Thursday, January 13, 2011

Lame Duck Legislature Passes Massive Tax Hikes In Illinois

Illinois is one of several states around the country in huge financial trouble. It has billions in debt and no way to pay for its annual expenditures. The outgoing legislature has decided that the way to close the deficit (but not eliminate it) is to raise taxes.

Lots of taxes.
The state is facing a $13 billion budget deficit that must be resolved by the end of the fiscal year on June 30. This includes $6 billion in unpaid bills to social service agencies, schools, contractors and others. In addition, the state's pension plan is severely underfunded.

To address these shortfalls, the Illinois House and Senate approved:

* Temporarily raising the personal income tax rate to 5%, from 3%.
* Temporarily hiking corporate income taxes to 7%, from 4.8%.
* Imposing a moratorium on new programs with spending growth capped at 2% per year, with the exception of increased school aid of more than $700 million.

The House postponed a vote on increasing the tobacco tax to $1.99 per pack, up from 98 cents. And lawmakers defeated a proposal to borrow $8.75 billion to clear the current stack of unpaid bills.

The state's Senate also approved a measure allowing the state to borrow $3.7 billion for the fiscal 2011 pension payment. The House approved this debt issuance last May.

Democratic lawmakers were racing to pass the tax hikes before the newly elected legislators are seated later Wednesday. Republicans, who gained ground in the November election, are firmly opposed to hiking taxes, preferring instead to cut spending.

The fiscal package remained in flux until the end. To gain support, Democrats scaled back the personal income tax spike to 66%, down from an initial proposal of 75%, and also reduced the jump in the corporate tax rate, which was originally set to rise to 8.4%.

The tax hikes, steep as they are, won't eliminate the state's deficit, since they are only expected to raise about $7 billion. Complicating matters is the defeat of the bond measure to cover the unpaid bills.
I'm surprised that the tobacco tax hike didn't get passed in order to reduce the personal income tax hike, but the fact that this budget plan is full of borrowing to pay current costs only increases the deficits down the road and doesn't address the structural deficit caused by borrowing to fund the massively underfunded pension.

State taxpayers are getting slammed from all sides, and the state's teetering on the brink of insolvency. Tax hikes cannot solve the state's fiscal woes. Invariably, the tax hikes do not produce the revenues expected, leaving the state in an even worse fiscal situation. Yet, doing nothing could lead to municipal bond defaults and even worse news down the road.

In fact, Wisconsin expects to see an influx of business and individuals relocating to avoid the onerous taxes being imposed by the Illinois legislature and likely to be signed by Gov. Pat Quinn (D) although Gov. Quinn disputes that possibility.

Illinois currently has a 3% personal income tax rate, which would increase to 5%. That compares with Wisconsin that has rates ranging from 4.6% to 7.75%. Iowa has rates ranging from 0.36% to 8.98%. Much more likely is that individuals may turn to Indiana, which has a personal income tax rate of 3.4% and whose state fiscal situation is stable.

Illinois has opted to impose draconian tax hikes to deal with years of debt rung up by irresponsible state spending. The measures are claimed to be temporary tax hikes, but if the state can't correct its budget situation, those tax hikes may linger on (it is tough to eliminate taxes once imposed).

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