Land of lagging: Illinois’ sluggish economy and lawmakers’ tax hike treachery
Illinois will not diverge from its path of poor growth until lawmakers realize the failures of recent tax hikes.
In 2011, then-Gov. Pat Quinn praised the decision by state lawmakers to raise the individual income tax rate by 66 percent to address the state’s “fiscal emergency.” Not only did this tax hike force cuts in family budgets, but it also significantly damaged the state’s economy, making it harder for Illinoisans to find good job opportunities.
Nearly 40 lawmakers who voted for the tax hike remained in office from 2012 to 2017.
In 2017, two years after the partial sunset of the 2011 tax hikes, 112 state lawmakers voted at least once to raise taxes on Illinoisans. Unfortunately, the 2017 tax hikes are expected to inflict similar economic pain.
The lesson? Until Illinoisans speak out and urge their lawmakers to reject a pattern of continuous tax hikes, they should not expect the state’s economy to diverge from the sluggish path it’s been treading.
The economic impact of an income tax increase
Most economists agree that when lawmakers raise taxes, economic growth suffers because of the negative impact of higher taxes on investment. This was the case with Illinois’ 2011 tax hike, and will be the case with the 2017 tax hike as well.
Measuring the effects of tax changes on the economy is a challenging task. Fortunately, there’s a large body of expert literature that addresses difficult empirical challenges. Romer and Romer (2010) find that tax increases have a negative impact on real gross domestic product, or GDP. This is because tax increases have a large and sustained negative impact on investment. These results are consistent with the findings of Blanchard and Perotti (2002) and Mountford and Uhlig (2009).
Why a decline in investment matters
Investment makes more productive capital available. Productive capital is essential for the production of goods and services – and for creating jobs.
But when productive capital becomes scarce, labor productivity declines, hiring slows and so do wages for new hires. Historically, productivity growth has led to wage gains for workers and higher returns for investors.
This has big implications for tax policy, especially the degree to which capital is taxed, since capital is an important ingredient to improvements in workers’ living standards.
Declining investment means a reduction in not just the number of jobs in Illinois, but also in the quality of those jobs.
The Illinois Policy Institute recently estimated that the income tax hike lawmakers passed in 2011 cost the Illinois economy 9,300 jobs and $56 billion in real GDP from 2012-2016.
Unfortunately, due to the tax hike’s drag on investment, the economic harm extends beyond the 2011 tax hike’s partial sunset at the beginning of 2015. This is because investment takes time to become productive capital. Half-finished factories, for example, are not part of the productive capital stock.
Using survey data, economist Thomas Mayer found that the average time (weighted by the size of the project) between the commitment to invest in a project and its completion was 21 months. Similarly, economists Robert Hall and Dale Jorgenson found a project takes an average of two years after its design to become productive. The empirical evidence they provide indicates that tax policy is highly effective in changing the timing and amount of investment expenditures.
The fact that investment takes time to generate productive capital means uncertainty over future tax hikes can be enough to drive investment out of the state toward a more investment-friendly, fiscally sound climate.
The bad news is that Illinois’ tax hikes have likely discouraged investment. But the good news is that reform can restore investment and improve the lives of working Illinoisans.
The Illinois experience: Did investment decline?
Illinois has experienced a decline in investment. This is made clear by data from the Bureau of Economic Analysis, which show that noninvestment spending in the private and public sector has taken up an increasing share of Illinois’ economy.
With this decline in investment, experts would expect labor productivity growth and employment growth to slow down in Illinois relative to other U.S. states. Indeed, an accounting decomposition reveals that’s exactly what happened.
Less productive capital means Illinois families will continue to see their incomes grow slower than other similar Americans.
Changing course
Could Illinois change course in 2018? A declining population means the employment picture and the state’s economy are likely to continue to lag the nation barring reform.
The right policy prescriptions in Illinois should aim to stimulate private-sector investment. Policies that lower the cost of doing business and lower barriers to entry into the marketplace would result in higher demand for capital, thus making investment in Illinois more attractive. Illinois will not diverge from its path of poor growth until lawmakers realize the failures of recent tax hikes, and opt for more pro-growth policies instead.
Illinoisans need to hold their lawmakers accountable by urging them to restrain public spending and repeal the income tax hike passed in 2017. A fiscally solvent state government will restore a sense of security about the future, making Illinois a more attractive place in which to plant roots and invest.
