CHICAGO — Illinois' relatively weak credit quality could get a boost if the state adopts a graduated income tax rate system, which provides increased revenue-raising flexibility to address pension and budget pressures, Moody's Investors Service said on Monday.
Democratic Governor J.B. Pritzker has championed the move as a way to tackle the state's fiscal woes.
The credit rating agency, which rates Illinois a notch above junk at Baa3, acknowledged that switching from the current flat income tax rate to rates that rise with income is "a politically difficult process."
That process requires the placement of a constitutional amendment on the ballot by a three-fifths majority vote of the state House, as well as the Senate, which approved the measure last week. If passed by the Democrat-controlled House, which has not indicated when it will take up the amendment, voters would then decide the amendment's fate in November 2020.
Illinois has the lowest credit ratings among U.S. states due to a $133.5 billion unfunded pension liability and a chronic structural budget deficit.
“A positive outcome for the state’s credit standing would require that the new system yield substantial net new revenue, without material damage to the economy, and the new revenue be largely allocated to addressing the state’s retirement benefit liabilities on a recurring basis,” Moody's analyst Ted Hampton said in a statement.
Pritzker has said Illinois could gain $3.4 billion annually from graduated tax rates. Only $200 million of the new revenue would be allocated to pensions annually, under a plan his administration unveiled in February.
Moody's said while a graduated tax rate system would give Illinois more flexibility to raise revenue, it would also expose state income tax collections to volatility in the financial market, which drives high income earners' tax payments.