By Joanne von Alroth
SPRINGFIELD, Ill., Feb 20 (Reuters) - An Illinois lawmaker proposed on Wednesday making a personal income tax increase permanent instead of allowing it to partially expire in 2015, a move many economists have long considered necessary to help resolve the state's fiscal crisis.
Democratic state Representative Lou Lang, a deputy majority leader of the Illinois House, introduced a bill that called for making the tax increase permanent as part of an overall fix to the nation's most underfunded state pension systems.
The system is only 39 percent funded when 80 percent is considered healthy.
Soon after the 2010 mid-term election, majority Democrats in Illinois pushed through the tax increases in a lame duck session of the legislature.
The state's flat personal income tax rate was hiked to 5 percent from 3 percent (a 67 percent increase), but will retreat to 3.85 percent on Jan. 1, 2015. The corporate tax rate, which was raised to 7 percent (a 46 percent increase), will drop to 5.25 percent in 2015.
While income tax revenue grew by $5.4 billion in the year ending June 30, 2012, most of that was devoured by burgeoning payments to the state's pension systems and the state's fiscal condition has not improved.
A report last year by a task force headed by former Federal Reserve Chairman Paul Volcker said that Illinois would need to extend the tax increases to have a chance of emerging from a fiscal crisis.
Lang's plan was the first significant proposal to do this as part of an overall pension fix.
Credit rating agencies have cited the partial expiration of the tax hikes as a negative factor for Illinois, along with the state's pension liability and structural budget deficit. Illinois has the lowest rating among states from Standard & Poor's and Moody's Investors Service.
Powerful state Senate President John Cullerton said he would consider the tax proposal, but Republicans criticized it.
"When the income tax increase was passed by the Democrats - they sold it as a temporary way to pay off bills, fix the structural deficit and so on. To extend that tax is a betrayal of trust with the taxpayers," said Senate Republican Leader Christine Radogno.
A legislative committee is holding a hearing on Thursday on one of several proposals to reform the pension system.