Advice to the New York Times editors. Butt out of issues about which you know little and probably don’t care enough about to become better informed:
After 22 years of not raising income taxes, Illinois saw its budget shortfall grow to $15 billion. It had the lowest state credit rating in the nation, and it wasn’t paying its bills to hospitals and schools.
The Illinois tax rate was low before and remains low for big states. The income tax will rise from a flat 3 percent to a flat 5 percent. That will cause pain at the lower and middle levels of the economic scale, but the state’s millionaires will probably stay put. (The top rate is 10.55 percent in California, 8.97 percent in New Jersey and New York, and 7.75 percent in Wisconsin.)
Illinois’s corporate tax is going up to 9.5 percent from 7.3 percent, but that by itself is unlikely to send businesses packing. What businesses crave most is a stable environment in which to make profits, and Illinois was anything but stable. Businesses tend not to like it when health and education systems break down.
As I have documented before, Illinois won’t solve its fiscal problems by raising taxes alone. Illlinois was already among the highest-taxing states before the bill was passed; raising taxes to the level required to solve Illinois’s fiscal problems would make Illinois the highest taxing state and Illinois does not enjoy some of the special conditions of other very high-taxing states, e.g. Vermont, a very small, homogeneous state many of whose residents are there for lifestyle reasons.
Illinois’s flat tax rate is based on a fixed percentage of federal adjusted gross income. This renders the tax even more regressive than it would otherwise be since those who don’t itemize (2/3s of Illinoisans) pay a higher proportion of their gross incomes than do those who itemize (almost entirely those in the top income quintile). Nonetheless the difference between 3% and 5% of a million dollars in adjusted gross income is $20,000. I think the NYT is underestimating the willingness of Illinois’s wealthy to leave the state.
I also think they’re underestimating the willingness of Illinois businesses to leave the state. The governments of Indiana and Wisconsin certainly think so.
The tax hike might be justified if it actually solved Illinois’s fiscal problems; it doesn’t. The more than $6 billion in new taxes only accounts for about half of Illinois’s shortfall. The legislature plans to raise an additional $4 billion by borrowing and defer payment on the remaining $2 billion. Borrowing to pay operating expenses will result in less money available in future years to pay operating expenses then: it’s a sucker’s game. Part of the reason that Illinois is in deficit now is that it’s servicing the debt that it incurred in 2003 when Gov. Blagojevich borrowed $10 billion to pay operating expenses. And deferring payment does nothing to reduce the amount the state owes; it merely kicks it down the road a bit to a point where Illinois has less available revenue, is paying interest at a higher rate, has reduced economic activity as a consequence of its prior fecklessness, and has blown its wad on income tax increases as an alternative for addressing the situation.
The tax hike will at least at the margins reduce economic activity, particularly retail sales, in Illinois. In Illinois city and county governments do not have the power to levy income taxes and, consequently, are mostly dependent on sales taxes, property taxes, and fees for revenue. The effect of reducing retail sales is to rob city and county governments of the revenues they need to operate. This may be one of the reasons that no Illinois mayor has come out in favor of the state legislature’s actions.
Illinois’s legislators’ pledge to limit the growth in Illinois’s expenditures to 2% a year is wishful thinking. All that needs to happen to exceed that level is for healthcare, public employee pension costs, and child welfare expenses to grow at their expected rate. Additionally, the Illinois legislature does not have the power to bind future Illinois legislatures other than by amending the constitution and, consequently, a future legislature, faced with the same revenue issues and incentives that the present one is, is more likely to amend this legislature’s actions which it can do by simple majority than it is to grasp the nettle the present legislature has refused to.
In summary the NYT editors have come out in support of a tax hike that doesn’t solve Illinois’s fiscal problems, reduces the state’s competitiveness relative to nearby states, benefits Illinois public employees at the expense of practically everybody else in the state, particularly the working poor, increases state revenues at the expense of city and county revenues, and poisons the well for future action. What are they thinking?
There’s a new chart from United Van LInes purporting to show interstate migration. http://www.unitedvanlines.com/mover/united-newsroom/press-releases/2011/2010-united-van-lines-migration-study_000.htm
3% income tax Illinois was among the “outbound.” So was no income tax New Hampshire.
California was not an outbound state. Neither was NY or MA.
And none of the zero income tax states were among the high “inbound.” Not TX, NV, FL, WA or TN. Which certainly flies in the face of a lot of anecdote we’ve been hearing.
Conservative (but pretty high tax) NC was a big gainer, and so was liberal and even higher tax OR.
I’m not a statistician, but I’m not seeing a correlation between personal taxe rates and moves. You’d probably have a higher correlation between weather and moves. Of course it’s obviously about jobs, but for all the sturm und drang it seems CA is holding its own.
(And as I sit in my back yard typing this and waiting for the grill to get nice and hot, I think I know why.)
I don’t much care about the food fight between fans of states with zero income taxes and those of states with higher tax rates. I have little doubt that there is no single reason that businesses or individuals enter or leave particular states.
My concern is more with changes within states and, particularly, in Illinois. I sincerely doubt that the higher income tax level will encourage any business or individual to move here and it might well be a factor in causing some to leave.
Illinois doesn’t have a seacoast or mountains. It doesn’t have a benign climate. Its oil is about tapped out and its coal has lots of sulfur. Will increasing its taxes make it a more or less attractive place for people to move to or businesses to open in?
I’ll cop to have a general suspicion of the image of trucks rolling out of the state. It’s a common legislative tact to get corporate welfare. The kind of thing that puts taxpayors on the hook to move Sears out of the Loop and pay the operating costs at a major league ballpark. One of the few times I’ve testified at the Illinois Senate, I was confronted afterwards by a legislature emphatically convinced that Kentucky was siphoning away all the jobs from Southern Illinois with it’s business handouts.
And here comes an example: “Train-maker Talgo Inc. is threatening to leave Milwaukee because Wisconsin rejected federal funds for high-speed rail. Talgo still considers Illinois a strong possibility for its new the company’s new home, despite the tax increase, said spokeswoman Nora Friend. The tax increase “would not weigh in as a positive, but it’s difficult to say whether it’s the deciding factor,” Friend said. “It would be one more factor that gets weighed in.”
The cynic in me predicts Illinois makes a large cash outlaw or targeted tax breaks to lure in businesses like Talgo, while the existing employment base remains stagnant.
The more principled approach is to say the taxes are not that big of a deal compared with questions about location, labor pool, utility cost, insurance cost, cost of living, regulatory environment. Illinois needs to work on these, get moving forward on worker’s compensation and unemployment insurance reform.
I enjoyed my time in the Chicago area but just got sick of the weather. Not much anyone can do about that.
I was pondering the question of what would induce an individual to relocate to Illinois. The still low personal income tax rate (5%) would be a sweetener, but the attraction rests almost entirely on the character of the city of Chicago. I think it’s less a matter of Illinois vs. Texas than Chicago vs. New York City vs. L.A. Or even more specific: Lincoln Park vs. Greenwich Village vs. the Hollywood Hills.
That’s where Chicago doesn’t do too badly. You get more house or apartment in Lincoln Park than you do in the Village, and you may decide you don’t want to live your life in a car as is inevitable in SoCal. Moving around is one thing at which I am extraordinarily experienced and it tends to come down to a “feel.” If it was just about money I’d move the Vegas and between taxes and mortgage save 60 or 70k a year.