Illinois Tax Hikes, Two Years Later: A Failure

Illinois Governor Pat Quinn, upon signing income tax hikes into law on January 12, 2011:

We had to take decisive action. … Our fiscal house was burning.

Almost two years later, the Land of Lincoln is still aflame. The state began its 2013 fiscal year this past July with an estimated $8 billion of unpaid bills and a total of some 160,000 bills awaiting payment.

What about additional tax receipts garnered by the state’s dramatic income-tax hikes? Unseen and unfelt, according to the Republican state comptroller, who has acknowledged that the gains were undercut by financing pension contributions, Medicaid expansion, and the expiration of President Obama’s 2009 stimulus.

Here’s a rundown of the governor’s 2011 tax hikes: a 67% increase for individuals (from 3% to 5%) and a 46% hike on corporations (from 4.8% to 7%, plus an extra 2.5% for an esoteric tax called the personal property replacement tax). The result for corporations is a 9.5% state rate, among the highest in the country. Among business leaders, Illinois now consistently occupies the cellar in surveys rating the best states for business.

For some perspective on how the hikes affect typical Illinoisans -- according to free market think tank Illinois Policy Institute -- a family of four with two working parents earning a combined $80,000 will pay an additional $1,527 in state income taxes thanks to Quinn’s hike. This is on top of the $2,160 they were already paying.

The taxes are only fanning the flames. Illinois’s total debt -- which includes unfunded pension commitments, outstanding bonds, and budget gaps -- is a staggering $271.1 billion, fourth largest in the country according to non-partisan research group State Budget Solutions. The systemic albatross for Illinois is its unfunded pension liability, which accounts for over 70% of this $271.1 billion figure.

Governor Quinn has even suggested the prospect of a federal guarantee of its pension debt. Fat chance of that -- Congress has no appetite for rescuing profligate states. In fact, Republicans in Washington (including Illinois Senator Mark Kirk) have preemptively proposed a resolution opposing bailing out state pension deficits.

The pension crisis is hardly an abstract future challenge; its consequences are immediate and far-reaching. In August, Standard & Poor's lowered the state’s credit rating because of "weak pension funding levels and lack of action on reform measures." Only California’s rating is worse among U.S. states. (Moody’s took a similar step earlier this year.) The downgrades will likely force the state to pay a higher rate when borrowing money, which could prove catastrophic when the Federal Reserve raises interest rates. For a state addicted to borrowing, it is an increasingly onerous burden.