One year after Illinois’ Democratic leaders pushed through a record tax hike, the grades are in. The tax hike flunked. It failed to put Illinois on sound fiscal footing. It failed at restoring confidence in government’s ability to meet serious challenges head on. It failed to strengthen the state’s economy. It failed to create opportunity and prosperity. It failed families and the businesses that want to be a part of making Illinois great again.
In January 2011, lawmakers raised income tax rates by 46 percent on businesses and a record 67 percent on individuals. The measure passed with the barest of majorities during the final hours of a lame duck session. It received the support of almost every legislator who retired a few hours later or was defeated at the ballot box the previous November. Gov. Pat Quinn, who had just run for election on a smaller tax increase, tossed his campaign pledge aside and seized the opportunity to transfer more money from Illinoisans to state government.
At the time, advocates promised that the tax hike would usher in a new era in Illinois’ fiscal affairs and economy at large. Among their claims:
“We have some temporary tax increases that are designed to pay our bills, get Illinois back on fiscal sound footing and make sure that our state has a strong economy.”
Gov. Pat Quinn
“The purpose of this bill is to raise enough money so that we can continue to pay our pensions without borrowing the money, to pay off our debt, to have enough money to pay the interest on that debt, and for the first time ever, establish caps on how much we can appropriate. We even are going to change our rules to basically turn over to the minority party the right to dictate whether or not there will be an extra spending over that cap. And it is going to work.”
Senate President John Cullerton
“…Remember the point of this income tax increase is not to expand programs, not to do brand new things in Illinois state government, it is only intended to pay our old bills and deal with the structural deficit. This is not about new spending. It is about trying to bring ourselves in line with the problems of old debt and of a structural deficit.”
House Majority Leader Barbara Flynn Currie
One year later, it’s clear the tax hike was the solution to neither Illinois’ fiscal problems nor its continuing economic decline. Today things are worse: Here’s why:
1. Spending grew, bills went unpaid and pension reform stalled.
With a flood of new tax dollars, urgent pressure to pass lasting structural spending reforms deflated. The state is incurring more expenses in fiscal year 2012 than it appropriated for, pushing more than $2 billion in obligations to the future. The state’s backlog of unpaid bills and unaddressed obligations is now at $7 billion. The state has no plan to pay down this liability, let alone prevent it from growing again in the future.
The tax hike allowed legislators to take a pass at resolving one of Illinois’ most urgent fiscal problems: the unsustainable state pension systems. Ballooning pension costs already are squeezing out spending on education and other vital services. By not reforming pensions, the fiscal crisis will only deepen. This was confirmed in January when Moody’s rating agency downgraded Illinois, giving the state the worst credit rating in the nation. In justifying the rating, Moody’s said Illinois “took no steps to implement lasting solutions to its severe pension under-funding or to its chronic bill payment delays.”
2. Illinois’ unemployment problem worsened.
Illinois’ unemployment rate is now the fifth highest in the nation. Unemployment jumped to 10 percent in just the last seven months, up from 8.7 percent in April. That increase contrasts sharply with a drop in the U.S. rate, to 8.6 percent from 9 percent, over the same time period. Had Illinois simply followed national employment trends since January, there would be fewer unemployed Illinoisans.
During the past year, Illinois’ employment numbers have moved the wrong way while neighboring states and the national trend have improved. Those who supported the tax hikes want to ignore the consequences of their actions, but the hundreds of thousands in want of employment demand a better approach.
3. The tax hike made Illinois less competitive and forced businesses to leave the state.
The tax hike spurred a number of companies to leave or threaten to leave. The state resorted to handing out tax incentives to keep large businesses from leaving. This reinforced Illinois’ reputation of favoring the powerful and connected at the expense of everyone else. It is this perception – grounded in reality – that keeps many entrepreneurs from even considering Illinois as a place to found or grow their business.
Illinois’ poor business environment is reflected in the Tax Foundation’s respected State Business Tax Climate Index. A forthcoming 2012 edition will show a precipitous fall for Illinois, thanks almost entirely to the personal income and corporate income tax hikes. Overall, Illinois fell to 28th place in 2012, from 16th place in 2011 (revised). In particular, Illinois fell 16 places in the corporate sub-index, dropping to 45th in the nation, from 29th prior to the tax hike.
Conclusion
In passing the tax hikes, House Speaker Michael Madigan and Senate President John Cullerton – along with the legislators who backed them – ignored the many voices warning that increasing taxes was the wrong thing to do. Quinn proceeded to sign the bill. The cost to families has been high: dollars lost directly to taxes, employment prospects lost indirectly.
Illinois must reverse course. The solution? Repeal the tax hike. It’s both good policy and good politics. Illinoisans deserve better than being forced to feed a broken system.