Just another failed state?  No, not some third world country, but our neighboring state of Illinois.  In this post I’ll examine the recent Illinois state income tax increase and in the process risk sticking my head into the hornet’s nest, actually a paper wasp’s nest, but you get my meaning.

Tuesday night or more accurately early Wednesday morning, the Illinois state legislature passed a 67% tax increase.  The legislature increased the state income tax rate from 3% to 5%.  It was a lame duck session that passed this tax increase in the wee hours of the night and with only a few hours to spare before the new legislature was seated later that day, at high noon.  Governor Pat Quinn is expected to sign the tax increase.  This tax increase is expected to raise almost $7B in revenue and will go a long way towards, but also fall far short of closing the state’s expected $15B budget gap.  The legislature’s failure to pass another $7B in borrowing authority leaves budget cutting as the likely last alternative to close the Illinois budget gap.  In Missouri, budget cuts are not only the last, but also the first and really the only alternative for balancing our state’s budget.

Living in the adjacent and relatively solvent state of Missouri, one is tempted to indulge in the sin of Schadenfreude, the taking pleasure in the misfortune of others.  And indulge I did along with some of my Missouri brethren.  We joked about illegal Illinois immigrants fleeing the insolvent state on our border and swimming across the Mississippi to a better life.

At work, there are few things left that can be still joked about, at least things that are still politically correct and won’t get you fired.  In our bi-state area, the dichotomy that defines this area still offers a chance for sport and sport was made, but only because a large portion of the people at work commute from Illinois.  I polled two of them and learned this. 

They don’t pay Illinois income taxes.  They, like me, pay Missouri income taxes.  Missouri income taxes run 6%.  So why were they still moaning and crying then?  Even 5% is still less than 6%.  It is not that simple they explained.  Missouri is much more generous with personal deductions than Illinois.  Even so, it still wasn’t clear whether either one of my statistically unscientific sample of two would end up paying anymore than they already do in income taxes, even with a 67% tax hike back home.  Instead of Schadenfreude, maybe its antonym, Mudita, the Buddhist concept of happiness in another’s good fortune is more appropriate?  No, I think not and I’m sure neither would they. 

At least Illinois has taken proactive action to solve its budget woes.  Most if not all states have to varying degrees similar problems as the state of Illinois.  The 2009 Federal stimulus package spent most of its money to prop up state and local governments.  Now that money is running out.  Most states are not in near as bad financial shape as Illinois, so their remedies should be more moderate.  One state, California, is in the worst fiscal shape.  Its budget shortfall is $25B+.  It will be interesting to see what California comes up with as a solution.