Tax hike roundup
Friday, Jan 7, 2011 - Posted by Rich Miller
* Sun-Times…
Gov. Quinn struck a deal with the Legislature’s ruling Democrats Thursday to raise the state income tax by 75 percent and boost the tax on cigarettes by $1 a pack…
The cornerstone of a dramatic day, the revenue agreement reached by Quinn, House Speaker Michael Madigan (D-Chicago) and Senate President John Cullerton (D-Chicago) would impose a temporary, four-year increase in the state tax on workers’ paychecks from 3 percent to 5 ¼-percent.
The money from that, the cigarette tax hike and a corresponding increase in the corporate income tax from 4.8 percent to 8.4 percent would erase the state’s expected $15 billion deficit.
It also would generate a $700 million-plus windfall for schools and fund annual $325 rebate checks to property owners beginning in 2011, two key concessions fought for by leading black lawmakers, including Rep. William Davis (D-Homewood).
The proposal would also limit state expenditures for the next three fiscal years to one percent a year, according to Cullerton.
* ABC7…
After four years, the rate would fall back to a permanent [3.25 percent]. The extra money would go for… property tax relief.
The four-year tax hike means someone making $50,000 a year would pay more than $1,000 annually.
* Tribune…
The personal income-tax hike is expected to net the state roughly $6.2 billion, and a corresponding corporate income tax increase could raise an additional $1 billion, Cullerton said. The rate businesses pay would temporarily jump from 4.8 percent to 8.4 percent [plus the currently imposed 2.5 percent replacement tax, for an effective tax rate of 10.9 percent]. […]
As a measure of how desperate state government’s finances are, Cullerton said the state would use the income-tax hike to borrow $12.2 billion. Of that, $8.5 billion would pay overdue bills and $3.7 billion would cover a government worker pension payment lawmakers skipped when putting together the current budget, he said. […]
With Illinois’ financial problems escalating each budget year, the state is facing prospects of a $15 billion budget deficit and more than $8 billion in overdue bills to providers of social services, primarily to the poor. At the same time, its massively underfunded public employee pension system faces the prospect of selling off assets to help cover retirement payments.
* SJ-R…
Local governments normally get a cut of the state income tax, but they would not share in revenue from the tax increase. Cullerton said they would not lose any of the portion they now receive. […]
If approved, this is the final year that property owners will use the property tax deduction currently on their state income tax return. Instead, in the future each property owner would receive a check from the state for $325.
“About 80 percent of the people who pay property taxes would get a greater break,” Cullerton said.
* ISN…
The income tax increase would be based on 2011 incomes, back to Jan. 1, according to Cullerton. But he is quick to say that homeowners will get a property tax credit this year, and property tax rebate checks of $325 starting in 2012.
Cullerton said the tax increase and borrowing plan of 2011 should settle Illinois’ budgets until at least 2014.
“Eight-billion-dollars will go back into the economy; people will be paid on time,” he said. “Our credit rating will be dramatically improved. We will then have a balanced budget with virtually no growth for the next four years.”
* AP…
Madigan’s spokesman said he couldn’t discuss the speaker’s position. The Senate has approved tax increases in the past, so the biggest question about the proposal is whether Madigan can find enough votes to get it through the House.
The governor’s office put out a statement that stopped short of saying the three leaders had reached a final agreement. Rank-and-file legislators said Quinn described the tax plan to them earlier in the day and portrayed it as a deal among all three of the powerful Democrats. […]
Madigan has repeatedly said he doubts that a tax increase could pass in the House without Republican support. But Republican leaders have not been included in tax and budget negotiations, and there was no indication Thursday that they were prepared to cooperate with the Democrats.
* Pantagraph…
State Sen. Dale Righter, R-Mattoon, characterized the push for a tax hike as a “last-minute, lame duck session money-grab by the Democrat leaders.”
“It’s taken us a decade to get into this problem. I don’t know why we think we need to solve it in two weeks like the Democrat leaders apparently intend to do,” Righter said.
* Fiscal year income tax revenues are up, by the way, but mainly because of the tax amnesty program…
Illinois has had only modest growth in tax revenue for the first half of fiscal year 2011, although a precise figure is hard to determine because of the tax amnesty program that ran from Oct. 1 to Nov. 8.
It appears, according to the Legislature’s Commission on Government Forecasting and Accountability, that real growth in the state’s “big three” revenue sources – the sales tax, individual income tax and corporate income tax – is about $240 million. But if the revenue from the tax amnesty program is included, that growth is about $679 million, an increase of about 7 percent over last year’s figures.
The results of the tax amnesty program are still being tabulated, but its proceeds are now up to $628 million, a sum that is greater than had been expected. Still, much of that money likely would eventually have been collected anyway, according to the commission.
