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Illinois Income Tax Increase: Legislature Approves 66% Tax Hike

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SPRINGFIELD, Ill. — Illinois Gov. Pat Quinn defended a massive increase in state income taxes passed by lawmakers Wednesday and promised to quickly sign the measure to help heal the state's ailing finances.

Lawmakers worked overnight to pass the increase to raise the personal income tax rate from 3 percent to 5 percent for four years – a 66 percent increase. Corporate income taxes also will rise, but Quinn rejected the notion that it would decimate businesses.

The rate increase might be the biggest any state has adopted in percentage terms while grappling with recent economic woes. Nevertheless, Illinois' tax rate would remain lower than in several other states in the region.

"It's important for their state government not to be a fiscal basket case," Quinn told reporters outside his Capitol office.

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 tax increase would 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. Quinn's office said the higher taxes will generate about $6.8 billion a year – a major increase by any measure.

The tax increase 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 said Republicans should have supported some parts of the plan instead of voting against everything. 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.

"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 3.75 percent and that same taxpayer will then owe $1,250.

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.

Republicans also 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.

Governors of some neighboring states quickly jumped on the issue. Republican Wisconsin Gov. Scott Walker, who took office last week has already proposed a tax cut for businesses that relocate to Wisconsin from other states, invited companies to head north.

"Years ago Wisconsin had a tourism advertising campaign targeted to Illinois with the motto, 'Escape to Wisconsin,'" Walker said Wednesday in a statement. "Today we renew that call to Illinois businesses, 'Escape to Wisconsin.' You are welcome here."

Quinn scoffed at the notion. "Lots of luck to them, but that's not going to happen."

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.

Democrats also 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.

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.

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Associated Press writers Christopher Wills and Zachary Colman in Springfield and Scott Bauer in Madison, Wis., contributed to this report.

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The bill is SB2505.

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Online: http://www.ilga.gov

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