The Illinois House mustered up precisely the number of votes to override Governor Bruce Rauner (R)’s budget veto, bringing an end to the longest stretch without a state budget in American history. Unfortunately, the budget—and the $5 billion taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increase it includes—fails to address any of the structural problems that got Illinois into this mess in the first place.
Here’s what the new budget does to address the state’s fiscal crisis:
- Raises the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate to 9.5 percent
- Raises the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rate to 4.95 percent
And here’s what it doesn’t do:
- Reform the state’s failing pension program, which currently faces $119 billion in unfunded liabilities
- Pay down any of the state’s $14.7 billion in unpaid bills
- Overhaul the state’s costly worker compensation system
- Identify savings in a government that imposes the 5th highest tax burden in the nation
- Provide ratings agencies with the confidence they need to avoid downgrading Illinois bonds to “junk” status now or in the near future
The three major ratings agencies have downgraded Illinois’ credit a combined 21 times since 2009, and should Illinois have its debt rated “junk,” an anticipated bond issue to pay some of those unpaid bills could become substantially more expensive, with a premium of $100 million entirely possible.
The ratings agencies are concerned not only with the state’s immediate revenue needs, but also with long-term structural reforms. That should be the state’s priority as well. Illinois has gone down this tax increase road before: these rate hikes almost perfectly mirror a temporary increase which began in 2011 and raised about $31 billion in additional revenue, ostensibly to help the state pay down its backlog of unpaid bills. The additional revenue barely made a dent.
This time, the tax increases are permanent, but there’s not even a pretense that they’ll address the state’s mountain of bills. Or address the pension crisis. Or do anything else to help get the state’s fiscal house in order.
Structural reform is difficult and often painful. That’s why, if there must be tax increases, they should have been paired with reform. Adopting tax increases first, with vague notions of implementing reforms later, makes real structural improvements increasingly unlikely.
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