Ill. faces 66 percent tax boost amid budget crisis

[January 12, 2011]  SPRINGFIELD (AP) -- Democratic Illinois lawmakers beat a looming deadline and approved a 66 percent income-tax increase in a desperate bid to end the state's crippling budget crisis.

Caption: House Speaker Michael Madigan, D-Chicago, listens to lawmakers argue state budget legislation at the state Capitol in Springfield on Tuesday.  (AP photo by /Seth Perlman)

Legislative leaders rushed early Wednesday to pass the politically risky plan before a new General Assembly was sworn in at noon, taking a slice out of the Democratic majority and removing lame-duck lawmakers willing to support the tax before leaving office.

The increase now goes to Democratic Gov. Pat Quinn, who supports the plan to temporarily raise the personal tax rate to 5 percent, a two-thirds increase from the current 3 percent rate. Corporate taxes also would climb as part of the effort to close a budget hole that could hit $15 billion this year.

"Governor Quinn today thanks the Illinois General Assembly for taking strong action to confront our fiscal crisis and provide the revenue and reforms needed to stabilize the budget, pay our bills and jumpstart Illinois' economy," a statement from his office said.

Quinn's office said the higher taxes will generate about $6.8 billion a year -- a major increase by any measure. In percentage terms, 66 percent might be the biggest increase any state has adopted while grappling with recent economic woes.

It will be coupled with strict 2 percent limits on spending growth. If officials spend above those limits, the tax increase will automatically be canceled. The plan's supporters warned that rising pension and health care costs probably will eat up all the spending allowed by the caps, forcing cuts in other areas of government.

Other pieces of the budget plan failed.

Lawmakers rejected a $1-a-pack increase in cigarette taxes, which would have provided money for schools. They also blocked a plan to borrow $8.7 billion to pay off overdue bills, which means long-suffering businesses and social-service agencies won't get their money anytime soon.

House Speaker Michael Madigan, sounding weary, said Republicans should have supported some parts of the plan instead of voting against everything.

"They're on the sidelines. They don't want to get on the field of play," the Chicago Democrat said. "I'm happy that the day has ended."

But Republicans noted they were not included in negotiations. They also fundamentally reject the idea of raising taxes after years of spending growth.

"We're saying to the people of Illinois, `For eight years we've overspent, now we're going to make it your problem,'" said Rep. Roger Eddy. "We're making up for our mistakes on your back."

The increase means an Illinois resident who now owes $1,000 in state income taxes will pay $1,666 at the new rate. After four years, the rate drops to 4 percent and that same taxpayer will then owe $1,333.

Republicans predict the tax eventually will be made permanent.

"It's a cruel hoax to play on citizens to say this is temporary," said House Minority Leader Tom Cross, R-Oswego.

Democrats bristled at being blamed for the state's financial problems, although they've controlled the governor's office and both legislative chambers since 2003.

They said some of the problem began under Republican governors and that Republicans backed some budgets that increased spending. They argued the national recession sent state revenues into a nosedive and that Democrats already have cut spending by billions of dollars.

"This mess is a mess that is the responsibility of all of us as Republicans and Democrats, of several different governors and part of the mess isn't even anybody's fault," said House Majority Leader Barbara Flynn Currie, D-Chicago.

The new tax money will balance the state's annual budget and let officials begin chipping away at the backlog of unpaid bills. Borrowing money, and then repaying it with a portion of the tax increase, would have allowed those bills to be paid immediately, aiding organizations that provide services for the state but go months without being reimbursed.

The delay and the spending limits are "very troubling" to those groups, said Sean Noble, policy director for Voices for Illinois Children, a member of the statewide Responsible Budget Coalition. Still, he called the tax increase "an enormous step" toward putting Illinois on sound financial footing.

The proposal passed the House on Tuesday night 60-57, the bare minimum. No Republicans backed the measure there or in the Senate, where the measure passed 30-29.

The governor has refused to discuss the tax proposal publicly, although his aides say he supports it. During his election campaign, Quinn promised to veto any tax plan higher than his proposal for a 1-point increase.

Republicans accused Democrats of doing irreparable harm to Illinois families and businesses. Business leaders decried the proposal as a job-killer.

"Based on this particular legislation the only businesses that will benefit are the moving companies that will be helping many of my members move out of this particular state," said Gregory Baise, head of the Illinois Manufacturers' Association.

Democrats countered that even with the increase, Illinois' tax rate will be lower than in many neighboring states -- Iowa's top rate is 8.98 percent, Wisconsin's is 7.75 percent. They also maintain that without more money, state government may not be able to pay employees by the end of the year. Major government services might have to be halted, they warn, and groups waiting for state payments will go under.

Spending limits were added to the plan to win the support of some suburban Democrats. Republicans said the limits don't do enough to clamp down.

The limits allow next year's spending to increase considerably so the state can make its required contribution to government retirement systems, pay overdue bills and cover other costs that had been shoved aside. After that, however, spending could not grow more than 2 percent annually for the next three years or else the tax increase would be reversed.

"We're really trying to handcuff ourselves and the governor in our spending," said Illinois Senate President John Cullerton, a Chicago Democrat.

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The bill is SB2505.

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Online: http://www.ilga.gov/

[Associated Press; By DEANNA BELLANDI]

Associated Press writers Christopher Wills and Zachary Colman contributed to this report.

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