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Illinois faces steep tax increases to meet fiscal crisis

Sept. 15 (Bloomberg) -- U.S. state pensions such as Illinois, Kansas and New Jersey are in a "death spiral," with assets at many insufficient to cover benefits, payouts consuming a growing portion of resources and costs rising twice as fast as investment gains. Bloomberg's Monica Bertran reports. (Source: Bloomberg)

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Washington Post Staff Writer
Saturday, January 8, 2011; 12:00 AM

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.

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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.

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