The Reagan administration`s proposal to eliminate the federal deduction for state and local taxes could make it more difficult for Illinois and its municipalities to increase taxes themselves, government leaders say.
As state and municipal officials learned the details of the administration`s proposed tax code revision, they raised concerns that the plan would renew calls for lower local taxes while hampering some key industries that provide local revenue.
”This is an assault on local government” said Chicago Budget Director Sharon Gist Gilliam. ”People figure the local tax burden isn`t quite so bad because they turn around and deduct that if they itemize. The minute it is no longer deductible, it makes it that much harder to raise taxes on the local level.”
At the same time, she said, the Reagan administration is cutting funds for the nation`s cities, so cities are getting hit from two sides at once.
”They are taking the local dollars, shipping them to Washington and not redistributing the money to housing, social programs (and) the whole plethora of programs. And then they make it so we can`t raise it locally to fund those services. I have to wonder if Mr. Reagan is working toward the end of the cities,” she said.
The impact also raised concern in some suburbs, where property tax rates vary widely from town to town. ”People were concerned about property taxes before, but now they`re really going to holler when they can`t deduct them,” said Evanston Ald. Jack Korshak, a member of the city`s Economic Development Committee. ”But we`ve been frying fat out of our budget for the past 10 years. The only thing left to fry is some muscle.”
While the impact on local taxes was lamented by government officials, it was hailed by proponents of lower taxes.
”I`ve heard a member stand up on the floor of the (Illinois) House and argue that taxes could be raised because the federal government would pick up 50 percent of the cost (through the deductions),” said Douglas Whitley, executive director of the Taxpayers` Federation of Illinois. ”I think that excuse should be taken away from Illinois politicians.”
Whitley said he was not opposed to the lifting of the state and local tax deductions. ”If you want a broader-based system with a lower rate, as everybody seems to, you have to give up some of the deductions.”
The tax plan got generally high marks from Gov. James Thompson. ”There are some people who worry that the provision to not let us deduct state and local taxes anymore is going to cost the average Illinoisan. That is just not so,” Thompson said in a prepared statement. ”The President is going to increase the personal exemption, and I think that provision, together with lowering of the effective tax rate, puts Illinois citizens at an advantage.” Elsewhere, Iowa Gov. Terry E. Branstad, a Republican, said he was
”greatly concerned” that the President`s proposal to eliminate the deduction for state and local taxes would hurt the Midwest especially.
”I think that would be unwise,” he said. ”I`m concerned that it would favor states like Texas and Florida that don`t have any income tax over states in the industrial Midwest that have a high income tax.”
Still, Branstad said he generally supported the President`s plan. ”I think the idea to reduce the complication makes a lot of sense, and I like what it does for many (middle-class) families,” he said.
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Under the Reagan plan, the personal tax exemption would be raised from $1,080 for 1986 to $2,000 each for heads of households, spouses and dependents. The plan sparked some speculation that the Illinois legislature would similarly raise personal exemptions on state tax forms, but that likelihood was rejected by some state leaders.
Such a personal exemption increase on state taxes would cost the state about $500 million a year but provide only a small tax decrease for each taxpayer.
Nevertheless, the possibility of tax reform fever hitting the state had some local officials wary. ”The plan itself probably will not have any obvious impact. But you don`t know what the legislature is going to do with something like the state income tax,” said Niles Mayor Nicholas Blase. Municipalities receive a twelfth of the state tax collected by the state.
Officials in several of the wealthier Chicago suburbs said they don`t expect the closing of tax loopholes and deductions in the Reagan plan to hamper their development efforts. But the elimination of some deductions could have a more serious impact on businesses connected with Chicago`s convention and trade show industry, which provides tax revenues that are distributed statewide.
Eliminating business deductions for entertainment and other expenses could deal a ”devastating blow” to the convention industry in Chicago, said State Sen. Howard Carroll (D., Chicago), chairman of a Senate Appropriations Committee.
Some officials, including Thompson, also questioned proposals to end the tax-exempt status for certain industrial development bonds issued for housing and other nonpublic purposes.
But Robert Repke, first deputy corporation counsel in Chicago, said the broad nature of the measures could limit the blow.
”Since the impact will be on all municipalities equally, I wonder if Chicago will be particularly compromised since it (the industrial revenue bond) is a tool cities use to compete with one another,” he said.
Added John Lawlord, finance director of Naperville, ”I don`t know if it would have a significant impact on us. Some bonds may be a little less attractive (to buyers), but it does the same thing to other tax shelters. It`s a wash.”