Madigan’s economic agenda is not aggressive and it’s not reform
The newly re-elected House speaker is pushing a new tax on businesses, an increase to the minimum wage and more spending, while doing nothing to address salient problems such as workers’ compensation and pension debt.
House Speaker Mike Madigan outlined his vision to improve Illinois’ business climate in an op-ed published in Wednesday’s State Journal-Register, describing his plan as aggressive reform. The problem with the Madigan outline is that it’s not aggressive and it’s not reform.
If enacted, it will make Illinois even worse for economic growth.
Madigan writes that he agrees with Rauner that the state’s business climate needs to improve. The speaker should be commended for this first step, because for the past two years he has avoided acknowledging Illinois’ terrible job creation and massive flight of residents. However, the agenda he outlined is compiled of rehashed, politically charged ideas that would result in less economic growth, would fail to address the economy’s real pain points, and are largely driven by more taxes, regulations and spending.
The Madigan agenda has been hurting the state economy for decades. His recent proposal would inflict more of the same on taxpayers. It includes:
- “Making sure all businesses pay something”: To start with the only idea that might have a sliver of growth connected to it, Madigan proposes cutting the corporate income tax rate in half. This idea taken alone is a positive start. The corporate income tax brought in $2.4 billion in fiscal year 2016. Cutting this tax in half would presumably reduce taxes by about $1.2 billion per year.
However, Madigan then goes on to say that many corporations do not have an income tax liability because they have no taxable income. This is true. Madigan suggests changing the corporate tax code to make sure “all businesses pay something.”
What that means is Madigan is proposing a new tax on corporations. This is a bad idea for a number of reasons. First, there already is a corporate tax all corporations pay – it’s the corporate franchise tax. All corporations also must pay the franchise tax, which is completely nonsensical and should be repealed.
A report from Ernst and Young shows that Illinois businesses pay more in sales taxes, property taxes, and unemployment insurance taxes than they do in corporate income taxes. Illinois businesses also pay more in workers’ compensation insurance than they do in corporate income taxes. It’s unclear how Madigan wants to levy additional taxes on businesses that have no taxable income, yet already pay taxes. This anti-growth idea would likely negate the pro-growth effect of cutting the corporate rate.
- No workers’ compensation reform. Madigan’s proposal is to do nothing to fix Illinois’ extremely costly system, which is driving blue-collar jobs out of the state and driving up taxes. There are many good options when it comes to reforming workers’ compensation in Illinois, but any reform that would address the overall cost would mean that special interests (unions, trial lawyers, doctors) would have to accept a little bit less. Madigan surely doesn’t want to cross his his primary financial benefactors, even if it would benefit injured workers, which many options for reform would do.
Madigan makes a completely nonsensical reference to Carrier jobs leaving from Indiana for Mexico to justify his stance against reforming workers’ compensation. This makes absolutely no sense. Of course some jobs leave for low-wage countries (although Carrier execs have noted that one of their primary concerns in moving was federal regulatory policy, which can be incredibly burdensome). But the fact that outsourcing occurs in no way justifies maintaining a costly, unwieldy workers’ compensation system that is driving jobs to Indiana and Wisconsin, not Mexico.
- Reinstating EDGE tax credits. Madigan proposes reinstating the EDGE tax credit, which almost exclusively benefits large businesses, just one paragraph after he complained that the tax code puts small- and medium-sized employers at a tremendous disadvantage.
How do you relieve small businesses of a tax disadvantage by reinstating a special tax break vehicle for big businesses?
- Increasing the Earned Income Tax Credit. Madigan proposes increasing the Earned Income Tax Credit, or EITC) which is a government booster to the wages of lower-income workers. The problem with the EITC is that it is part of a massive welfare cliff – a series of government programs, which taken together create a crippling cycle of poverty because they trap people in lower income levels.
The EITC boosts incomes for lower-income workers, but then it takes back those benefits once the workers start earning more money. That creates an incentive problem: workers are encouraged not to make more money beyond a certain low-income threshold, otherwise they will lose the EITC benefits.
Lower-income Illinoisans need more job opportunities so their wages and standard of living can rise – not steeper welfare cliffs that trap them in poverty.
- More money for education. Madigan proposes spending more money on education. But in Illinois, spending more on “education” really means spending more on pensions. Education funding is increasingly being consumed by pension debts, which Madigan has no proposal for fixing.
Taken in total, Illinois spends a lot of money on education. In fact, forthcoming Illinois Policy Institute research using data from the Census Bureau and the National Center for Education Statistics shows that Illinois’ per-capita spending on education is higher than every state in the Midwest. It also shows that low-income districts often spend more than high-income districts. Yet Illinois’ poor districts continue performing poorly. One reason for this is because without school choice, low-income students are condemned to failed schools.
- Pass a millionaire’s tax. Madigan plans to fund more education spending by instituting a millionaire’s tax. Such a tax is anti-growth and would contribute to more people – and more income – leaving the state. It also appears completely tone-deaf in the context of the massive wealth flight that IRS data say is already occurring from Illinois.
Furthermore, a 2015 report by a South African research firm found that Chicago is the only city in America with significant millionaire flight, losing a net outflow of 3,000 millionaires year over year. In sum, as more and more wealthy Illinoisans are fleeing the state, Madigan is proposing a millionaire’s tax.
- Increasing the minimum wage. Illinois currently has the highest black unemployment rate in the country, and has earned this terrible distinction for 15 months in a row. That’s driven in part by Illinois’ minimum wage law, which has a punishing effect on young people – particular black youth.
Illinois punishes low-income and minority teens twice. First, the state condemns thousands of them to failed schools that do not help them develop skills to earn higher wages. Then minimum wage laws make it impossible for employers to hire them at entry-level, starter wages until they gain training on the job. Failed schools give them no tools, and then wage regulations prevent them from getting on-the-job training.
If Madigan wants to raise the minimum wage he should at least articulate what his plan is to address the nation’s highest black unemployment rate.
- Increasing the overall tax burden. The most important question on taxes is what does Madigan want to do on the overall tax burden, including property taxes? In his article, Madigan leaves this question unanswered, but all indications are that he wants the overall tax burden to continue going up, which would reduce the wages and standard of living for all Illinoisans. Madigan has previously proposed raising the income tax back to the 5 percent level as a starting point.
This means that government will spend more money and households and businesses will spend less. This is a completely anti-growth approach to taxation, because taking more money from the productive private sector and spending it through the political sector is the same old tax-and-spend anti-growth agenda that has been plaguing Illinois for decades.
Madigan’s package of proposals is not reform, and would hurt the state’s economy.
Furthermore, Madigan doesn’t address salient economic issues such as the budget deficit, the state’s crippling pension costs, and the incredibly rapid flight of people from the state. Most likely he plans a tax hike for the budget deficit and rising pension costs, which will not only cost the state jobs but will also further accelerate population losses.
Madigan’s proposals have failed for decades. His newest proposal is more of the same. It’s scarcely believable that a man can stay in power for so long after doing so much to hurt so many.
If this is the best Madigan can do for reform, the stampede of Illinoisans across the border will continue.