Where to Begin?

I could hardly let the recent Wall Street Journal article, “What’s the Matter With Illinois?”, pass without comment. I’ve taken the liberty of sampling the graphic above from that article. As you can see, Illinois has fared far worse in the recovery than its neighboring states.

The WSJ attributes Illinois’s problems, essentially, to Democrats:

Democrats say Illinois taxes aren’t all that high and have room to grow…

[…]

Democrats want to impose a progressive income tax because they don’t want to extend their “temporary” tax hikes on their low and middle income constituents…

[…]

The real reason Democrats want higher taxes is the state’s exploding government-employee pension costs…

[…]

Democrats in Springfield are also teeing up a bailout for Chicago’s pension funds…

[…]

Taxes and public union governance aren’t the only policy differences in these states, but they have been the most notable since 2010. Judging by the record so far, nothing would make the four Republican Governors of neighboring states happier than for Illinois to keep soaking its millionaires.

I think that concluding paragraph begins to get to the heart of the matter but let’s do a more detailed comparison of the five states.

State Population (in millions) Per capita GDP Population of largest city (000) State Gini Percent non-white population
Illinois 13.0 $45,302 2,695 .465 29.5
Michigan 9.9 38,798 707 .451 21.0
Wisconsin 5.7 43,561 599 .430 13.8
Indiana 6.5 42,415 .440 15.7
Ohio 11.5 44,295 787 .452 17.3

or, in summary, Illinois is larger, richer, less equal, has a larger urban population, and has a larger percentage of minority and poor people than its neighboring states. It really isn’t as similar to its neighboring states as one might expect. It also has a higher state minimum wage than its neighboring states. Indiana can become Indiana just by competing with Illinois, tempting businesses to move across the state line, but it’s a lot harder for Illinois to improve its economy by attracting business away from Indiana. The numbers just don’t favor it.

What does Illinois need to do? Illinois isn’t a destination state like California or Florida and it doesn’t depend on natural resources as Texas does oil. The decline of the coal industry, largely a result of environmental regulations, has hit Illinois hard. Not only have thousands of working people been thrown out of work, many of those people headed to Chicago searching for jobs that proved elusive. Chicago’s Uptown neighborhood is still full of them.

Illinois needs to be more friendly to business, slowly reform its tax system to become less regressive, weed out government corruption, learn to live within its means, and recognize that it’s only by producing more that the state can prosper. Without business and industry Illinois will inevitably decline.

13 comments… add one

  • jan

    The Mercatus/Publications/Freedom%20in%20the%2050%20States.pdf”>Mercatus Center a conservative think tank, has published a list of states assessed for their ‘freedom’ status. They’ve taken into account the fiscal, regulatory and personal freedoms set forth in each state’s policies. Illinois comes in 6th, as the less free, with NY, CA, NJ, Hawaii, RI taking the 1st through 5th prizes. Another similarity noted by all these highly regulated, taxed states is that they are considered “blue” in their political affiliation (except for Christie being governor of NJ), dovetailing in with the theme of the posted WSJ article.

  • Essentially, that’s an opinion, Jan. It’s mostly subjective.

    As I tried to express in the post, needs and preferences may be different among different states. The incontrovertible reality is that Illinois needs to do something differently.

    Our elected officials seem to think that something is to pay more taxes. That might be true as one component of a much more comprehensive growth plan that includes changing how the tax burden falls and revising spending priorities.

    So far, very little of the rest of the job is being done. One of the differences I didn’t mention among the states captioned had to do with the state proportion of total school spending. Illinois is dead last among the 50 states while our neighboring states are all above the median. This despite the percentage of school age kids being about the same among the five states.

  • steve

    jan- Let me define the metrics and I am sure I can prove that the red states are the least “free”.

    Dave- It still looks mostly like long term problems with funding pensions. Had Illinois been adequately funding its pensions all along, their tax load now could be much lower. Also, since Chicago pays much more tax monies to the state than it receives back (I believe that is what we determined), how do you resolve the problems with the non-Chicago areas of the state which are causing so much of a problem?

    Steve

  • jan

    Dvae,

    It’s not only Illinois who needs to reassess their model of governance and policy-making. CA, for instance, has so many problems bubbling below the surface of what appears like a decent budget.

    Sorry for all the mistakes this morning. I’m propped up in a chair with my broken ankle, and it seems to be going to my fingers, as well. Anyway, thanks once again for the fixes.

  • Had Illinois been adequately funding its pensions all along, their tax load now could be much lower.

    Which brings me back to my favorite Yiddish proverb: if my grandmother had balls, she’d be my grandfather. Illinois’s problems in this area date mostly to the Blagojevich years, during which public pensions were sweetened even as the state failed to make its contribution.

    Much of the money was used to expand Medicaid benefits. Buying votes is easier than paying the freight.

  • PD Shaw

    I’m not certain that Illinois pays higher state/local taxes than its neighbors. There are significant differences, such as Illinois’ flat income tax rate, layers of taxing bodies, and reliance on property taxes.

  • One of the factors of which most non-Illinoisans are unaware is the very large number of independent taxing bodies we have. Since I just finished with my income taxes I just happen to have my property tax bill handy. Here are the components of my property tax:

    Metro Water Reclamation District of Chicago
    Chicago Park District
    Board of Education Chicago
    Chicago Community College District
    City of Chicago
    Cook County Forest Preserve District
    County of Cook

    Each of these can raise property tax rates without a by-your-leave and most are not particularly representative. Just a handful of elected and appointed commissioners. Repeat that for every city and town in the state.

