Illinois Tax Hikes, Two Years Later: A Failure

Illinois Governor Pat Quinn, upon signing income tax hikes into law on January 12, 2011:

We had to take decisive action. … Our fiscal house was burning.

Almost two years later, the Land of Lincoln is still aflame. The state began its 2013 fiscal year this past July with an estimated $8 billion of unpaid bills and a total of some 160,000 bills awaiting payment.

What about additional tax receipts garnered by the state’s dramatic income-tax hikes? Unseen and unfelt, according to the Republican state comptroller, who has acknowledged that the gains were undercut by financing pension contributions, Medicaid expansion, and the expiration of President Obama’s 2009 stimulus.

Here’s a rundown of the governor’s 2011 tax hikes: a 67% increase for individuals (from 3% to 5%) and a 46% hike on corporations (from 4.8% to 7%, plus an extra 2.5% for an esoteric tax called the personal property replacement tax). The result for corporations is a 9.5% state rate, among the highest in the country. Among business leaders, Illinois now consistently occupies the cellar in surveys rating the best states for business.

For some perspective on how the hikes affect typical Illinoisans — according to free market think tank Illinois Policy Institute — a family of four with two working parents earning a combined $80,000 will pay an additional $1,527 in state income taxes thanks to Quinn’s hike. This is on top of the $2,160 they were already paying.

The taxes are only fanning the flames. Illinois’s total debt — which includes unfunded pension commitments, outstanding bonds, and budget gaps — is a staggering $271.1 billion, fourth largest in the country according to non-partisan research group State Budget Solutions. The systemic albatross for Illinois is its unfunded pension liability, which accounts for over 70% of this $271.1 billion figure.

Governor Quinn has even suggested the prospect of a federal guarantee of its pension debt. Fat chance of that — Congress has no appetite for rescuing profligate states. In fact, Republicans in Washington (including Illinois Senator Mark Kirk) have preemptively proposed a resolution opposing bailing out state pension deficits.

The pension crisis is hardly an abstract future challenge; its consequences are immediate and far-reaching. In August, Standard & Poor’s lowered the state’s credit rating because of “weak pension funding levels and lack of action on reform measures.” Only California’s rating is worse among U.S. states. (Moody’s took a similar step earlier this year.) The downgrades will likely force the state to pay a higher rate when borrowing money, which could prove catastrophic when the Federal Reserve raises interest rates. For a state addicted to borrowing, it is an increasingly onerous burden.

An additional consequence of the tax-and-spend culture is residents voting with their feet. Out-migration during the last two decades has seen more than one person leaving Illinois (1.22 to be exact) every ten minutes. Top destinations include Indiana, Wisconsin, Missouri, and Texas. To further demonstrate this trend, according to the Institute of Government and Public Affairs: Indiana welcomes nine Illinoisans for every five Hoosiers it sends to Illinois.

How can Illinois put out its fiscal fire? Sensible measures must be taken. First, spending must be dramatically reduced. A good option would be a statutory Taxpayers’ Bill of Rights, which could tie state spending to average increases in per capita personal income, population, or inflation. Illinois Democratic lawmakers floated a weak version of the same in 2011, but unions quickly squashed the idea, arguing that it would fiscally straitjacket the state legislature.

Indeed, that’s exactly the point.

Next, the state must reel in its bloated public sector. Employee wages need to be frozen or slowed (Chicago teachers recently striking and winning 17.6% raises over four years was nothing to celebrate in this respect). Public employees must be required to contribute more to their pension and health care benefits; these simple strategies have already paid off for neighbors Indiana and Wisconsin. Most importantly, structural changes are badly needed to alleviate the state’s massive pension liability. These include increases in the retirement age for future pensioners, and either suspending or decreasing the rate built in for cost-of-living adjustments.

Last, the tax hikes. Repeal them.

They didn’t accomplish their stated purpose and accelerated the outflow of people and businesses, adding to the state’s fiscal morass.

Until meaningful reforms are embraced, Illinois’s fiscal house will continue to burn. Hardly a befitting legacy for the Land of Lincoln.