for extending the 5 percent personal income tax one more year and broadening the base by taxing retirement income.

When lawmakers faced a financial crisis in the 2010 election year, they waited until after Quinn's election to raise taxes. Democrats hold veto-proof majorities in both chambers.

Illinois has the nation's most underfunded pension system. It was the most populous of five states, including Kentucky, North Dakota, Oregon and Vermont, where pension- funding ratios fell at least 21 percentage points from 2007 to 2012, according to data compiled by Bloomberg.

While lawmakers approved a pension-repair bill Dec. 3 that would save the state $145 billion over the next 30 years, a coalition of unions has challenged the law's constitutionality in court.

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