Posted on: November 19th, 2012
By Rex Sinquefield, November 16, 2012
Now that the presidential election is over, and the drama of the campaign season has receded into the background, Americans are facing what could become a real crisis: the looming fiscal cliff. While some pundits argue that “cliff” is too severe a word, economists maintain that the term perfectly describes the peril we will all face if the government does not act. At the beginning of 2013, we could all see cuts in spending and hikes in taxes that will affect every American’s financial health.
This issue is not just a national one, though.
Right now, states throughout the country are facing their own fiscal cliffs, and some of these situations are very dire indeed. Governors and other leaders must listen closely to the conversations being held in DC – and then have similar conversations about their own state’s finances. One of the largest issues threatening to push states into the fiscal abyss is unfunded pension liability. This is particularly true in my neighboring state of Illinois.
According to figures from the Commission on Government Forecasting and Accountability (COGFA), Illinois is facing a public pension shortfall in excess of $85 billion. This staggering amount is the result of decades of short-sighted policy and underfunding. If Illinois does not undertake serious pension reform, these pension payouts will bankrupt the state and decimate funding for education, social services, and healthcare for the neediest citizens.
Compounding Illinois’ pension problem is the fact that the state’s tax rates make it unattractive to businesses. Illinois was known as a high-tax state for years, and Governor Pat Quinn made a bad situation worse last year when he hiked the personal income tax to 5 percent and the corporate income tax to 7 percent. To top it off, analysis by the Illinois Policy Institute shows that Illinois has the 14th highest tax burden per capita in the entire nation. This is the antithesis of a growth plan, and Illinois must take a serious look at its taxing and spending habits.
Clearly, Illinois is the poster child for what it means to be a state teetering on the edge of a fiscal cliff. Fortunately, though, other states are taking major steps toward reform. Strong leaders such as Kansas Governor Sam Brownback understand that tax reform is absolutely vital to a state’s economic health and its ability to attract businesses. In a move that should be a model for legislatures statewide, the Kansas legislature passed sweeping, pro-growth tax reform. Effective January 1, 2013, there will be just two tax brackets in Kansas rather than three, and the state income tax will be reduced for all individuals.
Even more important, owners of limited liability corporations (LLCs) and subchapter S corporations will see their state income taxes eliminated entirely. This is a major win for small businesses, entrepreneurs, and working families. The changes taking place in Kansas mean that my home state of Missouri must pay attention and must implement pro-growth tax reform policies. We cannot sit idly by (as this short-sighted Kansas City Star editorial recommends) while wealth and working capital move across our state’s western border, into Kansas.
Other states are setting the stage for growth and prosperity, too, thanks to smart tax structures. Newly elected Indiana Governor Mike Pence is building on the sound financial footing left to him by former Governor Mitch Daniels, and freeing up more take-home pay for all Indiana citizens by enacting an across-the-board, 10-percent income tax reduction.
Louisiana Governor Bobby Jindal continues to be a true leader in tax reform. His administration oversaw the largest tax cut in Louisiana history, as well as eliminated the state’s tax on business investments. The result of such forward-thinking reforms is $1.1 billion back in taxpayers’ pockets, making Louisiana an attractive place to live and work. In North Carolina, newly elected Governor Pat McCrory has a detailed plan to overhaul his state’s highly outdated tax code. Under McCrory’s leadership, the individual income tax will be decreased, as will the corporate income tax rate.
Clearly, each state in the nation – and, indeed, each business and each family – is facing our own version of the fiscal cliff. While it is important for us to hold Washington accountable for its actions regarding taxing and spending, it is also vital that we have the same conversations closer to home.
Original article at: http://www.forbes.com/sites/rexsinquefield/2012/11/16/its-not-just-the-feds-the-states-face-their-own-fiscal-cliffs-too/