Illinois Will Probably Raise Income-Tax Rate to 5%, Budget Director Says

By Darrell Preston - Jul 28, 2010 9:40 PM CDT Thu Jul 29 02:40:44 UTC 2010

Illinois, which is in its worst financial position ever, will raise the income-tax rate in January to address its deficit, Governor Pat Quinn’s budget director said.

Lawmakers probably will increase the individual and corporate income-tax rates by 2 percentage points, generating $6 billion of new revenue, the budget director, David Vaught, said in an interview. The Legislature failed to address the deficit this year because of the November election, he said.

“We’re going to pass a tax increase in January,” Vaught said. “We expect it is going to be substantial.”

The governor has called for boosting the rate by 1 percentage point to pay for education funding, and the state Senate approved a 2 percentage point increase.

“We don’t know what the House is going to do,” John Sinsheimer, Quinn’s director of capital markets, said in an interview.

The state has been under pressure from companies that rate municipal bonds to show it has the political will to address its $13 billion deficit for the fiscal year that began July 1.

Fitch Ratings cut its rating on $25.7 billion of debt from A+ to A, its sixth-highest investment grade, in June. Moody’s Investors Service cut its rating one level to A1 on June 4.

The cost of insuring five-year Illinois bonds against default more than doubled to a record of $370,000 in June to protect $10 million of debt, from a low of $155,000 in January, according to data compiled by Bloomberg. The price has fallen back to $281,000 today.

Deficit Premium

Illinois has been penalized in the $2.8 trillion municipal bond market because of the deficit, Vaught said. The state’s $1.3 billion short-term borrowing, which officially closed today, was more costly than a larger one a year ago. The longest maturity, due in June 2011, priced at a yield of 2.125 percent. Last year’s $2.25 billion of short-term borrowings priced at less than 2 percent.

At one point before lawmakers passed some reforms to cut the cost of pension contributions, a rating company threatened the state with a double downgrade if it didn’t take steps to address the deficit, Vaught said.

“That’s real feedback,” Vaught said. “If we don’t deal with it, it will get worse.”

The state ended fiscal 2010 on June 30 “in the worst fiscal position in its history,” Comptroller Daniel Hynes said in a report. The state’s backlog of unpaid bills rose to $4.7 billion from $2.8 billion a year earlier, Hynes said. The state’s general fund balance fell to negative $4.7 billion, the lowest level in the state’s history.

To contact the reporter on this story: Darrell Preston in Dallas at dpreston@bloomberg.net.


http://www.bloomberg.com/news/2010-07-29/illinois-will-probably-raise-income-tax-rate-to-5-budget-director-says.html