Thursday, January 27, 2011

Illinois Court Ruling Throws State's Financial Future Into Further Uncertainty

The state of Illlinois' efforts to close a multi-billion dollar budget deficit after raising state income taxes by two-thirds recently took a big hit yesterday after a state appellate court ruled that legislation funding a $31 billion dollar public works program was unconstitutional. The legislation in question enacted a series of tax and fee increases to fund a major public works program touted by Gov. Pat Quinn.The problem according to the court was that the original legislation dealt with the state's inheritance and generation-skipping tax but it was expanded to include more than one subject in violation of the state constitution's single subject requirement for all bills. The Sun-Times reports on Judge Patrick Quinn's unanimous opinion, who is no relation to Gov. Quinn:

In a stunning blow to Gov. Quinn’s administration, an Illinois appeals court Wednesday tossed out the $31 billion construction program passed in 2009 that has been a centerpiece of his job-creation efforts.

In so doing, the three-member appeals panel also invalidated video poker, partial state lottery privatization, higher liquor and sales taxes and other revenues that add up to $1.1 billion, money that was designed to support massive borrowing for the bricks-and-mortar program.

Quinn vowed an immediate appeal to the Illinois Supreme Court.

Reversing a lower court’s decision, the appeals court ruled unanimously that the General Assembly’s passage of the tax and fee hikes that underwrote the construction program violated the single-subject clause of the state Constitution. That clause says a bill can only deal with one specific issue, not a multitude of them.

The law in question “began as a five-page bill addressing the narrow subject of amending the Illinois estate and generation-skipping transfer tax. As enacted on July 13, 2009, [it] grew to 280 pages covering a variety of subjects,” wrote Justice Patrick J. Quinn, who is not related to the governor.

Within that sprawling package were the legalization of video poker, a partial privatization of the lottery, a boost in sales tax on candy, soft drinks and grooming products, an increase in taxes on wine, beer and hard liquor, and a hike in vehicle registration fees. It also contained a requirement that the University of Illinois conduct a study on the effect on families that purchase lottery tickets.

“In the present case, not all of the provisions of [the law] have a natural and logical connection to the single subject of revenue to the state. For example, we discern no natural and logical connection between the subject of revenue and the amendment to the University of Illinois Act to require the university to conduct a study on the effect on Illinois families of members of the family purchasing Illinois lottery tickets,” Justice Quinn wrote.
The lawsuit that triggered yesterday's ruling was brought by Chicago Blackhawks owner Rocky Wirtz and his family's liquor distributorship, which objected to the disproportionately higher tax on liquor
imposed by the new law. Wirtz is also a major investor in the company that owns the Sun-Times. Ironically, the Sun-Times endorsed Quinn's re-election as governor despite his tax and spend mentality. The story relates the potential impact on the state's precarious budget that already has bond holders uneasy:

So far, the state has borrowed $2.2 billion in construction funds that are linked to the threatened tax and fee hikes. The state has collected $425 million from the increases. If Wednesday’s ruling stands and the original money generators don’t get re-enacted, bond holders would have to be paid with dollars from the state’s deficit-riddled General Revenue Fund that now covers state government’s day-to-day operations, said Kelly Kraft, a spokeswoman for Quinn’s budget office.

If Wednesday’s decision is not overturned, Gov. Quinn will face an unexpectedly difficult and financially uncertain spring legislative session that many observers had expected to be relatively tame. Now, after passage of the politically unpopular income-tax hike, he could be faced with scaling back the construction plan or persuading re-enactment of the stricken tax and fee increases, borrowing and video poker that has been rejected by dozens of communities.

“For those who supported this most recent tax increase and then went home and heard from their constituents, what will your reaction be to another vote on fee and tax increases, which were part of the original capital proposal?” said Sen. Matt Murphy (R-Palatine), who said it is not a certainty that Republicans in a new Legislature will agree to the same framework as before on a construction package. “We’re in a different time.”

The prospect of having to go back to the Legislature and win backing again for billions of dollars in construction borrowing is further complicated by Gov. Quinn’s push for a separate $8.75 billion borrowing package he had intended to seek this spring to whittle down the state’s backlog of unpaid bills.
One has to wonder why the state would have recklessly gone on this tax, borrow and spend frenzy to fund such a large capital program when it already faced such difficulty in paying bills to fund basic state services. The state has faced huge criticism for its decision to hike income taxes by two-thirds, a move that has prompted the leaders of other states, including Indiana, to woo the state's businesses away. Gov. Quinn said at the time the income tax increase was necessary to assuage the state's bondholders because of the state's low credit rating that increased borrowing costs for the state.  Some wonder if states like Illinois and California will be forced into bankruptcy under the crush of their growing deficits and inability to repay debts.

I would point out Indiana has a similar single subject requirement for legislation in its state constitution, although the provision has been rarely enforced and legislation often encompasses a wide range of subjects. Indiana, interestingly, went bankrupt back in early 1800s after it borrowed heavily to construct a series of canals across the state. The growth of railroads made the canals a less viable form of transporting goods, leaving the state short of fees necessary to repay bondholders for the construction costs of the canals. Many new financial limitations were imposed when the state enacted a new constitution after that debacle limiting the ability of the state and local governments to incur debt. Loopholes in the interpretation of those provisions have allowed governmental entities to skirt most of those limitations.

1 comment:

Citizen Kane said...

As I read that article this morning, I couldn't decide whether I should patiently wait for a lawsuit that overturns at least one of the illegal laws enacted by Indiana (seems that there might be a few) or illegal maneuvers by the City of Indianapolis. Of course, in the end, we would pay for all of their financial machinations, either way.