Illinois faces steep tax increases to meet fiscal crisis

After years of papering over severe budget shortfalls, Illinois lawmakers Friday were closing in on a plan to raise the state income tax by 75 percent and refinance roughly $8.5 billion in debt in an effort to stabilize the state’s finances.

The deal, still being hashed out between Gov. Pat Quinn (D) and Democratic legislative leaders, also would raise the state’s corporate income tax and increase the cigarette tax by $1 a pack.

Lawmakers also are discussing reviving a proposal to sell more than $3.75 billion in bonds to plug part of the gaping hole in the state’s pension fund.

That leaders would contemplate raising the income tax rate from 3 percent to 5.25 percent and simultaneously take on new debt speaks to an increasingly desperate financial situation. But while experts call Illinois’s plight the worst in the nation, a similar scenario is playing out in many states that are grappling with the perils of air-brushing structural budget problems rather than implementing difficult tax increases or service cuts.

“These are the hard choices that have to be made. You’ve got to cut expenses and you got to raise taxes. You just have to,” said Matt Dalton, chief executive of Belle Haven Investments, a $600 million fund that stopped buying Illinois bonds last June because of the state’s mounting fiscal problems. “What Illinois is contemplating is a good thing. This is what needs to happen not just in Illinois but across the country.”

In most states, accustomed to years of easy money during the economic boom, the recession has shattered an already fragile fiscal situation. The drop in revenue, combined with increased demand for social services because of stubborn unemployment, has left state leaders with an unpalatable choice of deep spending cuts, steep tax hikes or more debt.

A combination of federal stimulus money, service reductions and fee and tax increases allowed states to close shortfalls totaling $130 billion in their current budgets, according to the Center on Budget and Policy Priorities. Still, the center says, 40 states already are staring at a combined $113 billion in shortfalls next year.

“States have done all the easy things,” said Nicholas Johnson, director of the center’s state fiscal project. “They have drawn down their reserve funds and utilized accounting tricks to get by. Now those things are over.”

In California, new Gov. Jerry Brown (D) has promised to cut spending and trim pensions to help close that state’s $25 billion budget gap over the next 18 months. New York Gov. Andrew Cuomo (D) took office last week pledging to close a $10 billion budget gap by freezing state employee wages and sharply curtailing spending.

Maryland Gov. Martin O’Malley (D) is working on a plan to close the state’s $1.6 billion budget gap that could include cuts to health care, pensions and education. Virginia is facing a projected $2.8 billion budget shortfall next year. Meanwhile, D.C. Mayor Vincent Gray is working to close a $175 million gap in the District’s current budget.

Those problems pale next to the fiscal situation confronting Illinois. Without new revenue, its budget deficit is expected to hit $15 billion by the spring, which amounts to 45 percent of the state’s general fund. Spending and revenues were so far out of whack that it would take a doubling of the state’s personal income tax, a 116 percent hike in the sales tax or slashing spending by 26 percent to balance them, according to the Institute of Government and Public Affairs.

A vote on the tax and debt package — whose passage is hardly assured — is expected before the lame duck session of the legislature concludes early next week.

President Obama, a Chicago resident who served in the Illinois Senate before bursting into national prominence, has pushed aid to help states weather the recession’s fallout. But he has not advocated federal help for solving the structural economic problems facing his home state.

Many experts say that is proper, arguing that up until now the state has done little to help itself.

“Politicians here have been craven on the tax issue,” said Ralph Martire, executive director of the Center for Tax and Budget Accountability, a research and advocacy group. “They have convinced people that they can have public services and not pay for them. As we know, that doesn’t work at the end of the day.”

The Illinois constitution requires a balanced budget. But there is no provision against rolling bills from one year to the next, or selling bonds to pay for on-going expenses, or allowing unfunded liabilities, like pensions, to grow. Illinois has done all of those things with abandon.

Last month, the state sold nearly $1.5 billion in bonds backed by funds from its portion of a settlement between 46 states and the tobacco industry. The money was used to pay health-care providers and other vendors who had been waiting for their state payments for nearly a year.

Even after that payout, the state still owes an estimated $6.8 billion in payments to public universities, local school systems, human service providers and vendors.

The late payments have left the state’s social service network in chaos. A recent survey of 282 social work agencies by Illinois Partners for Human Service, an advocacy group, found that 95 percent of them have been hurt by the budget crisis. More than half were forced to reduce service; 28 percent closed programs; half laid off staff members; and 49 percent were forced to tap lines of credit.

“It is really frightening not to be paid in the volume we’re not being paid,” said Anne Tyree, director of development at the Community Counseling Center in Alton, Ill.

The agency, which provides community-based mental health services, is owed $3 million in state reimbursements — half its $6 million annual budget. “That’s a lot for us to handle,” she said.

Percy Dace, director of the Lessie Bates Neighborhood House, a community center whose roots reach back more than a century in impoverished East St. Louis, said the state owes the center $3 million.

“This has been a challenge,” said Dace, who said the program has refinanced property, cut staff, and reduced programs to cope. “Many of our staffers have gone into their own pockets to pay for things for our clients.”

The state’s fiscal problems have mounted even as its tax burden has remained relatively modest. Its income tax rate is among the lowest in the nation at a flat 3 percent. Its sales tax extends to only a small sliver of services. Yet the red ink has flowed for years, allowing the state to function even as its budget problems mounted.

“We haven’t in the past had to make any of the tough decisions that are required because we covered it with debt,” Tom Johnson, president of the Taxpayers’ Federation of Illinois. “Greece did the same thing until no one would lend them money. The longer you extend the debt, the more draconian the effects when there is no longer a willingness to lend.”

 
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