Spotlight on the States: Illinois

Continuing our "Spotlight on the States" series, which takes a look at state-level fiscal issues around the country, the Bottom Line turns to the state of Illinois.

Illinois faces a budget deficit of at least $13 billion - and many predict that it could reach $15 billion by 2012. That number is even scarier when compared to the operating budget of Illinois' General Fund (including statutory transfers) of approximately $33 billion, making a deficit of $13 billion equal to over 39% of that budget. The state also has billions of dollars worth of unpaid bills to various public institutions - including local school districts, state universities, pharmacies, and other social service agencies - which have forced many of the establishments to impose mandatory work leaves, lay off employees, or borrow money. In fact, by the end of FY2010, the state was 153 working days behind (over 7 months) in paying its bills. Illinois also ranks last among all states in terms of funding for its state pension system, and ranks second-to-last in terms of its bond rating (California ranks last). To quote the recently published report Titanic and Sinking: The Illinois Budget Disaster, "It is hard to overstate the depth of the fiscal hole the state is in."

The state has already attempted to reduce spending in order to get its fiscal problems under control; in August of 2010, Gov. Pat Quinn (D) detailed $891 million in budget cuts, including $576 million in cuts to the Department of Human Services and $311 million in cuts to public education. Though these cuts reduced the state's budget gap, Illinois still faced an historic deficit. In response, on January 12, 2011, Illinois lawmakers passed controversial legislation aimed at further reducing their deficit. Highlights of the legislation include:

• Increase in personal income tax rate from 3% to 5% (66% increase)
• Increase in corporate tax rate from 4.8% to 7% (45% increase)
• Both measures will last through 2015, and combined are projected to increase revenues by $6.8 billion per year
• Tax increases are tightly bound to a 2% limit on spending growth - if spending goes above this limit, the tax increases are automatically canceled

The proposal barely passed (60-57 in the State House and 30-29 in the Senate) and inspired some severe criticism from predictable sources. It did help improve Illinois' credit rating, with Fitch Ratings lifting its outlook on Illinois from negative to stable in reponse to the tax rate hikes. While Gov. Quinn praised the state legislature's actions, many Republicans voiced concerns that the tax hikes would stunt growth and encourage businesses to look elsewhere. Scott Walker, the Republican governor of neighboring Wisconsin, released a statement aimed at Illinois businesses saying "Escape to Wisconsin. You are welcome here. Our talented workforce stands ready to help you grow and prosper."

Opinions differ on whether or not other states will follow Illinois' example; Robert Ward, deputy director of the nonpartisan Nelson A. Rockefeller Institute of Government at the State University of New York, said that "the great majority of states have been trying to avoid broad-based tax increases, and there is little evidence that that will change." A report issued by The Tax Foundation took a different view, stating that:

"Due to a combination of improving revenues and growing political opposition to increased state-level taxes and additional federal aid to states, 2010 was a lighter year on state-level tax changes than anticipated. But as temporary federal stimulus aid ends in mid-2011 and with many states still not balancing their projected revenues with desired expenses, 2011 may be a year of dramatic tax increases."

The year ahead holds many fiscal challenges for state governments, and obviously we will see many different kinds of approaches in dealing with them. Hopefully the tough economic climate will inspire state legislators to work together and reach bipartisan solutions - and who knows, maybe  Washington will be able to set an example in the coming months that states can follow.

Click here to submit your ideas for a better state budget for Illinois, and here to tackle our federal budget.

Updated 01/31: This version removed a line on taxes in other states and how the Illinois tax increase compares.