(Adds Chicago dateline, recasts lead, adds Moody's quote, background on budget, bill backlog)
CHICAGO, June 3 (Reuters) - The fiscal 2015 budget passed by the Illinois Legislature late last week, which failed to include an extension of higher income tax rates, poses the risk the state could erode some of the progress it has made in reducing its huge pile of unpaid bills, Moody's Investors Service said on Tuesday.
The Democrat-controlled House and Senate sent Governor Pat Quinn a $35.7 billion operating budget that does not include the extension of higher income tax rates enacted in 2011 that are scheduled to partially roll back at the end of 2014. Lower personal and corporate income tax rates midway through the state's fiscal 2015 will result in an estimated $1.8 billion revenue drop.
"As a result, Illinois could face a structural deficit that leads the lowest-rated U.S. state to rely on credit-negative practices such as increasing an already large backlog of unpaid bills to achieve balanced financial operations, reversing significant progress of recent years," the credit rating agency said in a report.
Moody's rates Illinois A3 with a negative outlook.
The state had shrunk its bill pile to $4.17 billion as of April 2014 from $5.3 billion in April 2013, according to the governor's budget office. The state reached a peak of $9.9 billion in outstanding bills in 2010, according to Moody's.
The rating agency said the revenue loss from the lower tax rates will be more pronounced in future fiscal years with the governor's budget office projecting the bill backlog could hit $16.2 billion in the next three years.
Republican lawmakers have warned that the Democrats would take advantage of lame-duck legislators in the wake of the November general election to try to make the tax rates permanent. (Reporting by Karen Pierog in Chicago and Arnab Sen in Bangalore; Editing by Kirti Pandey and Chizu Nomiyama)