Forget Defaults, The Real Muni Crisis Is The Evisceration Of The Obama Tax Break

carlos boozer

Photo: ap

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.

Now Check Out The 15 Biggest States Budget Gaps >

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