An against-the-tide tax hike in Illinois

  • Article by: CURT BROWN , Star Tribune
  • Updated: February 21, 2011 - 12:21 PM

A hefty increase in income and corporate taxes has drawn mixed reviews in state with $15B deficit.

CHICAGO - Mike Vasilevich skimmed a small Zamboni over the skating rink in Millennium Park, smoothing the ice below the shiny metallic hunks of modern sculpture. Starting this month, Vasilevich's paycheck has been similarly skimmed.

While Minnesota debates taxing high-end earners and Wisconsin takes aim at state employee unions, Illinois has already decided on its dramatic remedy to state budget problems -- it bucked national no-new-tax trends, imposing a major increase in taxes to try to cage its runaway $15 billion deficit beast.

With state pension funds collapsing and Illinois' borrowing ability on the verge of junk-bond status, Democrats muscled through by a single vote an across-the-board income tax increase from 3 percent to 5 percent. Corporate taxes were jacked up from 4.8 percent to 7 percent. Both rates are scheduled to drop to previous levels in four years. "They'll be as temporary as the tollways," Vasilevich predicted. "It's aggravating, but we're used to it. The state's broke so it doesn't faze me anymore. It's never going to go down, so everybody just goes with the flow."

He shrugs his shoulders in what's become a common gesture as the initial outrage over the tax hikes has turned to ambivalence, and even relief in some quarters.

"The tax increase is akin to having someone in an emergency situation and you've just put on the tourniquet," said the Rev. Denver Bitner, the pastor and president of Illinois' Lutheran Social Services. "You've not addressed the issues, but you've preserved the life and at least we've moved away from the brink."

The tax increases will drum up $7.3 billion in annual new revenues and Illinois plans to impose spending caps and borrow billions more to pay a backload of bills to schools, health care and social service agencies.

"The state used its pension funds like a credit card, then the markets crashed and the recession hit, so they absolutely could not go without a tax increase," said Ralph Martire, director of the bipartisan Center for Tax and Budget Accountability in Chicago.

Bitner's agency serves 70,000 of Illinois' poorest, helping with mental health, substance abuse, foster children and the elderly -- 70 percent of whom earn less than $15,000 a year. Alphonso Hernandez, 44, is one of them. Diagnosed with both schizophrenia and chemical dependency, Hernandez takes the bus to a mental health clinic four days a week in the Portage-Cragin neighborhood on Chicago's northwest side. "I'm happy about the tax in a way because I'd be on the street if they push us to the side and don't find a way to fund us," he said. "Where would I learn to take my medications that I need?"

The state was $13 million in arrears to Lutheran Social Services of Illinois. It and the state's schools and many smaller agencies had wrung out all available credit lines and reserve funds. The state owed the school district in Rockford, the state's third largest city, $8 million a year ago. That number is now more than $17 million. "It's almost a miracle that the folks in Springfield had the willingness to step up and pass the tax," Bitner said. "We've been pushing for this for 10 years and, in all the foofaraw, our taxes are still low in relation to the states around us."

Irritating business

Republican governors in Wisconsin, Indiana and even New Jersey wasted no time in pouncing on what they see as the anti-business message behind the tax increases.

"Don't let Illinois balance its budget on the back of your business," New Jersey Gov. Chris Christie says in radio ads airing in Illinois that aim to lure companies away. Wisconsin just passed a law forgiving personal and corporate taxes for two years if companies relocate there.

But at his family's 85-year-old steel processing plant a mile south of Midway Airport, William Hickey Jr. isn't ready to head out and start over.

"We certainly can't pick this place up and move to New Jersey," said Hickey, the company president. "But you'll get to the point where the tax burden will make people really question expansion."

The 250,000-square-foot Lapham-Hickey Steel facility cuts, finishes and ships steel to businesses across the country. He has other plants from Alabama to Little Canada, Minn., and has talked to other business owners irked by the tax increases. "I can't find any employer who's saying, 'Gee, I can't wait to open a new plant in Illinois,' '' Hickey said.

Jimmy John Liautaud, whose chain of 1,000 sandwich shops is based in Champaign, told that city's newspaper that several "pro-business" states are wooing him. But Greg Baise, who runs the 3,500-member Illinois Manufacturers' Association, said Liautaud had already moved to Florida and enrolled his kids in school there before the tax increase passed.

"Conservatives who want to fan that flame can get to outrage pretty quick," Baise said. "And there is an irritation factor about the tax increase that is not going to be helpful the next few years."

But Baise points out that Rahm Emanuel, former Chicago congressman and key Obama administration lieutenant, is expected to win easily in next week's Chicago mayor's race. And Obama ads in the last days of the governor's race helped Democrat Pat Quinn edge out Republican Pat Brady last fall.

"That's the problem," Hickey said at his steel plant. "This is a one-party state so there's no way to fight things like this tax increase."

At the Heartland Institute, a free-market think tank in Chicago's Loop, John Nothdurft points out that most Illinoisans' paychecks earlier this month included some federal tax relief from Social Security payroll tax breaks ironed out in a compromise between Obama and Republicans. That extra cash, aimed at revving up the economy, disappeared in the next batch of paychecks when the state income tax increase kicked in.

"Our former senator who is now the president wanted to stimulate the economy by lowering taxes," Nothdurft said. "But his old state said: No, we'll keep that money and raise your taxes at the worst time -- just when we're trying to crawl out of a huge recession."

At an antique mall on the Illinois-Wisconsin border near her home in Rockton, dealer Rene Newland shrugged.

"It's more than a little bit frustrating because one check had a little extra and then the state just sucked it right back," she said.

Cecilia Frank, a 71-year-old former teacher and reading consultant in suburban Rolling Meadows, pays more than $300 a month for health care, which her $283 Social Security check doesn't cover.

"And now my income taxes have almost doubled and so have my real estate taxes and we all want to know where did the money go?" she said. "Where is it? It's just ridiculous and people are just discouraged."

Curt Brown • 612-673-4767

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