Monday, January 17, 2011

Illinois Wakes Up To Higher Taxes and the New York Times Cheers

Illinois taxpayers are going to be taking on the chin with massive tax hikes enacted by the lame duck legislature. The legislature had hoped that the tax hikes, which include raising the personal income tax from 3% to 5% and the corporate income tax rate from 4.8% to 7%, would raise $7 billion.

The New York Times thinks that this tax hike is a good thing in that it shows that Illinois is finally getting serious about fiscal responsibility. And it thinks that Illinois is somehow a model for righting the fiscal ships of so many other states that are facing massive budget deficits. Yet, its very premise is undercut by its own facts and observations:
For years, Illinois, like so many states, pretended that it had not fallen off a budgetary cliff. It was spending too much and taking in too little revenue, but every year it would kick its problems into the next. Unable to pay its bills, it finally accepted reality last week and raised taxes on incomes and businesses — a first step toward getting its house in order.

The action was immediately ridiculed by several governors around the nation who are still pretending that they can cut their way out of the enormous shortfalls they face, without raising taxes. Wisconsin and Indiana predicted a windfall of angry corporations and residents would head their way from Illinois. Even Gov. Chris Christie, the New Jersey Republican, vowed to fly to Illinois to invite businesses there to defect to his state.

That makes great political theater. But businesses and voters in Illinois, and around the country, should take a closer look at the facts and figures, including their own.

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.)
Right there in the first paragraph epitomizes the problem with Illinois and other states whose budgets are now massively out of whack.

The states were spending far more than the revenue they were taking in - regardless of the tax rates that were being imposed. Raising the taxes, which is what states like New Jersey and New York have done in the past did not solve the budget equation.

These states simply continued spending more than their revenues would allow. Over time, that built up massive structural budget deficits that required deficit spending - taking out debt to pay for ongoing operating costs.

The Illinois solution of raising taxes is not going to solve the state's fiscal problems because the state refuses to address the spending component. Years of inadequate control on spending resulted in the deficits, and raising the taxes wont solve the problem either - and the Illinois legislature has already acknowledged as much.

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