The following is a list of state lawmakers who voted in favor of the 2011 and 2017 tax hikes:
Illinois House of Representatives
Luis Arroyo, D-Chicago
Daniel Beiser, D-Alton
Daniel Burke, D-Chicago
Linda Chapa LaVia, D-Aurora
Barbara Flynn Currie, D-Chicago
Anthony DeLuca, D-Chicago Heights
Sara Feigenholtz, D-Chicago
Mary Flowers, D-Chicago
LaShawn Ford, D-Chicago
Greg Harris, D-Chicago
Lou Lang, D-Skokie
Camille Lilly, D-Oak Park
Mike Madigan, D-Chicago
Elaine Nekritz, D-Buffalo Grove
Al Riley, D-Hazel Crest
Robert Rita, D-Blue Island
Andre Thapedi, D-Chicago
Michael Zalewski, D-Riverside
Illinois Senate
James Clayborne, D-East St. Louis
Jacqueline Collins, D-Chicago
John Cullerton, D-Chicago
William Haine, D-Alton
Don Harmon, D-Oak Park
Linda Holmes, D-Aurora
Mattie Hunter, D-Chicago
Toi Hutchinson, D-Chicago Heights
Emil Jones, III D-Chicago
David Koehler, D-Peoria
Kimberly Lightford, D-Westchester
Terry Link, D-Gurnee
Iris Martinez, D-Chicago
John Mulroe, D-Chicago
Antonio Munoz, D-Chicago
Laura Murphy, D-Elk Grove Village
Kwame Raoul, D-Chicago
Martin Sandoval, D-Cicero
Ira Silverstein, D-Chicago
Heather Steans, D-Chicago
Donne Trotter, D-Chicago
And here is the list of state lawmakers who voted at least once for the 2017 tax hike:
Illinois House of Representatives
Carol Ammons, D-Champaign
Steven Andersson, R-Geneva
Jaime Andrade, D-Chicago
Luis Arroyo, D-Chicago
Daniel Beiser, D-Alton
Terri Bryant, R-Mt. Vernon
Daniel Burke, D-Chicago
Kelly Burke, D-Oak Lawn
Kelly Cassidy, D-Chicago
John Cavaletto, R-Salem
Linda Chapa LaVia, D-Aurora
Deb Conroy, D-Villa Park
Melissa Conyears-Ervin, D-Chicago
Fred Crespo, D-Streamwood
Barbara Flynn Currie, D-Chicago
John D’Amico, D-Chicago Heights
C.D. Davidsmeyer, R-Jacksonville
William Davis, D-East Hazel Crest
Anthony DeLuca, D-Chicago Heights
Scott Drury, D-Highwood
Marcus Evans, D-Chicago
Sara Feigenholtz, D-Chicago
Laura Fine, D-Glenview
Mary Flowers, D-Chicago
LaShawn Ford, D-Chicago
Mike Fortner, R-West Chicago
Robyn Gabel, D-Evanston
Jehan Gordon-Booth, D-Peoria
LaToya Greenwood, D-East St. Louis
Will Guzzardi, D-Chicago
Michael Halpin, D-Rock Island
Norine Hammond, R-Macomb
Sonya Harper, D-Chicago
David Harris, R-Mount Prospect
Greg Harris, D-Chicago
Chad Hays, R-Danville
Elizabeth Hernandez, D-Cicero
Jay Hoffman, D-Belleville
Frances Ann Hurley, D-Chicago
Sara Wojcicki Jimenez, R-Springfield
Thaddeus Jones, D-South Holland
Stephanie Kifowit, D-Aurora
Lou Lang, D-Skokie
Camille Lilly, D-Oak Park
Mike Madigan, D-Chicago
Theresa Mah, D-Chicago
Natalie Manley, D-Joliet
Robert Martwick, D-Chicago
Rita Mayfield, D-Waukegan
Charles Meier, R-Highland
Bill Mitchell, R-Decatur
Christian Mitchell, D-Chicago
Anna Moeller, D-Elgin
Elaine Nekritz, D-Buffalo Grove
Brandon Phelps, D-Harrisburg
Reginald Phillips, R-Charleston
Robert Pritchard, R-Sycamore
David Reis, R-Olney
Al Riley, D-Hazel Crest
Robert Rita, D-Blue Island
Sue Scherer, D-Decatur
Carol Sente, D-Buffalo Grove
Elgie Sims, D-Chicago
Justin Slaughter, D-Chicago
Cynthia Soto, D-Chicago
Juliana Stratton, D-Chicago
Silvana Tabares, D-Chicago
André Thapedi, D-Chicago
Arthur Turner, D-Chicago
Michael Unes, R-Pekin
Litesa Wallace, D-Rockford
Lawrence Walsh, D-Joliet
Emmanuel Chris Welch, D-Westchester
Ann Williams, D-Chicago
Kathleen Willis, D-Northlake
Michael Zalewski, D-Riverside
Illinois Senate
Omar Aquino, D-Chicago
Scott Bennett, D-Champaign
Jennifer Bertino-Tarrant, D-Plainfield
Daniel Biss, D-Skokie
Melinda Bush, D-Grayslake
Cristina Castro, D-Elgin
James Clayborne, D-East St. Louis
Jacqueline Collins, D-Chicago
John Cullerton, D-Chicago
Bill Cunningham, D-Chicago
William Haine, D-Alton
Don Harmon, D-Oak Park
Napoleon Harris, D-Harvey
Michael Hastings, D-Frankfort
Linda Holmes, D-Aurora
Mattie Hunter, D-Chicago
Toi Hutchinson, D-Chicago Heights
Emil Jones, III, D-Chicago
David Koehler, D-Peoria
Steven Landek, D-Burbank
Kimberly Lightford, D-Westchester
Terry Link, D-Gurnee
Andy Manar, D-Bunker Hill
Iris Martinez, D-Chicago
Pat McGuire, D-Crest Hill
John Mulroe, D-Chicago
Antonio Muñoz, D-Chicago
Laura Murphy, D-Elk Grove Village
Kwame Raoul, D-Chicago
Dale Righter, R-Mattoon
Martin Sandoval, D-Cicero
Ira Silverstein, D-Chicago
Steve Stadelman, D-Rockford
Heather Steans, D-Chicago
Donne Trotter, D-Chicago
Patricia Van Pelt, D-Chicago