CHICAGO – Illinois lawmakers narrowly approved an income tax increase to ease the state’s fiscal crisis and $3.7 billion of bonding to cover pension payments, but rejected other key pieces of a fiscal bailout plan including a $1 cigarette tax hike and an $8.75 billion borrowing to pay off mounting bills.
With Democratic support only, the House voted 60 to 57 late Tuesday to raise the individual income tax to 5% from 3% and the corporate rate to 7% from 4.8%. The plan moved to the Senate where it garnered a 30-29 vote early Wednesday, again with only Democratic support.
The income tax increase – the first in two decades -- takes effect immediately and is expected to raise $6.8 billion annually, at least for the next four years after which the rates will shrink. The legislation also includes a 2% cap on increases in annual state spending through 2015.
“Illinois is in crisis, absolute financial crisis, and there is no way we can dig ourselves out of the crisis without increased revenues,” said the bill’s House sponsor, majority leader Barbara Flynn Currie, D-Chicago.
“We are in desperate need to improve our bond ratings and we will do that by raising this money,” said the chief senate sponsor, President John Cullerton, D-Chicago, adding that the state would still need to make “tough” spending cuts but at least the new revenues would allow it to pay its bills and pension payments. “It’s not easy to do this, but the alternatives are disastrous.”
The Senate also authorized, in a 42 to 16 vote that included some Republican support, borrowing $3.7 to cover most of the state’s scheduled pension payments in the current fiscal year. The House last year approved the financing.
A proposal to borrow $8.75 billion to pay off bills failed to clear the House. New debt requires a three-fifths majority so it needed 71 votes. The measure failed 65 to 52 in a first vote and 68 to 49 on a second vote. The House also rejected the $1 per pack increase in the state’s 98-cent cigarette tax with only 51 members voting for it, nine short of the majority needed. The increase would have raised an estimated $377 million annually.
Republicans remained steadfast against the tax increases without tighter spending controls and cuts and they warned that businesses and retirees would flee the state. “Put your money in moving vans, they will be in high demand,” said state Sen. Kyle McCarter, R-Decatur. “Stop this disastrous plan.”
“This is the nuclear bomb of jobs bills,” warned Sen. Dan Duffy, R-Barrington. “If you vote for this bill you are responsible for devastating the state of Illinois.”
Gov. Pat Quinn, a Democrat, and Democratic leaders of the General Assembly scaled down the increases from a plan first floated last Thursday to raise the support needed to pass the hikes during the final day of the lame-duck veto session. A new General Assembly takes office Wednesday afternoon and Democrats will lose some seats although they will hold onto their majorities. Quinn, who praised lawmakers after the vote, will hold a news conference Wednesday morning to discuss the action.
The narrow victories for Quinn, Cullerton, and House Speaker Michael Madigan, D-Chicago, were won amid warnings that the eyes of rating agencies and investors were honed in on the state awaiting action. “If we don’t solve this fiscal problem we will be a junk bond state you know, and that’s where we shouldn’t be,” state budget director David Vaught said Tuesday.
The state has seen its ratings tumble over the last two years as lawmakers resorted to one-shot revenues to deal with growing budget deficits. Moody’s Investors Service rates Illinois’ $25 billion of general obligation bonds A1 with a negative outlook. Fitch Ratings rates them A, with a negative outlook and Standard & Poor’s rates the state A-plus, but has it on CreditWatch with negative implications.
The state faces a deficit of as much as $15 billion going into fiscal 2012 which begins July 1, $62.4 billion of unfunded pension liabilities, and a backlog of $8 billion in bills. The state has an all-funds budget of about $52 billion, including a $25 billion general fund.
A portion of the income tax increases are temporary. The 5% rate would remain in place until 2015 when it would drop to 3.75% and then fall to 3.25% in 2025. The 7% corporate rate would remain in place until 2015 when it would drop to 5.25% and to 4.8% in 2025. The original proposal raised the taxes initially to 5.25% and 8.4%. The income tax increase and spending caps are in amendments to Senate Bill 2505.