* And at the bottom of the usual scare story about bond speculators, we have this…
John Miller, chief investment officer of Nuveen Asset Management, has been increasing Nuveen’s Illinois holdings as part of its national muni portfolio of nearly $80 billion, because he says default fears are overblown.
He says if the governor and lawmakers can agree this week on raising the state income tax for the first time in years, it would go a long way toward closing the $13 billion deficit. In that case, he said, spreads could tighten ”quickly.“
Quite right. All of those people betting against Illinois in the still relatively tiny CDS market are gonna lose big bucks if this tax hike and bond program passes.
Discuss.
- wordslinger - Friday, Jan 7, 11 @ 6:52 am:
–All of those people betting against Illinois in the still relatively tiny CDS market are gonna lose big bucks if this tax hike and bond program passes. –
Gee, that would be a shame. They perform such a vital role. Kind of like of short sellers in the stock market.
- Cassiopeia - Friday, Jan 7, 11 @ 6:55 am:
First it has to pass the house today. The Madigan silence and exclusion of the Republicans could be a sign that there may well not be the votes to get this done. It has to be done quickly before the legislators have a chance to hear from their constituents.
This is probably the responsible thing to do but when virtually all other states that are facing similar problems are going the cutting route first Illinois seems to be an outlier by going the tax route first with a “cutting” pledge to follow. This is especially true when you look at the courageous approach being taken by the new Governors in New York and California.
Also what happened to the Quinn promise to veto any increase over 1%. I guess its the same place as most have his other promises.
- Rich Miller - Friday, Jan 7, 11 @ 7:06 am:
===llinois seems to be an outlier by going the tax route first===
First? Where’ve you been the past two years?
- Parmenides - Friday, Jan 7, 11 @ 7:15 am:
IL wont change if this passes, as the new revenue will just be spent by future politicians.
- Parmenides - Friday, Jan 7, 11 @ 7:35 am:
and there will be new deficits and unpaid bills in a half decade.
- FormerIowan - Friday, Jan 7, 11 @ 8:24 am:
Rich–your Capitol Fax this morning says that Illinois would have the second highest corporate tax rate in the country at 10.9%, behind Iowa’s 12%. In reality, Illinois’ rate would be even higher than Iowa’s because Iowa allows corporations to deduct half of the federal income taxes they pay in determining their taxable income. So, to take a simpilified example, a corporation with $10 million of Iowa income will pay $3.5 million in federal income tax (the federal rate is 35%), and can deduct $1.75 million of that in determining its taxable income in Iowa. That would leave the corporation with taxable income of $8.25, which at a tax rate of 12% yields a tax of $990,000. That makes Iowa’s effective tax rate about 9.9%–a full point lower than what the new Illinois rate would be under the leaders’ agreement.
- Anonymous - Friday, Jan 7, 11 @ 8:53 am:
The funny thing is that the “Property Tax Rebate” check you receive from this proposal would be considered income when you file your Federal Income tax. Therefore, you will have to pay taxes on your property tax rebate. Something to think about…
- Anon - Friday, Jan 7, 11 @ 8:54 am:
The newspapers should use “effective rate” in the proper sense, which is dividing the tax due by the gross income before all the deductions. And no corporations actually pay the full 35%, they have plenty of deductions and credits.
- Plutocrat03 - Friday, Jan 7, 11 @ 9:39 am:
When passed, the revenue will not match projections, job creation will be retarded and the ‘budget disciple” will never materialize.
I believe Mitch Daniels was asked about what Indiana’s business development plan is. Purportedly, the answer was to the effect of ‘We are not Illinois or Michigan”
- Parmenides - Friday, Jan 7, 11 @ 9:42 am:
“Eight-billion-dollars will go back into the economy” If you take $8B from taxpayers (removing the money from the economy) and send it to people owed the $8B (sending it back into the economy) its a wash, not sending $8B into the economy.
- Excessively Rabid - Friday, Jan 7, 11 @ 9:54 am:
The thing I like least about this is the property tax rebate. Reduce or limit the deduction if that’s what you need to do but spare us the complications of this rebate poppycock.
- wordslinger - Friday, Jan 7, 11 @ 9:58 am:
–the ‘budget disciple” will never materialize.–
Oh, ye of little faith. If you had but the faith of a soybean, verily you could move mountains.
Bureau of Labor Statistics, Unemployment Rates, Oct. 2010
Indiana: 9.2%
Illinois: 9.2%
No “budget disciple” and perhaps Mitch is a false prophet, too.
- Logical Thinker - Friday, Jan 7, 11 @ 10:12 am:
The revenue this bill promises will never materialize. The projections will come up significantly short because people will either move or the rich won’t take income.
What people don’t understand is you can’t make rich people take income; they can live off of capital gains all day long. Tax increases have negative effects on revenue.
