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Tax Happy in Illinois

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Tax Happy in Illinois

The Prairie State prepares to double down on terrible fiscal policies. July 27, 2020
Economy, finance, and budgets

Illinois is in awful economic shape. It has the third-largest unfunded liabilities as a percentage of pension obligations in the nation. Its growth rate has been pegged at 45th lowest of the 50 states. Its business regulatory climate is unfriendly. One result: the lowest credit rating of any state. Worse still, neighbors like Indiana and Wisconsin have been cutting taxes and deregulating for over a decade, making them attractive destinations for individuals and businesses fleeing the Land of Lincoln.

The responsibility for this dismal situation is, to some extent, bipartisan. Republican governors in the past were not fiscally prudent. In this century, the voters of the state elected and then reelected a clown and a crook, Democrat Rod Blagojevich, who ran a corrupt and rudderless administration. But the politician most to blame is Democrat Michael Madigan, now implicated in a federal bribery investigation, who has been the speaker of the general assembly for 35 of the last 37 years—a period that has coincided with Illinois’s decline. Madigan almost singlehandedly derailed the reform agenda of the last governor, Republican Bruce Rauner, who tried to move the state in the direction of its revitalized neighbors.

Even if Madigan departs, the current governor, Democrat J. B. Pritzker, is doubling down on the same disastrous policies. Like Madigan, Pritzker wants to raise the state’s tax burden, Like Madigan, he has done little to deregulate and nothing substantial to ease the crushing unfunded pension burden.

Illinois has only two options for getting out of its current mess. It needs to improve its business and growth climate so much that companies will want to move there, even knowing that they will have to pick up the tab for the unfunded pension liabilities. And the state must pass a constitutional amendment to permit the government to reform some of the pension framework for state and municipal workers, at least those not nearing retirement.

Unfortunately, Pritzker shows no sign of interest in such changes. He refuses to seek any amendment to a state constitution that presently prevents any substantial pension reform. He claims that the U.S. Constitution’s Contracts Clause prevents him from altering any terms. Whatever its original meaning, the Contract Clause has long been interpreted to permit states to use their sovereign powers to meet financial exigencies. The Rhode Island Supreme Court, for instance, recently allowed one of the state’s major cities to relieve some of its pension obligations—less severe ones than some Illinois localities face. The reason Pritzker shirks real reform is not the majesty of law but the power of public-sector unions.

Pritzker has done little to improve the business climate. He and the legislature recently phased out a so-called franchise tax—a complex tax on capital—but few other states even impose that antiquated charge. And any tax relief that businesses get will be more than offset by new business taxes proposed for 2021. The governor’s latest State of the State speech mentioned nothing about deregulation, in a state among the most heavily regulated in the nation. Pritzker pins his hopes for economic revival on infrastructure spending, though it’s naïve to think that top-down decisions in a state known nationally for corruption will lead to more growth, rather than simply bigger deficits.

Pritzker’s signature initiative is to raise taxes by eliminating the provision of the state constitution that requires a flat tax—currently 5 percent on income—and replace it with a progressive income tax. The marginal tax rates projected by the legislature for 2021 will be 7.75 percent on income for joint filers earning above $250,000 and 7.85 percent on income from $500,000 to $1,000,000. Income over $1 million will be taxed at 7.99 percent, with the kicker that taxpayers will pay this highest rate on their entire income, from its first dollar. In a gimmick, Pritzker hopes to get people to vote for his amendment by reducing the tax rate for most other filers from 5 percent to 4.9 percent, though these rates could be raised in 2022.

The elimination of the constitutional requirement of a flat tax, if passed by voters this November, will reduce any chance that Illinois can climb out of its deep hole of debt. The higher tax rates will discourage talented people from moving to the state. And if the governor and the legislature are no longer restrained by the requirement of flat rates, then nothing will stop the state from jacking up taxes anytime. Indeed, because Pritzker promises to use only $100 million of the $4 billion in expected additional revenues to pay down pension debt—an insignificant sum, compared with approximately $100 billion of such debt—more tax increases will soon be in the offing. Rational businesspeople will factor this likelihood into their investment decisions. They won’t jump to relocate their businesses here.

Illinois already has one of the United States’ highest tax burdens. The new taxes will push it further toward the top, particularly in taxing the most productive citizens. The new taxes will also make the state’s revenues more subject to the income volatility of the very wealthy, who can readily redomicile themselves into more favorable tax climates. French president Emmanuel Macron famously joked that his predecessor François Hollande’s tax increases would make France Cuba without the sun. Pritzker’s Illinois will be like California without the sun, Hollywood, or Silicon Valley—just the taxes.

 Photo by Joshua Lott/Getty Images

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