Democratic lawmakers voted 71-42 to override Republican Gov. Bruce Rauner's veto of a $5 billion tax hike on Thursday.
Illinois has been in a budgetary showdown to address a $6.2 billion deficit, as well as nearly $15 billion in unpaid bills and hundreds of billions of dollars in unfunded retirement benefits for state workers.
Rauner had pushed lawmakers to close the deficit by reforming workers compensation and consolidating local governments, while also capping local property taxes. Democrats, who control the state Senate and House of Representatives, along with 16 Republican state representatives, rejected those measures and instead approved hiking income taxes from 3.75 percent to 4.95 percent and corporate taxes from 5.25 percent to 7 percent on Sunday night. Rauner vetoed the bill on Tuesday.
Rep. Steven Andersson, one of the Republicans who broke with Rauner, defended the measure, saying that the tax hike was necessary to avoid a "financial meltdown." He said that Republicans did not have the votes to pass Rauner's budget and that the state needed to pay its immediate debts.
"Impasse politics do not work," Andersson said. "We are going into free fall if we don't do it. Our options are this or financial meltdown."
The vote was initially delayed after a Hazmat crew investigated white powder that was thrown at Rauner's office. The statehouse was on lockdown until 4:27 and Capital Police took a woman into custody. No hazardous materials were found.
Rauner told reporters on Wednesday that the tax hike "will make our problems worse."
"This is not just a slap in the face to Illinois taxpayers. This is a 2-by-4 smacked across the foreheads of the people of Illinois," he said. "This tax hike will solve none of our problems. In fact, in the long run, it will make our problems worse, not better."
The state's massive debts had spooked markets. Credit-ratings agencies had threatened to downgrade Illinois to junk status, a move that would drive up interest payments and make it that much harder for the state to borrow money. Moody's downgraded Illinois to Baa3, just a step above Junk, in June due to the "political impasse" over the state's budget and its $251 billion pension debt.
However, the Democrats' solution failed to improve the state's standing. Moody's announced on July 5, the day after Rauner's veto, that it had place the state "under review for possible downgrade."
"Despite the progress toward budget balance that the emerging fiscal plan embodies, the plan entails substantial implementation risk," Moody's said. "The plan appears to lack concrete measures that will materially improve Illinois' long-term capacity to address its unfunded pension liabilities."
Lawmakers cited the credit warning in speaking out against the bill. Rep. David McSweeney said that the tax hike would hurt people without getting the benefit of confidence in lenders and improving the interest rates open to the state.
"If we pass this tax increase Moody's is telling us we're going to junk," he said. "This budget is full of smoke and mirrors … this budget is going to hurt people."
Government watchdogs said that the bill passed by Democrats would only exacerbate future problems with the state's debt. Michael Lucci, a vice president at the pro-free market Illinois Policy Institute, said that the state has been "in essentially a long-term recession with the worst income growth in the United States" and that the tax hike would solve the state's "cash flow crisis" at the expense of its fiscal health.
"This is not a solution. We're not paying our bills right now, but the real problem is the long-term debt crisis," he said. "This will allow the debt crisis to continue to fester and we'll be back here with the same problems, but we'll already have raised taxes."
Many Illinois residents were already preparing for tax hikes at the local level before the state hikes passed Thursday. In June, the city of Chicago announced that property taxes would increase by 10 percent for residents in an effort to pay for public safety and education. In November, the City Council voted to institute a soda tax that is expected to generate $224 million to address the city's deficit, though a lawsuit has prevented it from going into effect.
Lucci, a Chicago resident, said that the reliance of tax hikes to address debt crises at the state and local level will strain workers and hurt the economy.
"The problem is the localities are all leveraged up. They can't borrow anymore. So you have layers of debt on top of the same population and then you have layers of taxes imposed on that same population," he said. "This is not sustainable. We will tax ourselves into bankruptcy."
House Democrats needed 71 votes to override the veto. The measure passed 72-45, the same vote total the tax increase received on Sunday.