Illinois tax increase: why lawmakers passed 66 percent income-tax hike

The Illinois legislature has passed personal income-tax increases of 66 percent and corporate income-tax in creases of 45 percent, designed to address a $15 billion state budget deficit that lawmakers said was leading the state into insolvency.

By the early hours of Wednesday, Senate and House lawmakers had voted to raise the personal income tax rate from 3 percent to 5 percent and the corporate tax rate from 4.8 percent to 7 percent. Both rates were adjusted to carry through until 2015, when they would drop to 3.25 percent and 5.25 percent, respectively.

The Illinois tax increase, which is waiting to be signed into law by Gov. Pat Quinn (D), who supports the package, would take effect retroactively Jan. 1. The package was passed without a single Republican vote in either chamber.

No other state has successfully raised income taxes to balance its 2011 budget, according to the National Conference of State Legislatures in Washington. Most states have turned to less politically risky measures to shore up state budgets, such as raising sales taxes for vending-machine purchases or delaying corporate-tax refunds for a year.

“No other state had to [raise taxes],” says Ralph Martire, executive director of the Center for Tax and budget Accountability, a bipartisan think tank in Chicago. He describes the scope of the tax increases as “transformational.”

But the financial crisis in Illinois is unusual. The state had no choice but to raise taxes, Mr. Martire says: Cutting spending was not a viable option because already, major cutbacks had been made and spending is at a historic low. Then there is the debt: The state already owes $8 billion to vendors, including social service agencies.

Also, Illinois is facing $77.8 billion in underfunded pension liabilities, according to the state’s Commission on Government Forecasting and Accountability. This makes it the largest underfunded pension system in the United States.

A more reasonable measure moving forward, Martire says, would be to overhaul the state’s tax system. He calls it “underperforming and antiquated” for not addressing modern tax growth, leaving out the service sector in its sales tax, and not taxing according to income, which he says hurts lower- to middle-income families.

Illinois is one of only a handful of states that still operate with a flat-rate tax standard regardless of income, according to the National Conference of State Legislatures. Even with the 2011 adjustments, Illinois would have one of the lowest tax rates in the nation, but the rates across the US are hard to pin down because most states, such as Iowa, have up to nine different tax rates for personal income.

“In terms of taxable income, it’s not always an easy comparison to make [between states],” says Arturo Pérez, a fiscal analyst with the organization.

Republicans criticized the Illinois package, saying that it would force companies to move to neighboring states and that lawmakers would use the tax revenue only to increase spending, thus bankrupting the state. “Here’s an investment tip for you: Put your money in moving vans. They’ll be in high demand,” state Sen. Kyle McCarter (R) said during debate of the package.

State Democrats lauded the package for an extra twist: A spending cap would limit state spending through 2015. If lawmakers were caught exceeding the new limits, the new tax rates would revert to their original rates.

“This is not a game, not a trick ... we’re really trying to handcuff ourselves and the governor in our spending,” said Illinois Senate president John Cullerton (D), according to the Chicago Tribune.