The Illinois legislature voted last night to increase the state personal income taxes by 67 percent and business taxes by 46 percent. Illinois now has the highest effective corporate tax rate in the industrialized world, and prior to the vote Illinois ranked 48th in job creation. All Democrats voted yes, and all Republicans in both the House and Senate voted no. The Senate passed the measure at 1:30 am by a 30 to 29 vote margin.
The huge tax hike passed the House before midnight on a 60 to 57 vote. They also approved $4 billion in new borrowing. A new Illinois legislature will be sworn in at noon today, and last night was the final opportunity to pass these measures by the outgoing lawmakers. Seven lame duck Democrats provided the victory margin.
The legislature did not cut the budget, they just hiked taxes. Republicans said the enormous increases would drive businesses out of the state. Sen. Kyle McCarter (R) said the best investment now “is in moving vans. . . They are bankrupting the state with this increase.”
Illinois is the worst credit risk in the nation and its public debt is in excess of $130 billion. The state has not balanced a budget in a decade, and rating agencies now describe its debt as being close to junk status. The debt can no longer be ignored because the state wants to borrow an additional $11 billion on top of the $4 billion which was approved last night. Several lawmakers noted that investors are reluctant to lend new money because of the huge existing obligations.
The major reason the fiscal situation is so out of control is because of pension payments for public sector union employees. Deficit reduction proposals and the pension liabilities were routinely ignored until March of 2010. The system was then changed for new employees, but that still does not address the $130 billion burden.
The personal income tax rate is going from 3 percent to 5 percent.
Illinois has a Democratic Governor and a Democratic legislature and they are attempting to hike the corporate tax rate to 8.4 percent. Other proposals now being discussed are the largest property tax hike in state history.
All of this money is needed to address the pension fund crisis which has been apparent for a long time. Lawmakers in the past ignored the problem and continued to borrow money to pay for current pension obligations. Unlike the federal government, a state can not create new money to pay its bills.
For the past decade Illinois has been spending $3 for every $2 it takes in. Now Illinois has enacted tremendous tax increases but it still has not addressed the problem that got them into this situation, pension reform.
Republican warnings about the fiscal crisis were routinely ignored. A liberal Democrat was elected Governor in November and Illinois is the heartland of Blue America. They sent Barack Obama to the U.S. Senate with 70% of the vote in 2004 and returned the Democratic Whip, Dick Durbin, with a thundering 68% in 2008. Obama won another statewide landslide that year.
The state has a history of corruption in both parties. In the summer of 2010 Illinois over took California as the worst credit risk in the nation. California has a $19 billion deficit this year, and sovereign debt of more than $500 billion. California also has off balance sheet obligations for state employee union pensions of nearly $400 billion. California is so deep in debt that it is difficult to see how it can work its way out.
Nevertheless, the rating agencies say Illinois is number one. The Democratic legislature always refuses to cut spending. The state comptroller says “We are not paying bills for absolutely essential services. That is obscene.”
Other states would cut their budget or generate revenues, but Illinois rejects that path. The New York Times described the situation last year by saying:
For the last few years, California stood more or less unchallenged as a symbol of the fiscal collapse of states during the recession. Now Illinois has shouldered to the fore, as its dysfunctional political class refuses to pay the state’s bills and refuses to take the painful steps to close a deficit of at least $12 billion, equal to nearly half the state’s budget.
NOTE: The deficit is now $15 billion.