The Illinois Blueprint: How Not to Grow an Economy

The Illinois Blueprint: How Not to Grow an Economy
Ted Schurter/The State Journal-Register via AP

After two years of political gridlock paralyzing the budget process, the Illinois General Assembly overrode Governor Rauner’s veto of the proposed budget. The bad news? While this is the first budget in years, it raises taxes on personal income, businesses, and makes no substantial reform to tackle outstanding debt or put the pension system on solid financial footing. 

The economic situation is dire in the Prairie State: 114,000 people moved out of the state last year; unemployment remains a percentage-point higher than the national average; and GDP and income growth clock in at a mere 0.4 percent. A critically important indicator of the state’s financial health is the bond credit rating, which was just lowered for the eighth time in as many years. An additional downgrade will come with a “junk” designation — a sign to investors that the state has a strong likelihood of default.

Unfortunately, the new budget barely addresses these long-term challenges and shifts additional burden on already-struggling taxpayers.

In a move to reduce the $15 billion backlog of past-due bills, the budget measure will increase the personal income tax by 33 percent, resulting in a tax obligation of 4.95 percent (up from 3.75 percent). By enacting these permanent revenue enhancement measures, the state hopes to raise $4.3 billion. To put that in perspective, an individual making $34,000 and a family of three making $74,000 a year will have to pay an additional $382 and $822 each year, respectively. Homeowners and taxpayers already face significant tax burdens in Illinois; these additional increases will only accelerate the rate of outward migration to lower-tax states like Florida, Texas, and Indiana. As the tax base erodes, Illinoisans will be forced to shoulder even more tax burdens in the future to offset the flight of taxpayers.

Corporations, meanwhile, will see their tax rate increase from 5.25 to 7 percent, which the state hopes will raise an additional $400 million. Such increases, along with high property and sales taxes, will make Illinois one of the highest taxed states in the country. No surprise many firms are leaving Illinois for nearby states. Hoist Lift Trucks, for example, cited Illinois’s unfriendly business climate as the rationale for moving across the state line to Indiana. Since high tax rates discourage businesses from starting or staying in Illinois, more and more businesses will likely relocate to states with more business-friendly tax codes.

Eight years of fiscal calamity have taken a huge toll on the state’s credit rating. Constant rating reductions have increased the interest rate for the state to borrow, making future debt more expensive. Further reductions will add an additional $5 to $10 million in interest for every $1 billion borrowed. Considering Illinois has accumulated a debt of $154 billion and runs an annual deficit of about $9.6 billion, these additional costs can add up quickly. Moreover, higher borrowing costs means further cuts in the budget or tax hikes to offset these growing obligations. 

If the Gov. Rauner and Illinois General Assembly truly wanted to make Illinois prosperous again they would broaden the tax base to incentivize people to stay in the state. Last year, one person left Illinois every 4.6 minutes — taking with them, on average, $30,000 in taxable income. Even more concerning is that the largest outbound demographic group is not older people or retirees, but prime-working age adults and millennials. Among other problems, an exodus of young people means fewer entrepreneurs who will open up small businesses and enable long-term growth. For the third consecutive year, Illinois is the only state in the Midwest with a shrinking population, while the city of Chicago was the only major city to lose population in 2016. Just last year alone, approximately 56,382 people moved from Illinois for Indiana, Florida, Wisconsin, and Texas — states that have, on average, 73 percent lower taxes.

This budget has serious changes that will affect everyone. Unfortunately, it fails to address the looming pension crisis that will be devastating to the people of Illinois if nothing is done in the short-term. Illinois has $203 billion in unfunded pensions and postretirement health-care liabilities with no long-term fiscal solution. The debt-to-revenue ratio for state and local governments is nearly 5-to-1, putting both levels of government on a path towards insolvency. If state lawmakers want to set Illinois up for future success, they must include real pension reform in the budget.

Without real reform over the next few years, Illinois’s fiscal future looks grim.

Thomas Aiello is a Policy and Government Affairs Associate at National Taxpayers Union.

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