Posted on: November 15th, 2013
by Rex Sinquefield
In nearly every state, budget debates are reaching a critical stage — and in Illinois, the stakes are as high as they can get.
Illinois’ budget struggles shine a bright light on the futility and fundamental unfairness of state governments engaging in picking corporate “winners and losers.” As it stands right now, Illinois lawmakers can be congratulated for successfully avoiding considerable veto session pressure to expand tax incentives to companies such as ADM and Office Depot.
But, when lawmakers reconvene in a matter of weeks, they will be facing several very tough decisions. At stake is the state’s tax credit system, which has become the core of the Illinois’ fiscal policy. Lawmakers will face the reality of risking the loss of major employers that are pushing hard for tax credits that benefit a hand-selected few, but that punish smaller, entrepreneurial employers. The situation is made worse by a recent corporate tax hike to 9.5% (one of the highest in the country), for employers that have been deemed unworthy of tax relief. Even worse, the revenue Illinois sought from the tax increase will evaporate in 2015, when it is set to expire.
The state legislature would likely not be facing such a decision if it didn’t have such an unappealing income tax structure in the first place.
Complicating matters even further is a $100 billion public employee pension deficit, along with the state’s single factor corporate income tax system, which does not tax corporate income earned outside of the state. This means that some of Illinois’ largest companies would not benefit from income tax incentives. In short, Illinois is rewarding companies that are not paying income taxes to it in the first place.
Public employee pension deficits are a huge drag on Illinois’ economic performance, as they create uncertainties about future tax policies and raise the costs of financing for municipalities. Fitch’s recent two-point downgrade of Chicago, Illinois’ main economic driver, from AA- to A-, is a perfect example of this.
In explaining its decision to downgrade Chicago, Fitch cited the “lack of meaningful solutions to both near- and long-term pension burdens.” While Illinois and Chicago, in particular, have improved their financial standing during the last five years, their growing pension liabilities overshadow the progress made. Echoing the recent downgrade, Fitch maintains a “negative outlook” on Chicago’s debt, suggesting the potential for further downgrades in the months ahead as the city’s “pension stress exacerbates the already weak debt profile.”
The situation in Chicago is a canary in the coalmine for the problems facing the state of Illinois, in which public employee pension liabilities have reached monstrous proportions.
The 117 members of Illinois’ 98th General Assembly will need to meet these challenges head-on. The future of the state and its ability to fund critical social services, education and infrastructure will be in these lawmakers’ hands. A shift to a broader, lower tax rate across the board for all earners would provide a more fair, transparent and stable source of revenues for the state. It would also get government out of the business of punishing many for the benefit of the few.
To put it mildly, the state legislature has gotten the state in a real pickle. In its ongoing budget crisis and general economic downward spiral, even Illinois is realizing that tax policy trickery and manipulations via corporate tax incentives are bad.