Follow the Yellow Brick Road

House Speaker Michael "The Wizard of Oz" Madigan has spoken, and the Rod "The Wicked Witch" Blagojevich's Gross Receipts Tax is dead. Even if The Witch can't admit it yet.

The Wizard has also made it very clear that some sort of tax increase is headed out of the House, noting at various times recently that he doesn't think that a zero-growth budget is in the cards and that a tax increase seems inevitable.

So, where exactly are we headed? No one knows for certain what Madigan's thinking, except that he has announced that House Democrats will meet this Tuesday morning to discuss an "alternative tax plan."

Here are some things that could be on the table:

Corporate and Personal Income Tax Increase - $3.4 billion
The Civic Committee of the Commercial Club of Chicago (a big business group) has recommended an increase in both the personal income tax of 1% and corporate income tax rate by 1.6%, while the Center on Tax & Budget Accountability (largely union-backed) has recommended 2% and 3.2% respectively. These increases would generate $3.4 billion to $6.8 billion. Because a veto from the Governor is promised, House Republicans will have to be in on the deal, so if this is part of it, expect $3.4 billion.

Sales Tax on Personal & Entertainment Services - $1.7 billion
This is another area where there is common ground between The Civic Committee and CTBA, with the Civic Committee recommending a $2 billion expansion and CTBA a $2.2 billion. State Rep. Jay Hoffman has been kind enough to offer an exhaustive list of what would be taxed under HB 750. The Governor has taken special exception to the tax on hair cuts (insert Blagojevich joke here), without noting that every state around us also taxes haircuts. I expect some of the proposed service niches to be shelved for political reasons or due to the skill of their lobbyists. Just note, however, that businesses tend to offer less resistance to sales taxes because they are transparently paid by consumers, while the state allows the retailers to keep a significant portion of the tax. Municipal governments, too, get a piece of the action. Still, I'd expect this would be scaled back at the end of the day (taxes on haircuts and funerals), but I'm betting it could still bring in $1.7 billion.

Expand Gambling - $2 billion + $1 billion one-time
Legislation sponsored by State Rep. Lou Lang to create four additional Casino licenses, expand gambling slots at existing casinos, and allow slot machines in racetracks has already cleared the House Gaming Committee. Lang says the measure would bring in $3 billion the first year and $2 billion in additional years. The new casino licenses would go to Waukegan (Read: Senator Terry Link), the south suburbs (Read: Senator Emil Jones), O'Hare airport (Read: State Rep. Skip Saviano) and the City of Chicago (Read: Mayor Daley). Gambling is, as CapitolFax's Rich Miller puts it, "a tax on people who can't do math," while lawmakers who support it call it a "voluntary tax." While previous gambling proposals have often collapsed under their own weight, if Madigan puts it into legislation, it will pass. Senate President Emil Jones has wanted this for years, Senator Terry Link, who is credited for picking up two new seats for Democrats in Lake County, has wanted this for years, and Mayor Daley has wanted this for years. The problem for Madigan is that he doesn't want to leave our next Governor (Read: Lisa Madigan) with budget problems, and gambling revenues tend to flatten out pretty quickly, while the state budget grows with inflation. Gambling can and likely will be part of the mix, but it will never be the whole answer.

Closing Corporate Loopholes - $300 million
As Madigan noted during floor debate on the Gross Receipts Tax, he was one of 23 lawmakers that supported efforts by the Governor to close six corporate tax "loopholes" a couple years ago, to the tune of $300 million. Capitol regulars privately snickered of course, because there was little doubt if Madigan had been earnest about closing those loopholes, the bill would've gotten more than 23 votes. Madigan of course didn't want to be blamed by the Governor for standing in the way at the time, and two years later we see once again just what a chess master Madigan is. The fact that Madigan has resurrected the idea of closing loopholes now -- at a time when business groups can see their are much worse alternatives -- leads me to believe this will be part of the deal.

Alternative Minimum Tax - $400 to $500 million
Those looking to bring the governor on board are floating the idea of a Gross Receipts Tax on businesses that would be much more targeted than the Governor's proposal. How much revenue would be generated depends on where the cut-off is; the Governor has repeatedly blasted companies with more than $50 million in gross revenues that pay no taxes, so that seems like a likely target. House Majority Leader Barbara Flynn Currie pointed out in a speech to the Taxpayers' Federation of Illinois that corporations are only paying about $500 million less in corporate income taxes now than they were in 1980, so I'm using that number as the likely tab of an Alternative Minimum Tax.

I'm skeptical about the AMT for a few reasons. First, the Gross Receipts Tax by any other name is still a Gross Receipts Tax, and lawmakers who vote for it could still be nailed for voting for "Governor Blagojevich's Gross Receipts Tax." Secondly, it generates very little revenue compared to the political price, and lawmakers would still have to include expanded gambling, increased income tax, or expanded sales tax to make a dent on our budget woes, all three of which the Governor has previously said he'll veto. Third, Madigan mentioned during floor debate that taxing companies on gross receipts rather than reported income is a dramatic shift in tax policy, so he doesn't appear to keen on the idea.

And finally, the Illinois Constitution makes it clear (Article IX, Sections 2-3) that any form of a Gross Receipts Tax could be unconstitutional, and is certainly likely to be challenged. Section 2 requires corporate income taxes to be uniform, Section 3 prohibits a graduated corporate income tax rate and says that there can only be one form of income taxes on businesses. The GRT could be used to replace the corporate income tax, but any type of corporate income tax PLUS GRT/ATM appears to be prohibited.

Still, as long as its still floating around out there, I'll keep it alive for discussion.

3% Payroll Tax - $1 Billion
This idea has gotten very little attention, mainly because its tied to the Governor's "Illinois Covered" proposal. I think "Illinois Covered" is as dead as the GRT, and no lawmaker has yet to come out in support of a payroll tax of 3% on all businesses with 10 or more employees. Still, let's not forget it.

Sale/Lease of Lottery - $10 billion one-time, minus $650 - $1.2 billion per year
Next to the GRT, the plan to sell the lottery in exchange for more money for schools is probably the politically dumbest thing floated by the governor in the last year. Anyone involved in school funding debates over the last two decades knows that you don't put "lottery" and "education funding" in the same sentence. The idea got an ice cold reception from lawmakers on both sides of the aisle, as well as editorial boards.

The Gov has since retooled his idea slightly, calling for the one-time revenues generated from the sale/lease to go directly to a one-time reduction in state debt. That makes it politically more pallatable for budget hawks, but other problems remain. Chiefly, the Lottery currently generates $675 million a year for education, an amount that is expected to grow steadily to $1.2 billion over the next 20 years, so any sale of the Lottery creates a hole in the education budget that must be filled. In addition, GenTech, a client of Blagojevich fundraiser John Wyma, has already been identified as one of the companies most likely to bid on the lease -- and was even exempted from the GRT if it got the contract. Madigan is unlikely to hand such a windfall to a Blagojevich ally, so any measure allowing the sale/lease of the Lottery is likely to contain language similar to HB 1 that would prevent one of the Governor's campaign contributors from getting the contract.

A NOTE TO POSTERS: I'm sure lots of you are thinking that we are getting the cart before the horse when we talk about raising taxes before we talk about reducing spending. I hope to have a thorough outline of some of the spending proposals and cost-cutting proposals later this week, but given that this revenue discussion will be taking place tomorrow, I wanted to outline some of the things that will be on the table. Feel free to e-mail me with your cost-cutting or spending ideas.