Analysis: Why the 67% tax increase doesn't end Illinois' budget problem

January 12, 2011

These have not been easy times for Illinois bean counters and those who depend on them.  An already weakened state balance sheet, like the pocketbooks of its already stretched citizens, was hard-hit by the recession.  Ever since, the state has been caught in a cycle of rising costs, unpaid bills, public protests, and political gridlock.

That's why the Illinois Senate rocked the political world when it voted to raise the state's personal income tax rate from 3 percent to 5 percent early Wednesday morning.

The tax plan amounts to a 67 percent increase in individual income taxes, far more than the 33 percent increase Governor Pat Quinn proposed - and campaigned on - during much of 2010. 

All told, the tax increase deal is expected to raise an estimated $6 billion in additional revenues for the state - an enormous windfall for state coffers and a big help to its operating budget. 

But a closer look at the Illinois' fiscal condition suggests that these new tax revenues won't be enough to solve Illinois' mounting fiscal woes.

Why? 

For starters, the revenue impact won't hit all at once; it will take time before the state reaps the benefits of the tax hikes.  Meanwhile, the state still needs to pay unpaid bills. 

In addition, by conservative estimates Illinois is facing a structural deficit of at least $13 billion.  Most now say the number is closer to $15 billion.  Using the smaller number, that roughly breaks down to the following:

$4 billion = Owed to Pensions

$2 billion = Additional borrowing costs

$6 billion = Unpaid bills (expected to reach $8 billion by July 2011)

$13 billion = Total (so far)

That means that the additional $6 billion in state income tax revenues the General Assembly just mandated will cover at most half of the total deficit.

The vote to increase taxes was politically tough for many lawmakers.  Not surprisingly, it came late at night, under the cover of darkness, and during the twilight of a lame-duck legislative session.  In light of the serious fiscal problems facing Illinois, some public policy analysts praise the move as necessary and courageous.  Others say an already bloated government ducked the hard work of spending cuts, hurt economic growth, and stuck the taxpayers with the bill.

No matter how you see it, one thing is clear:  the problems aren't going away with Wednesday's vote.  Bills continue to mount - especially for pensions and health care.

That leaves the Governor and lawmakers in the new 97th session of the General Assembly with many more tough days ahead.  Watch for Quinn to continue to push his $15 billion dollar loan consolidation plan and for others to keep the push alive for more casinos and gaming revenues.  Why?  Because the remaining options are limited - and painful.   They include more dramatic pension reforms, more tax increases, and more cuts to services and programs. 

And that's even after Illinoisians kick in 67 percent more come tax time than they did before.