- wordslinger - Friday, Jan 7, 11 @ 10:19 am:
– Tax increases have negative effects on revenue.–
The Return of the Supply Siders. All small government proponents should be happy then, because we’re going to starve the beast, lol.
Makes you wonder why Reagan and Bush I raised taxes, though.
- Parmenides - Friday, Jan 7, 11 @ 10:39 am:
society get less of whatever gets taxed; if it works for cigs it works for income. this is why einstein said the hardest thing in the world to understand is the income tax. this deal will casue less income in IL. that math says so.
- John Bambenek - Friday, Jan 7, 11 @ 10:54 am:
I may have to take up smoking if this passes… you know, it’ll be for the children!
- Logical Thinker - Friday, Jan 7, 11 @ 11:46 am:
What happens when all the smokers quit smoking and there is no more revenue to collect from them?
Red light cameras at every intersection? Parking meters in your driveway?
- Cook County Commoner - Friday, Jan 7, 11 @ 12:54 pm:
Not so sure whether the CDS market will ultimately decide that the cost to insure Illinois government debt should drop if the current proposals become law. I don’t know how the Illinois corp tax works, but such a steep increase seems to be a job killer, along with forcing certain internet retailers to pay sales taxes. The debt markets, especially the municipal market, take a longer view than the hair trigger equity markets. Depending on how all this shakes out and the Dems get their wish, the best I think they’ll get is no increased spread on interest and CDS rates because it all looks like finger in the dike remedies. If the Repubs and some Dems pushed this whole lame duck, short order cooking back with a coherent increased tax plan including sweeping education and pension funding changes, which would be rationally debated during the regular session, I then think the bond and CDS markets would be more accomodating. But the likelyhood of that seems slim, so I guess we take whatever unsavory stew that will be served in the lame duck session and hope we have enough later for the antacid.
- jake - Friday, Jan 7, 11 @ 1:04 pm:
When all the smokers quit smoking, the payoff on health care costs from not having to treat their smoking-related diseases will more than offset the revenue from cigarette tax.
- wordslinger - Friday, Jan 7, 11 @ 1:05 pm:
–Not so sure whether the CDS market will ultimately decide that the cost to insure Illinois government debt should drop if the current proposals become law.–
But then again, who cares? The state isn’t buying insurance. Let the numbers players worry about it.
- Bigtwich - Friday, Jan 7, 11 @ 1:05 pm:
“Taxes are the price we pay for civilization.”
Oliver Wendell Holmes, Jr.
That could explain why Indiana is a “low” tax state.
- steve schnorf - Friday, Jan 7, 11 @ 1:43 pm:
Word, unless things have changed, we do insure some of our debt, the cost of insurance being less than the benefit in spread.
- Capitol View - Friday, Jan 7, 11 @ 1:51 pm:
any business that pays business income taxes has a fool for an accountant and business office manager.
It is a double taxation situation, because first the business pays tax on its earnings for the year, and then the business owners pay an income tax when the profits are distributed.
Much better to distribute estimated profits before the end of the tax year and only have the owners pay it (once), or steer what would have to be reported profits into more R&D efforts and business expansion.
- wordslinger - Friday, Jan 7, 11 @ 2:29 pm:
–Word, unless things have changed, we do insure some of our debt, the cost of insurance being less than the benefit in spread.–
Through CDS? I recall back in the day some issues being insured through MBIA. If the state is participating through swaps, I stand corrected.
My understanding is most of that market is just the casino. Folks are just betting on movement of the number and don’t actually have an interest in the underlying debt.
- Cook County Commoner - Friday, Jan 7, 11 @ 2:48 pm:
Wordslinger, I’m with you if the CDS market is just a casino. However, I understand that pension funds and large holders of municipal debt also enter into these contracts as a hedge against default. I guess they are filling for the questionable insurers who once offered default insurance. Love to see what one of these contracts look like, however, I understand that the feds are still floundering about with standardization and establishing some sort of clearing house to monitor and govern the transactions and ensure that the players can pay up if called upon to do so.
- Rambler - Friday, Jan 7, 11 @ 2:53 pm:
Still no explanation as to why my comment was deleted — just a deletion of my follow-up.
Do you plan a permanent ban then for no stated reason?
- Rich Miller - Friday, Jan 7, 11 @ 2:58 pm:
Rambler, tone it down.
- Rambler - Friday, Jan 7, 11 @ 3:05 pm:
I guess there are just some views that — even if expressed reasonably — are unacceptable here. Disappointing.
- Rambler - Friday, Jan 7, 11 @ 3:23 pm:
I’ll just add though that there’s a bright side to this little drama — it bolsters the probability that the other commenters are more perceptive than I thought.
Now I’ll get off your back. Have a very nice weekend.