The State of Illinois is perilously close to the edge, and experts predict it could become the first US state to file for bankruptcy.
The beleaguered, Democrat-controlled state is already in hot water because of its extreme financial practices and programs, and is now scrambling to avoid bankruptcy by placing a hefty burden on the shoulders of taxpayers.
How did Illinois dig itself in such a deep hole, and why are individual hard working citizens being asked to shoulder this high burden? A look at how the Democrat-led state manages its money reveals a lot.
Income Tax Hike for Residents
After a long series of debates, the Illinois State House approved a huge tax hike for residents who work – the final rate is a 32% increase for the average working resident. Both the Democratic House and Senate voted to override the governor’s veto and agreed to raise the state’s personal income tax rate; where working residents once paid 3.75%, they will not pay 4.95% in income tax. This is a permanent change, not just a temporary measure.
Businesses did not escape unscathed either, as both House and Senate voted to increase tax rates on corporations as well; the original rate of 5.9% will now be 7% for businesses. Legislators hope that shifting the burden to individual taxpayers and businesses will generate an additional $5 billion in taxes overall.
Illinois Tax Rates Are Already High
Illinois residents are sadly accustomed to high taxes; the state has the highest property taxes in the entire nation, often leaving older citizens with no option but to move away after they retire. The soaring tax rates impact all residents, but hit minorities particularly hard; Chicago and Cook Counties already see a growing number of African American residents fleeing the state.
This income tax increase is not much of a surprise for those who have watched Illinois lawmakers scramble to cover increasing deficits. According to CBS news, the state could become the first to apply for bankruptcy protection, a process usually reserved for cities or counties.
Ratings agencies have already downgraded the state’s bonds to the lowest possible ratings; the state also has the lowest credit rating in the nation. Credit works for states just like it does for individuals, so a low credit rating means Illinois is paying more to borrow money.
Soaring pension needs and an unbalanced, incomplete budget are largely to blame for the current crises; a long history of financial mismanagement has resulted in the Democrat-led state in 2017. The state currently has over 600 pension funds for the government alone with set rates and that made big promises to workers. The state then spent the money needed to fund those pensions on things like infrastructure and schools. All those unfunded liabilities result in today’s crisis and the growing worries about bankruptcy.
Overburdened Citizens
Illinois has a Democratic House and Senate and a Republican governor. House leader Michael Madigan needed only three Republican members to vote his way, but 10 Republican representatives ended up voting to increase taxes on citizens and overturning the Governor’s earlier veto.
The state, which in addition to being in the worst financial straits in the nation, also has the lowest amount of new jobs in the country, and is losing citizens to nearby states at an alarming rate. Loss of individuals and low job numbers will make it even more difficult for Illinois to rebound.
While the new bill increased taxes on citizens and business, it did not include any reforms or cut any spending, further driving the state towards junk bond status. Which Republicans sided with Democrats to raise taxes and overturn the Governor’s veto? The Chicago Tribune has a complete list of those who abandoned typical conservative beliefs and voted to hike taxes.
Whether or not the state will continue overtaxing its residents to offset its own budget problems remains up in the air. As the state runs perilously close to bankruptcy, the outcome could impact the way other states choose to tax citizens and business and how they manage money.
Regards,
Ethan Warrick
Editor
Wealth Authority
