Lawmakers in Illinois moved quickly yesterday, Jan. 12, to pass a new bill that increases the state's personal income tax rate by a whopping 66%. This appears to be the largest tax increase any state has approved in the wake of recent economic woes.
Newly-inaugurated Illinois Governor Pat Quinn has publicly defended the move to raise taxes, citing the state's dismal financial picture and budgetary shortfalls, which are expected to expand as stimulus spending comes to an end this year. The new legislation will increase the current 3% rate to 5% for the next four years and includes an increase in income taxes assessed on corporations.
With a budget deficit hovering at nearly $15 billion, there's no question that Illinois has its back against the wall and needs to make meaningful changes to its fiscal policy. While tax increases are seldom popular politically, it seemed a foregone conclusion that Illinois would utilize tax changes along with budget cuts to start making a dent in the current deficit and rein in future spending. It came down to yesterday morning, when the lame-duck legislature finalized the deal before new lawmakers were scheduled to be sworn in mid-day.Past lawmakers in Illinois have routinely used debt to finance budget shortfalls and new spending, but the time to make tough choices appears to have been put off as long as possible. Thompson Reuters now rates Illinois state bonds as the riskiest in the country in terms of perceived risk of default.
Recently interviewed by 60 Minutes about the severe economic issues facing Illinois, state Comptroller Dan Hynes said, "The state of Illinois is known as a deadbeat state." Hynes added that Illinois earned its reputation over many years and seemed genuinely upset by the fact that he frequently can do little more than apologize when the state's creditors come calling.
While the increase is huge in terms of percentages, the new tax rate of 5% is still lower than most other states. States such as California and Hawaii have top tax rates that exceed 10%, and only about a dozen states continue to enjoy rates under 5%. Under the terms of the bill, the 5% rate is set to expire after four years and return to a rate of 3.75%.
Unfortunately for Illinois lawmakers both in support and opposed to the new legislation, the tax rate hike is only the first of many difficult decisions that must be made on the journey back to sound fiscal responsibility. Illinois politicians will have to devote considerable time to reviewing the budget for redundancies and waste as well as to determining where cuts can be made to state sponsored programs. Some options originally proposed but cut from the final tax bill included an additional $1 tax on packs of cigarettes and a plan to borrow an additional $8 billion to help pay at least some of the overdue bills to businesses and agencies engaged with the state.
Introduction to Preferred Shares
Learn the difference between preferred and common shares.View Course »