Swimming in debt, Ill. considers massive tax boost

[January 11, 2011]  SPRINGFIELD (AP) -- Crippled by a massive deficit, Illinois has seen its bills pile up and its bond ratings fall. Now the state's Democratic leaders are making a desperate effort, and fighting the clock, to fill the budget hole with an equally massive tax increase.

They want to boost the personal income tax rate temporarily by up to 75 percent, pushing the current rate of 3 percent as high as 5.25 percent.

In sheer percentage terms, the Illinois proposal could be the biggest tax increase on the long list of increases states have passed as they grappled with recent economic woes.

"I wouldn't use end-of-days rhetoric, but it is definitely higher than we normally see," said Kail Padgitt, an economist for the Washington-based Tax Foundation.

The move is as difficult as it is bold. The window for action may be less than 24 hours, before Democrats lose some lame-duck lawmakers and a slice of their majority when a new General Assembly takes over on Wednesday.

"There's only one day left," House Speaker Michael Madigan, D-Chicago, said Monday night. Tuesday "is do-or-die."

Republicans reject the concept completely. Rank-and-file Democrats are pushing back by proposing strict new limits on government spending or a slightly smaller increase, perhaps 66 percent instead of 75 percent.

Illinois faces starkly different outcomes worthy of its extreme situation, where a deficit of $15 billion has built up over the years as officials have repeatedly avoided serious action. If the increase passes, Illinois could vault out of its budget hole immediately -- at least until the four-year increase ends -- while making the state a much more expensive place to live and work. Or Illinois could lose the only viable solution leaders have come up with, leaving nothing on the table that could fill a deficit that amounts to half the money in the state's key budget fund.

The increase, coupled with doubling the tax on cigarettes, could generate $7.5 billion a year, enough to balance the annual budget and begin chipping away at a backlog of unpaid bills. The state regularly falls months behind in writing checks to schools and universities, businesses that build roads or rent offices to the state, and organizations that provide a vast array of social services.

No one disputes that Illinois is at a critical point. The dispute is how much of the problem can be solved with spending cuts and how much must be covered by higher taxes.

Democratic leaders, particularly Gov. Pat Quinn, argue they've cut spending significantly -- about $2 billion -- and have taken steps to limit growth in health care and retirement costs. Republicans insist they haven't done nearly enough.

The prospect of voting for a huge tax increase has some legislators running scared. Rep. Joseph Lyons, D-Chicago, called it a "potential career-ending vote."

"Are the political will and votes there to do it or not? At this stage, I don't know the answer," said Lyons.

Many lawmakers worry about scaring away business.

Raising the personal tax rate triggers a corresponding jump in corporate rates. The first version of the increase would have bumped corporate taxes to 10.9 percent, which the Tax Foundation says would be the highest in the nation.

Negotiators quickly began discussing alternatives that would keep corporate taxes under 10 percent.

Verenda Smith, head of the Federation of Tax Administrators, called it misleading to think of the Illinois proposal as a 75 percent increase. The key point, she said, is that Illinois' personal tax rate would move from a relatively low 3 percent to 5 percent or perhaps 5.25 percent -- still comparable to many other state rates.

But other states haven't made such sharp jumps that would apply across the board.

California, for instance, approved a temporary increase of one-quarter point to each of its tax brackets. Connecticut added a third income bracket, of $500,000 for single filers and $1 million for joint filers, to be taxed at 6.5 percent. Wisconsin added a new top rate of 7.75 percent on income over $225,000 or $300,000 for joint filers.

The Illinois increase also would be huge in terms of the money it generates.

The national Center on Budget and Policy Priorities reports that 33 states raised taxes in 2008 and 2009 to make up for plummeting revenues. All the increases together produced $32 billion. The Illinois proposal by itself is supposed to produce $7.5 billion.

Padgitt, of the Tax Foundation, said approval of a huge tax hike in Illinois would be noted elsewhere.

"States will take notice of that and say, 'If it can pass there, it could pass in our state,'" he said. "Illinois is the first mover on this, the first to test the waters."

[Associated Press; By CHRISTOPHER WILLS]

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