UPDATE 1-Illinois budget with income tax revenue hole passes

Fri May 30, 2014 7:56pm EDT

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(Adds statements from governor, Senate president; in paragraphs 4-5, 9-10)

By Karl Plume

SPRINGFIELD, Ill. May 30 (Reuters) - The Illinois Senate gave final approval to the state's $35.7 billion fiscal 2015 budget on Friday, sending the governor a spending plan that offsets a big tax revenue hole with one-time measures.

Temporary income-tax rate increases, passed in 2011 in the midst of one of the state's budget pinches, are set to partially expire on Jan. 1, causing an estimated $2 billion revenue decline in the fiscal year that begins on July 1. The budget bills, which were passed by the Democratic-controlled House on Tuesday, keep most spending flat despite the projected revenue decline.

Governor Pat Quinn had proposed making the temporary tax rates permanent, but House Democrats could not muster enough votes to pass the extension, which Republicans in both chambers opposed. The House also refused to enact spending cuts to account for the revenue loss.

The Democratic governor said lawmakers sent him an "incomplete" budget that postpones tough decisions.

"I will work to minimize the impact of cuts in vital services while continuing to cut waste and maintain our hard-won fiscal gains," Quinn said in a statement.

The revenue decline will occur in the second half of fiscal 2015 as the personal income tax rate falls to 3.75 percent from 5 percent and the corporate rate drops to 5.25 percent from 7 percent.

Lawmakers said the budget is expected to add $2 billion to Illinois' big backlog of unpaid bills, while it would allow the governor to borrow up to $650 million from a variety of dedicated state funds to boost general fund cash flow. These kinds of one-time revenue measures have contributed to past downgrades of Illinois' bond ratings, which are at the lowest level among states.

The state has shrunk its bill pile to $4.17 billion as of last month from $5.3 billion in April 2013, according to the governor's budget office.

Senate President John Cullerton acknowledged that the budget will reverse fiscal progress Illinois has made in recent years and said lawmakers will have to revisit income tax rates.

"In order to return to this path of fiscal progress, we will have to bring revenues in line with our growing liabilities," Cullerton said in a statement. "While a vote on our tax rates has been deferred, rising costs and pressures will force the issue at a later date."

Ahead of the budget vote in the Democratic-controlled Senate, Republican senators held a news conference to push a resolution to prevent a post-November general election vote on making the income tax rates permanent.

"Lame-duck action is not something that needs to be occurring on very controversial and important issues," said Senate Republican leader Christine Radogno. "Those should be reserved for the regular session of the general assembly." (Additional reporting by Karen Pierog in Chicago; Editing by Matthew Lewis and Mohammad Zargham)

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