By Erin Ailworth 

CHICAGO -- The governor of Illinois is setting out on a tough sales job: convincing voters to replace the state's flat income-tax rate with a graduated rate that would hit the wealthy the hardest.

Illinois faces a $3.2 billion budget deficit next fiscal year, unfunded pension liabilities estimated from $133 billion to $250 billion, and the worst credit rating of any U.S. state. It has roughly $8 billion in bills outstanding. Making the tax change requires a constitutional amendment and voter approval.

Since being sworn into office in January, the governor, J.B. Pritzker, has unveiled a tough fiscal 2020 budget, which legislators are poring over now, that is meant to hold the line as he campaigns for his income tax proposal. Any vote on the tax plan is unlikely before the 2020 general election.

Deputy Governor Dan Hynes, a former state comptroller, said he has to believe voters will pass the tax change. "You have wide acceptance that Illinois needs new revenue," he said in an interview, and a graduate tax will provide that. "If the voters disagree with us in 2020, then we'll have to explore other revenues."

Think Big Illinois, a nonprofit backed by Mr. Pritzker, a Democrat, on Thursday rolled out a TV ad to support the graduated tax plan. Opponents, led by a former head of the Illinois Manufacturers' Association, launched an online ad criticizing the plan.

Also Thursday, Mr. Pritzker touted his budget proposal and tax plan in downstate Illinois.

Mr. Pritzker, an heir of the Hyatt Hotels fortune, is trying to walk a tightrope by raising revenue without raising taxes so much that businesses and residents flee the state.

In a poll of 1,000 registered voters released this week by the Paul Simon Public Policy Institute, 40% gave Mr. Pritzker a positive job approval, while 38% disapproved. The poll has a margin of error of 3.1%.

"We're nowhere near out of the woods yet, but we can see some light between the trees," said Illinois Comptroller Susana Mendoza.

Moody's Investors Service and S&P, however, rate the state's debt just one notch above junk status, and Illinois has the worst credit rating of any state at both ratings firms, as well as at Fitch.

The budget plan "precariously balances the future budget, but punts measures to address fiscal progress to future years," S&P said in a recent report. "Illinois has a track record of leaving difficult fiscal choices to future budgets."

A state commission tallied the state's unfunded pension liabilities at $133.7 billion at the end of June. Moody's, using different assumptions, estimated the same liabilities at $250.1 billion in fiscal 2017, when the ratings agency said it last had audited numbers. A state constitutional amendment prevents the legislature from reducing the level of benefits.

The state must find additional sources of revenue to get back on firm financial footing, said Michael Belsky, executive director of the University of Chicago's Center for Municipal Finance. "More is going to have to be done if we are going to solve the problem," he said.

One risk is that increased taxes could cause more people to leave Illinois. The state's population has dropped by roughly 157,000 since 2013, even as other Midwestern states have grown.

Adam Schuster, the budget and tax research director at the Illinois Policy Institute, a conservative think tank, worries about just that.

"We are taxing a dwindling tax base," he said. "As a state, we are somebody who is limping from paycheck to paycheck and relying on high interest payday loans."

Write to Erin Ailworth at Erin.Ailworth@wsj.com

(END) Dow Jones Newswires

March 24, 2019 10:14 ET (14:14 GMT)

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