It’s time to forget about default and start worrying about recession.Last week Illinois was forced to pass a 2 per cent income tax hike, as part of a plan to close a $15 billion gap (not counting $87 billion in unfunded pension liabilities).
Now here’s what that does to the federal tax cuts. Obama’s tax plan set rates at 10-15-25-28-33-35, which amounts to breaks of respectively: 5%, 13%, 6%, 8%, 6.6% and 4.6%.
Then Illinois increased state income tax from 3% to 5%. Suddenly those tax breaks were reduced to 3%, 11%, 4%, 6%, 4.6% and 2.6%.
On average the tax hike undoes 28 per cent of the “critically important” tax break.
Lets see how this affects Chicago Bulls star Carlos Boozer, who will earn $13.5 million next year. Extending the federal tax cuts reduced Boozer’s total income tax bill from 42.6 per cent to 38 per cent, saving him $621,000. The Illinois tax hike raised the total bill back to 40 per cent, reducing his total savings to $351,000.
Of course, if Illinois had to cut spending to fill the gap, the drag would be felt similarly, just through a different mechanism.
This is the real issue. Cities and states probably won’t default, but they will raise taxes to avoid that, and your Obama tax breaks disappear.
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