(Adds reaction from Republican legislative leaders and credit rating analyst, budget numbers)
By Karl Plume
SPRINGFIELD, Ill., March 26 (Reuters) - In an effort to keep the state budget afloat, Illinois Governor Pat Quinn on Wednesday proposed making permanent a once-temporary hike in the state's income tax, a key issue in the 2014 gubernatorial election campaign,
Quinn, who is facing a tough re-election campaign against wealthy Republican venture capitalist Bruce Rauner, sought to soften the move to lock in the higher tax rate by also offering a property tax refund to homeowners and increasing the earned income tax credit for low-income workers.
"This comprehensive tax reform plan would maintain current income tax rates, allowing us to balance the budget, properly invest in education, and provide every Illinois homeowner with a guaranteed $500 property tax refund every year," the Democratic governor said in his budget address to the state legislature.
The tax increase, which took effect after Quinn signed the 67 percent hike in the personal income tax rate into law in 2011, is set to expire partially on Jan. 1, 2015, the halfway point of the state's upcoming fiscal year. Under the law, the rate is scheduled to drop from 5 percent to 3.75 percent, while a corporate tax rate increase will also fall to 5.25 percent from 7 percent.
Rauner released a statement blasting his opponent for backtracking on an earlier commitment to allow the tax hike to roll back.
"After five years of Pat Quinn's failed leadership, we have record tax hikes, outrageously high unemployment, massive cuts in education, and there's still a giant budget mess in Springfield," he said in the statement.
House Speaker Michael Madigan, a powerful Chicago Democrat, told Illinois Public Television that the governor showed political courage and that he will push for Quinn's tax proposal during the legislature's spring session, which ends May 31. He added that lawmakers have an opportunity to "improve" the state's overall tax code.
Madigan last week unveiled a proposed constitutional amendment that would subject millionaires in the state to a 3 percent income tax surcharge in an effort to raise $1 billion a year for schools. The move was seen by political observers as an effort to help Quinn's re-election campaign.
Quinn, in his speech, said he opposed taxing services and retirement income, but did not address Madigan's millionaires' tax plan.
Senate President and Chicago Democrat John Cullerton also threw his support behind making the tax hike permanent, adding that "draconian budget cuts to vital programs" would be unacceptable.
"In order to stay on this path of fiscal stability, we have to maintain the same level of revenue," he said in a statement.
The hikes in the state's personal and corporate tax rates have raised between $7.5 billion and nearly $8 billion a year, according to an August report by a legislative commission.
Republican legislative leaders took issue with the argument made by Quinn and other Democrats that funding for education and other vital problems would be drastically cut if the tax hike were to expire.
"The governor said time and time again that we are going to have all these cuts," Senate Republican Leader Christine Radogno told reporters. "They don't have to happen. There is significant wiggle room built into the numbers that they are portraying."
Quinn unveiled a $65.9 billion all-funds budget that includes $38.57 billion in general fund spending for the fiscal year that begins July 1, according to budget documents. The governor also released a five-year budget blueprint that forecasts a general funds surplus that would reach $757 million in fiscal 2019 and a decline in an unpaid bill backlog from $4.8 billion in fiscal 2014 to about $2.2 billion in fiscal 2019.
Wall Street credit ratings agencies, which have slapped Illinois with the lowest ratings among U.S. states, have been focusing on the partially expiring tax hikes and the impact of the lost revenue on the state's shaky financial position.
"It's obviously something that affects our view of the credit," said Moody's Investors Service analyst Ted Hampton. He added that while it was noteworthy that Quinn came out in favor of keeping the tax rate hike, it remains to be seen how and when the legislature may act.
Rating agencies welcomed the enactment in December of comprehensive pension reforms aimed at easing Illinois' estimated $100 billion pension funding shortfall. But they also are awaiting the outcome of five lawsuits challenging the constitutionality of the reforms. (Reporting by Karl Plume in Springfield; Additional reporting by Karen Pierog in Chicago; Editing by James Dalgleish, David Greising; G Crosse and Dan Grebler)