BLOOMINGTON -- Jeremiah Arnold is unhappy lawmakers are raising his income taxes by 66 percent, and he's looking for a second job to help cover the difference. Deb Nohl plans to scale back her spending but calls the new tax plan an inevitable necessity.

It was a debate taking place across Central Illinois on Wednesday after the General Assembly worked into the early morning to send Gov. Pat Quinn a controversial tax increase bill. If signed, it would raise the cash-strapped state's income tax rate from 3 percent to 5 percent and the corporate rate from 4.8 percent to 7 percent, both retroactively to Jan. 1.

Nohl, of Heyworth, works at a downtown Bloomington florist. She said she'll watch her household budget closely, but "the perks will be there when things get better."

Arnold said he and his wife both work full time, but this latest tax hike and recent increases to his property taxes are taking a toll.

"I can barely make it now," said Arnold, a custodian from El Paso.

A family of four making $60,000 a year would pay about $1,040 more in income taxes, according to the Illinois Policy Institute, a free-market think tank.

Quinn on Wednesday defended the increase and promised to quickly sign the measure to help heal the state's ailing finances.

The rate increase might be the biggest any state has adopted in percentage terms while grappling with recent economic woes. Nevertheless, Illinois' tax rate would remain lower than in several other states in the region.

"It's important for their state government not to be a fiscal basket case," Quinn told reporters outside his Capitol office.

In a flurry of last-minute, lame-duck action, the House approved the tax hike on a 60-57 vote. That action was followed a few hours later by the Senate, which approved the increase on a 30-29 vote.

The income tax hike vote came after the House rejected a measure to raise the cigarette tax by $1.01 per pack.

Unfriendly to businesses?

The new 9.5 percent corporate rate -- the 7 percent plus an existing 2.5 percent "replacement tax" for local governments -- would be the third-highest in the U.S., according to the Tax Foundation, a research firm.

Illinois had been No. 23, but only about one-third of companies pay that tax. The others, such as small-business owners, pay through their personal income taxes.

Both increases would make Illinois more unattractive to firms that may want to move into or expand here, said Ryan Whitehouse, government and public affairs director at the McLean County Chamber of Commerce.

"It's kind of like throwing a Band-Aid on it," Whitehouse said of the state's budget deficit, which could top $15 billion this year. "Are the necessary reforms put in place before you just turn to the taxpayers?"

Caterpillar Inc. CEO Doug Oberhelman has said the tax increase will stifle economic growth and make it more expensive to maintain employee pay levels. A spokesman said State Farm Insurance Cos. was reviewing the plan.

"It will increase our costs, and we will have to determine how to move forward and adjust our budgets accordingly," said Country Financial spokeswoman Chris Anderson.

Chamber President Bob Dobski, who with his wife, Julie, owns nine McDonald's in Central Illinois, said they and their almost 600 employees will be slammed by the tax hikes. The Dobskis may be forced to cut back on part-time employees or their hours and watch utility costs more closely, he said.

"Whereas, the state is not doing that," he said.

Other factors matter

Tax rates matter to companies, but so does having a stable state that can pay its bills, said Marty Vanags, CEO of the Economic Development Council of the Bloomington-Normal Area, which works to attract and expand businesses in McLean County.

"The income tax is just one small part of a larger decision-making matrix," Vanags said. "I'm not overly worked up about it yet. It's just too early to tell."

Any new stability will be welcomed by public schools, which have dealt for years with late payments from the state, said Vickie Mahrt, president of the teachers' union for the Normal-based Unit 5 school district.

Many teachers are excited about the tax plan's passage, Mahrt said, putting them in an unusual position. Their paychecks will shrink, plus they're losing out on the Making Work Pay federal tax cut that expired in 2010. And they won't benefit from a federal payroll tax benefit designed to replace it because they don't pay into Social Security.

"We understand there are places that we could cut (state) spending and other things we could do, but really, it's to the point where we can't wait," Mahrt said.

Indiana's personal (3.4 percent) and corporate tax rates (8.5 percent) are both lower than Illinois' new levels.

But beyond tax rates, Indiana's state leaders are "on the same page" about attracting businesses, by keeping its budget stable and thinking long-term about issues like education reform, said Ron Walker, president of the Bloomington Economic Development Corporation in Bloomington, Ind.

Indiana's $1.3 billion budget shortfall is 9.4 percent of its budget, according to the Center on Budget and Policy Priorities. Illinois' budget hole is around 40 percent.

"I think it's really paid off for us," Walker said. "I'm really happy to be where I am."

Kurt Erickson contributed to this report.

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