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Illinois tax hike: Is your state next?

Many states are facing huge budget problems. Expect lots of wrangling over how to cut budgets and whether to raise taxes.

By Teresa Mears Jan 14, 2011 1:18PM

This post is by Janet Novack of Forbes.

 

Forbes.com on MSN Money
With President Obama and Congressional Republicans having sealed a deal in December to extend the Bush tax cuts through 2011 and 2012, the tax debate has taken a short Washington hiatus and hit the road.

 

On Wednesday, Illinois kicked off this national tour with high drama. In a lame duck session vote just hours before a new, less heavily Democratic legislature was to be sworn in, the state’s Senate gave final legislative approval to raising the state's personal income tax by two-thirds, from 3% to 5%, and its corporate income tax rate by 45%, from 4.8% to 7%.  The tax package, designed to close half the state’s $13 billion 2011 deficit, also brings back the state’s estate tax with an exemption of just $2 million per person, compared to the new $5 million per person exemption from the federal estate tax. (For other states’ 2011 estate taxes, click here.)

 

"Our state was careening towards bankruptcy and fiscal insolvency,"’ Gov. Pat Quinn said at a news conference confirming he will sign the stunning increases. "Our fiscal house was burning,’" he added.

 

Not surprisingly, state business leaders warn the tax hikes used to put out the fiscal fire could douse Illinois’ growth prospects, too. The Washington-based Tax Foundation has already recalculated Illinois’ ranking on it s 2011 State Business Tax Climate Index, downgrading it from 23rd to 36th. The Tax Foundation says that when an additional 2.5% property replacement tax imposed on Illinois corporate income is figured in, the state will have a 9.5% corporate income tax rate -- the third highest in the nation.

 

Illinois’ new 5% flat personal income tax won’t, however, be among the highest in the nation, or even in the Midwest; Iowa has a top rate of 8.98% and Wisconsin a top 7.75% rate.  (The highest 10 state rates are here.) Moreover, lllinois still ranks ahead of Iowa (45th), Minnesota (43rd) and Wisconsin (40th), in overall business tax climate, according to the Tax Foundation’s Joseph Henchman and Kail Padgitt.

 

Indiana Gov. Mitch Daniels, a Republican whose state ranks 10th (the best in the Midwest), couldn’t resist gloating yesterday. "You guys are nothing if not entertaining. It’s like living next door to the Simpsons -- the dysfunctional family down the block,"’ Daniels told a Chicago radio station.

 

If Daniels finds Illinois’ fiscal follies funny, he should have lots of laughs this year. While Illinois’ mismanagement has been particularly egregious, it’s hardly the only state facing huge budget problems. In fact, the Center on Budget and Policy Priorities, in a report issued last month, predicted that fiscal 2012 (beginning in July 2011, for most states) could be the most difficult year for state budgets this downturn, as the federal stimulus money that helped the states through fiscal 2010 and 2011 disappears. According to the Center’s calculations, the states face $134 billion of 2012 net budget gaps (that’s net of federal aid), compared to net gaps of $101 billion in 2011 and $123 billion in 2010.

 

Illinois’ big tax hikes are unlikely to be matched elsewhere given the statehouse and gubernatorial gains Republicans made last November. But there will be plenty of fights over raising, cutting and redistributing the tax burden -- particularly when compared with last year’s comparatively quiet state tax front. Among the developing dramas:

More from Forbes and MSN Money:

VIDEO ON MSN MONEY

4Comments
Jan 17, 2011 2:16PM
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Thankfully we no longer have to worry about paying state income taxes.  Moved from Iowa to Wyoming in 07.
Jan 27, 2011 10:18PM
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If income tax were the end of it in Illinois would be one thing, but the author talking about Illinois income tax as not so bad, needs to look a little deeper.  My $259,000 house has real estate tax in excess of $6000.  Valuations are at 100% in my area.  My sales tax (on all items) are 8%.  My income tax is now 5%.  And, I live in downstate Illinois, which has virtually no clout with state govt. 
When I retire, I think I will have to leave the state.

Jan 17, 2011 6:39PM
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Good move, DavidBl !!  Been here for 30+ years and love it.
Feb 7, 2011 10:32PM
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all rights not reserved for the federal government belong to the states? or something like that is in the contstitution. So if the fed has the right to collect income taxes, then the states do not have that right. im not a lawyer who can read between the lines but it seems to me that the states dont have the right to collect income tax

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