The biggest tax increase in Illinois history, a last-
minute bid to resolve the state’s worst fiscal
crisis, drew applause from investors, gloating
from neighbors and scorn from taxpayers and
businesses.
Within hours of Senate approval yesterday for
the 67 percent income-tax increase aimed at
closing a $13 billion budget deficit, an eruption of
protests put Governor Pat Quinn on the
defensive.
“We had to take decisive action,” the Democratic
governor said at a news conference in
Springfield, the capital. The tax boost was needed
to protect a state that was “careening toward
bankruptcy and fiscal insolvency,” he said.
The personal income-tax rate increase to 5
percent from 3 percent, which took effect
immediately, was the cornerstone of a budget-
balancing package supported only by Democrats
that moved through the General Assembly in the
final hours of a session that began two years
earlier.
The plan boosted the corporate income tax by 46
percent, to a rate of 7 percent, from 4.8 percent.
“It’s the worst time in the world to be raising
taxes on the citizens and businesses of this state,”
said W. James Farrell, former chief executive
officer of Illinois Tool Works Inc. and chairman of
the Commercial Club of Chicago, echoing the
view of Chicago Mayor Richard Daley.
Wisconsin Governor Scott Walker issued a
statement urging Illinois companies to switch
states.
“Years ago, Wisconsin had a tourism advertising
campaign targeted to Illinois with the motto,
‘ Escape to Wisconsin,’” Walker said. “Today we
renew that call to Illinois businesses. ‘Escape to
Wisconsin.’ You are welcome here.”
The comment came a day after Indiana Governor
Mitch Daniels, in an interview on WLS radio in
Chicago, compared being Illinois’s neighbor with
“living next door to ‘The Simpsons,’ you know
the dysfunctional family down the block?”
‘Illinois -- Hooray’
The criticism wasn’t shared by investors, who
have looked with concern at the state’s
accumulation of $6 billion in unpaid bills and
almost $4 billion in missed payments to
underfunded state pensions.
“There are some actions being taken,” Bill Gross,
who runs the world’s biggest bond fund at Pacific
Investment Management Co. in Newport Beach,
California, said in a Bloomberg Television
interview with Margaret Brennan yesterday.
“Illinois -- hooray!”
The Legislature’s action is “a serious and
successful effort to address this problem in a way
that ’s material and has an immediate influence,”
Chris Mier, chief municipal strategist with Loop
Capital Markets LLC in Chicago, said in a telephone
interview. “Right from the start you have
improved cash flow.”
‘A Big Difference’
He said the measure “is significant and will make
a big difference in the fiscal health of the state.”
Standard & Poor’s and Fitch Ratings said they’d
examine the budget package and its potential
impact on the state ’s credit grades. S&P rates
Illinois A+, its fifth-highest investment level, two
steps above California, which gets the lowest
rating for any state ’s general-obligation debt.
Illinois’s “willingness to implement difficult and
politically unpopular measures to restore budget
balance has been questionable over the past two
years, ” New York-based S&P said in a statement.
Quinn, who was elected in November by a
margin of 20,000 votes, out of more than 3.6
million cast, had said he would support only a
one-percentage-point increase in the income tax.
His budget director, David Vaught, told
Bloomberg News in a July interview that the state
would push for a two-percentage-point increase
after the election.
Illinois and other U.S. states confront deficits
totaling $140 billion in the next fiscal year,
according to a Dec. 16 report from the Center on
Budget and Policy Priorities, a Washington
research group.
At the Bottom
Illinois and Arizona were ranked the weakest in a
Dec. 30 financial-strength report from BMO
Capital Markets analysts led by Justin
Hoogendoorn in Chicago.
An Illinois general-obligation bond maturing in
January 2018 yielded 4.6 percent in trading
yesterday, according to Municipal Securities
Rulemaking Board data. A basis point is 0.01
percentage point.
Quinn said the state’s budget crisis had been
decades in the making, and resolving it will “take
another decade or so,” he said.
The fiscal package includes what Senate President
John Cullerton called “an unprecedented spending
cap.” The first year will limit spending to a 10
percent increase that will include an estimated
$4.5 billion payment into the state ’s retirement
systems. The state has been borrowing money
to make payments.
Spending Limited
Spending in the next three years will be limited to
an annual increase of 2 percent, Cullerton said.
Some expressed doubts about the state’s
commitment to holding the line on spending.
“Illinois continues to send the impression that we
are anti-business,” said Doug Whitley, president
and chief executive officer of the Illinois Chamber
of Commerce, in an interview. “I don’t think the
tax increase is going to cause immediate,
wholesale loss of jobs, but the message
continues to be that Illinois politicians are
insensitive to fundamental business questions
such as the cost of doing business. ”
In Chicago, some residents expressed resignation
at the actions of lawmakers.
“I don’t want to say it’s a necessary evil, but what
are the alternatives?” asked Genelle Lutsch, 31, a
senior business analyst in Deloitte Touche
Tohmatsu ’s Chicago office.
“Do we want to pay our firemen or police force,
improve our infrastructure, our roads -- that all
comes from tax money, ” she said.
Source: Http://www.bloomberg.com/news/2011-01-12/illinois-governor-quinn-calls-67-increase-in-income-tax-crucial-to-state.html
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