  • jan

    IMHO, this country is being burdened by two major governmental dysfunctions.

    The first is how it’s placing societal wedges in place, creating a blatant sense of disruption between categories of it’s citizens in order to gain political advantage in elections.

    The second is the sheer weight of it’s regulations, dampening economical growth, job creation, as well as the innovative processes which encouragingly spark new ways of assessing and overcoming old problems

    Two articles read just today speak to these wayward government actions.

    The first one involves how intrusive regulations, coupled with the ramping up of the War on Woman rhetoric, can actually lead to legislation like The Paycheck Fairness Act backfiring against women.

    Every time we make it harder for employers to succeed by imposing unreasonable standards on worker compensation, they’re more likely to turn to robots. Even The Economist has changed its tune on thinking that this new technology will create more jobs than it will destroy. A recent article, “Job destruction by robots could outweigh creation,” explains the risks facing employment.

    At a time when jobs are just beginning to come back and Americans—both men and women—are digging out of the deep hole of the recession, why add another regulatory burden to employers who are already smothered in the do’s and don’ts of ‘human’ resources. Unless, of course, it’s just politics. If so, ladies, be careful what you wish for.

    Then there’s this piece entitled Suffocating Science Harms Everyone, adding a cautionary note to the unintended consequences of over-regulation, generated by ambitious politicized, PC-tinged bureaucracies adhering to governmental agendas of the day.

    Regulation isn’t inherently evil. Regulation is one tool that government uses, whether for good or ill. When research is regulated unwisely, scientists’ careers are jeopardized, but what matters is the suffering of ordinary people, not the frustration of the scientists.

    The questioning of regulation fickleness/abuse touches on all manner and forms of regulation, including FDA approval of drugs, new medical practices, to governmental intervention in racial/gender discrimination, to the deposition of government grants favoring one study over another, including magnanimously giving global warming endorsements to one peer reviewed orientation while ignoring a whole set of other dissenting peer reviewed studies.

  • Guarneri

    “Had Illinois been adequately funding its pensions all along, their tax load now could be much lower.”

    This reminds me of the, ahem, “CFO,” of one of our portfolio companies who once announced the “if we just didn’t have all these debt payments we’d be fine.”

    Did I mention he is the ex-CFO?

  • steve

    Davw- This guy went and tracked it back for us. The pension issues go back at least until the 1970s. The numbers occasionally look better when the stock market is thriving, but even then pensions in Illinois seldom reach much above the 60% funding level. Anyway, my point is that when it comes to the state budget, the problem is primarily a pension problem.

    http://www.chicagomag.com/Chicago-Magazine/The-312/March-2011/Illinois-Teacher-Pensions-Always-in-Distress-Mode/

    Steve

  • I guess I haven’t expressed what I’ve been trying to get at as clearly as I should. The only thing that shows up in a budget is what you’re spending money on not what you aren’t spending money on. As it works out Illinois is spending much of its money on public employee pensions and healthcare.

    The state should be spending considerably more on education. It would take billions in additional revenue just to put Illinois on par with the median state.

    Illinois’s sales tax is among the highest and its property tax is among the highest. Both of those are regressive. So is its income tax, a flat tax. It used to be one of the lowest among the states but with the “temporary” bump it’s now in the middle of the pack. The bump didn’t increase revenues proportionate to the size of the bump, not a good sign. Its corporate income tax is the highest of the five states cited and the fourth highest in the U. S. Its unemployment rate is the second highest in the country and personal income is growing more slowly here than just about anywhere else.

    I don’t think we can accomplish what we need to on the basis of taxation alone. I also think that increasing taxes, at least increasing taxes in the absence of substantial governance and fiscal reform, is actually counterproductive in Illinois’s case.

    The article you cited is useful. Thank you. However, it just addresses the TRS. That’s just one component of the problem. It doesn’t address other public employee pension funds’ problems or Chicago teachers’ pensions.

    What we really need is growth.

  • Guarneri

    Skip the shameless gold promotion and just think about the numbers and portfolio implications.

    http://www.zerohedge.com/contributed/2014-04-15/pensions-timebomb-85-pension-funds-will-go-bust

    A person in a position to know informs me that some of the Chicago pension entities have reduced their return assumption to 6%. Not enough. Only a robust pickup in growth will save the day, and there is nary a hint that the state of IL, or its electorate, is in that mindset.

    And whatever you do don’t let Menzie Chin see that graph. It might upset his jihad against Scott Walker, er, Wisconsin.

  • Jimbino

    “The state should be spending considerably more on education. It would take billions in additional revenue just to put Illinois on par with the median state.”

    The opposite is the truth. Illinois should drop all support for public education and healthcare. Taxes would immediately drop, breeders and their families would move to Indiana, and the GNP/capita of Illinois would double. Any improvement in production could be attained by welcoming already potty-trained young workers from Indiana and Mexico, who would presumably flock there to participate in the new-found opportunity and prosperity. Illinois’s economy would look very favorable, more like those of Hong Kong, Singapore, Estonia or Santa Clara. It would also be much quieter, what with all the kids, dogs and cats off the streets.

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