(Bloomberg) — Illinois voters defeated a measure that would have allowed the state to raise taxes on its wealthiest residents, striking down a pillar of Governor J.B. Pritzker’s plan for shoring up the state’s finances and preventing its debt from being cut to junk.
The defeat of the constitutional amendment that would have scrapped the state’s flat income tax by a vote of 55% against sent the prices of Illinois’s bonds tumbling, with those due in 2034 down about 7%. If approved, the state would have been able to proceed with enacted legislation to apply higher rates to incomes over $250,000, raising levies on the highest earners.
The loss adds a new challenge to the Democratic governor’s effort to steady the finances of Illinois, whose rising pension-fund costs and chronic budget shortfalls left it with the lowest bond rating among U.S. states even before the pandemic struck. Failure of the measure won’t automatically trigger a downgrade to junk and ratings companies have said they’ll be watching for the state’s backup plan.
“The options for Illinois without the fair tax are not good,” Pritzker said during a press conference on Tuesday before polls closed. He added that without the additional revenue from the graduated income tax, the state needs to look at budget cuts potentially for public safety, education and health services and rely on its “regressive” tax system for additional revenue.
The business closures since March have added to the fiscal challenges and all three major rating companies have a negative outlook on the state, signaling that it could be the first state stripped of its investment grade rank. Such a step would likely add to its financial problems by saddling the government with higher interest bills and preventing many mutual funds from owning its debt.
“In this election, Illinois voters sent a resounding message that with an $8 billion deficit and two massive tax hikes in the last ten years, we cannot trust Springfield Politicians with another tax hike,” the Coalition to Stop the Proposed Tax Hike Amendment, said in an emailed statement late Tuesday.
The ballot measure set off a costly campaign, with the state’s billionaire governor drawing heavily on his own fortune to parry well-financed opponents. Pritzker contributed at least $58 million to the committee supporting it. That sum was nearly matched on the opposing side by billionaire Citadel founder Ken Griffin, who gave some $54 million to foes who said it would give the state more power to raise taxes and hurt business.
“We are undoubtedly disappointed with this result but are proud of the millions of Illinoisans who cast their ballots in support of tax fairness in this election,” Quentin Fulks, chairman of the Vote Yes For Fairness campaign, which supported the measure, said in an emailed statement on Wednesday.
“Now lawmakers must address a multi-billion dollar budget gap without the ability to ask the wealthy to pay their fair share,” Fulks said. “Fair Tax opponents must answer for whatever comes next.”
The amendment would have ended a requirement that all incomes are taxed at the same rate and allowed the enactment of already passed legislation to increase levies on incomes of more than $250,000 a year. That would have brought in $1.2 billion for fiscal 2021, which began July 1, and $3.1 billion for a full year, according to state estimates.
It was no panacea. Illinois has about $8.3 billion of unpaid bills, some $137 billion of unfunded pension liabilities, and its rainy day fund has just $68,459. With the bond market demanding high penalties to own its debt, it’s one of just two that have borrowed from the emergency lending facility the Federal Reserve rolled out after the pandemic.
With the tax hike now off the table, Pritzker needs to push through other ways to close the state’s deficit. Pritzker has said budget cuts of 15% over two years or potentially borrowing from the Federal Reserve again are options if the income tax measure fails and no more federal aid arrives.
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