In Illinois, a Giant Deficit Leads to Talk of a Giant Tax Increase
With Illinois’s budget crisis reaching dizzying, desperate levels, lawmakers here over the weekend were seriously pondering something that would have been unimaginable even a few months ago: a 75 percent increase in the state’s income tax.
That was just one element in an enormous, controversial and still evolving financial package the state’s top political powers dreamed up in private meetings here. On Sunday, they were racing to find enough support to push it through before a new crop of lawmakers takes over on Wednesday.
In a state where the budget woes have, by some estimates, grown more dire than even those in California, it seems that months of inaction might at last be overtaken by some combination of timing (elections are far away) and fear (the state’s national reputation and bond ratings seem to be sinking as fast as its debts are mounting).
In a moment when states around the country are wrestling with withered revenues, Illinois faces a deficit of at least $13 billion; more than $6 billion in unpaid bills to social service agencies, schools and funeral homes; the most underfinanced state pension system; and growing signs of concern from bond investors.
“We are very close to things becoming unraveled,” said Richard F. Dye, the co-author of a study released last week by a University of Illinois institute titled “Titanic and Sinking: The Illinois Budget Disaster.” The report suggested that doing nothing is simply no longer an alternative.
“It won’t take long,” Mr. Dye said, “for this backlog of bills to be so outrageous that people will not deal with the state.”
Still, it is uncertain whether the Democratic leaders, who control both chambers of the legislature and the governor’s office, can quickly summon enough support to pass the package, which has yet to be formally announced. It was expected, in one version, to include a $1 tax increase on packs of cigarettes, a sharp rise in the corporate tax, and an increase, for the first time in nearly 20 years, in the income tax, which would rise to 5.25 percent from 3 percent.
Democrats say that part of the increase would be temporary, and that the deal could come with pledges to keep spending growth to a bare minimum and to find cuts in areas like Medicaid. But even some fellow Democrats, particularly in the State House (where Democrats hold 70 votes and would need only 60 for passage of a tax increase), seem skeptical.
“Look, this would be a way to get back to even,” John J. Cullerton, the State Senate president, said after one in what has seemed an endless flurry of closed-door meetings with the state’s top three Democrats. The tax increases were expected to raise some $7.5 billion a year — enough, advocates said, to solve the state’s deficit under a new borrowing plan.
“We’d pay our bills,” Mr. Cullerton said. “Our vendors get paid. Our bond rating would improve.”
Republican leaders criticized the size of the proposed tax increase and complained that they had not been included in conversations where the plan was developed. Most of all, they argued that spending cuts needed to be looked at first, even given the urgency of the crisis, before anyone should resort to a giant and rushed tax hike.
The state’s Republican Party chairman, Pat Brady, on Saturday described the whole notion as “the latest example of life in Madiganville,” referring to the longtime speaker of the House, Michael J. Madigan, and introduced an online petition in which residents could urge lawmakers to thwart the tax increase.
On a recent afternoon, Tom Cross, the Republican leader of the House, said he believed that the situation in Illinois could be “catastrophic” as early as May or June, then ticked down a four-page list of proposals that he says Republicans have tried to offer as ways to truly sort out Illinois’s mess. On the list: sell half of the state’s fleet of cars, require only one license plate on cars instead of two, combine the state treasurer’s and comptroller’s jobs, ban out-of-state travel for elected officials, and end the remodeling of state offices (carpet included).
“Even if you have a tax increase like this, you can’t wake up and say, ‘I’ve got all the money in the world, and I can spend like a drunken sailor,’ ” Mr. Cross said. “This is all as bad as everyone says, and I still don’t hear any willingness to see the need to tighten the belt.”
Mr. Madigan, who is also the state’s Democratic Party chairman and, in the view of many, the state’s most powerful politician, has sent signals that more spending is not what he has in mind. He has pressed for two constitutional amendments — both of which Mr. Cross mocks as “gimmicks” — that would make it more difficult to approve benefit increases for pensioners and would hold state spending growth to a level residents see in their salaries.
As word of a possible deal filtered out, some in the business community were criticizing the size of the tax increases, saying they would make new companies less likely to come here and existing ones less likely to stay. Others were predicting that angry taxpayers might appear in droves in Springfield on Monday.
Steve Brown, a spokesman for Mr. Madigan, said voters’ responses to the notion remained an open question. “It’s not going to be an easy story to tell because we know the economy is still not very good, we know unemployment’s still a bad thing,” he said. “But we know the desperate fiscal condition that the state is in.”
The timing of this plan is no accident. For months, as Illinois and other states watched revenues sink, some leaders seemed wary of any drastic steps, given competitive political races in November. In the end, Gov. Patrick J. Quinn, a Democrat who has long said he would support a tax increase, though he suggested it might be a smaller one, narrowly defeated his challenger. And while the Republicans won a handful of legislative seats, they remain in the minority.
And so, Democrats see an opportunity. They have two days left with their most powerful margins in each chamber, and several departing legislators may now feel free to vote for a tax increase without worrying about any wrath from voters. Come noon on Wednesday, when new lawmakers arrive, the odds of passing any such package grow slimmer.
The state had to borrow to make payments to its pension system last year, and it has been considering borrowing $3.7 billion more with municipal bonds to make payments this year — though with sinking bond ratings, the cost of borrowing grows ever higher. And the state’s bills keep piling up. No one is certain what will happen if the tax increase package — or some permutation of it — does not pass now.
“You would have a continuation of deficit spending and borrowing, further deterioration of our bond ratings, and the image that we convey to businesses that might want to come here as that of instability,” Mr. Cullerton said grimly. “It would be disastrous.”