This is a rush transcript from "Special Report," January 12, 2011. This copy may not be in its final form and may be updated.



GOV. PAT QUINN D-Ill.: The reason we had to do this is because we had a fiscal emergency that -- our house was burning; our fiscal house was burning in Illinois. It takes a lot of political fortitude to do the right thing.

GOV. CHRIS CHRISTIE R-N.J.: They were talking about 75 percent. They apparently done the 66 percent. Let me tell you, you know who the happiest people in the world are? Governor Branstad of Iowa, Governor Walker of Wisconsin, Governor Daniels of Indiana, right? The people are going to be fleeing and businesses are going to be fleeing from Illinois to Wisconsin, to Iowa, to Indiana.


BRET BAIER, HOST OF "SPECIAL REPORT": Well, sure enough, the Illinois governor announced this plan and the legislature approved it, the state legislature, to increase taxes there by 66 percent. Not soon after that we did hear from the Wisconsin governor, the new governor, Scott Walker. He said he was going to put out a bumper sticker, "Escape to Wisconsin." Instead of giving it to tourists, he was going to hand it to employers in the state of Illinois.

And Mitch Daniels in Indiana said they already had an edge over Illinois in terms of doing cost of business and this will make it significantly wider.

What about this decision by Illinois to deal with the $13 billion hole they are facing in their budget? We're back with the panel. Steve?

STEVE HAYES, SENIOR WRITER, THE WEEKLY STANDARD: Governor Quinn said the house is on fire and that necessitated this kind of urgent action. The house has been on fire for at least a year. Back in January in 2010, Crane’s Chicago Business wrote that Illinois was effectively insolvent, they couldn't pay their bills, they couldn't do anything. They had to borrow billions to be able to fund their pensions.

The mess that was Illinois's fiscal state has been the case for years. And this should be a warning to the country, when you look at what they did, the fact that they had to do it after midnight, the day before a new legislature was sworn in, raising taxes on narrow votes, this is what I think the country faces if we don't step up and look at the kinds of spending decisions that we're making right now. We will be forced into an emergency.

NIA-MALIKA HENDERSON, THE WASHINTON POST: Certainly multiple states around the country, particularly ones with Democratic governors, big states, California and New York are going to have these same conversations with their constituents and with their legislatures. You look out in California, and he -- the new governor there is going to --

BAIER: Jerry Brown.

HENDERSON: Yes, Jerry Brown is going to have to extend some of these tax hikes and get reports from Republicans to do so. You have Cuomo in New York drawing the line say nothing new tax hikes. We'll have to see.  This is a conversation we'll have to have in Washington about our fiscal state as well.

BAIER: These other governors are saying this is just the absolute wrong philosophy to take, economic effort to take when you are dealing with businesses. Are they right?

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: I think absolutely right. I think this is for Illinois economic suicide.

Let me be statesman-like here and say this is the beauty of federalism, which is called, you know, the, where you get experiments, called the laboratory of democracy. Each state will try something out.

So Illinois is going to try it by increasing income tax. The surrounding states with Republican governors are not. You have a state like New Jersey where the governor today talked about Illinois and talked about how he was attacking the problems of New Jersey by cutting spending and holding the line on that.

We are now going to get the result. We're going to see. It will be a controlled experiment. We'll see if Illinois will do well or not. I think the odds are it is going to be in horrible shape. But let's see.  This is why we have a federal system.

BAIER: Steve, Pat Quinn, the governor of Illinois said -- emphasized that this is temporary. It's only going to be a short time. He was defending it saying it was a tough decision that he had to make.

HAYES: If you look at the numbers, that's not true. Illinois had increased spending at a rate of 5.7 percent on average, since 1997.  Revenues have grown at 3.4 percent over the same timeframe. The numbers just don't work, and that's not even including the pension issues.

But what I find so funny, I happen to interview Scott Walker on election night. And the first thing he said to me is Wisconsin is open for business. This was clearly his slogan. He campaigned on and he has been talking about it ever since.

And last week we had emergency session of the Wisconsin state legislature in which he rolled out a number of spending cuts and how they wanted to redo pensions. And one thing he had in there, not anticipating this particular action, was a particular corporate tax break where he would give new businesses that located in Wisconsin basically two years off of corporate taxes if they located in Wisconsin.

And now this happens. So I talked to him on the phone this afternoon and he is positively giddy at the prospect of stealing the jobs from Illinois.

BAIER: He may get the Chicago Cubs.


HAYES: Or the Bears, if the Packers beat them.

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