Budget & Tax
William Freeland | October 17, 2017
Illinois—not Kansas—is a cautionary tale for Oklahoma policymakers
In light of Oklahoma’s recent (and much overstated) budgetary woes, some are now pointing to Kansas’s recent fiscal experiment, which featured tax reductions in an attempt to boost economic opportunity, as some sort of cautionary tale for states failing to embrace a big-government policy regime.
Much can and has been said about the litany of untruths that have been written about Kansas. But what cannot be said about Kansas is that it remotely approaches the dysfunction and economic despair of my adopted home state—Illinois.
Illinois hadn’t passed a budget in just over two years, right up until July 6th. On that day, the legislature overrode the governor’s veto on a budget that apparently passes for a solution in Illinois—a “solution” featuring billions of dollars in annual tax increases.
That solution allegedly provides fixes to one of the nation’s least competitive policy environments, chronically weak revenue due to a hemorrhaging tax base, and a nation-leading level of crippling debt. Meanwhile, the state’s fiscal position remains so poor that two of the three bond rating agencies (Fitch and Moody’s) are warning the state of an imminent downgrade to “junk bond” status even after the recent tax increase.
All of this while (unlike Kansas) embracing high taxes and high spending. Allow me to give you a tour of what an economic basket case truly looks like as I guide you through the economic policy and performance of Illinois.
Illinois’ Fiscal Position
The Mercatus Center recently analyzed the fiscal health of the 50 states. Illinois ranks second to last in the nation, a fiscal summary that is indicative of the deep hole that state has dug for itself through irresponsible fiscal practices and chronic noncompetitiveness.
Narrowing in on the state's massive pension debt, consider a recent study by the American Legislative Exchange Council (ALEC), which tabulated state pension debt using actuarially sound methods. Illinois ranks at the bottom of the nation—48th in per capita pension debt. Illinois' nearly $363 billion funding gap—a figure that translates to a funding ratio of only 23.8 percent of pension liabilities owed—equates to $28,200 in debt per state citizen from the public pension plan alone.
Illinois’ Economic Competitiveness
What is particularly notable about the extent of Illinois' fiscal woes is that the state’s colossal debt was accrued while taxing at one of the highest levels of any state in the nation. The Tax Foundation's annual tabulation and ranking of state and local tax burden ranked Illinois as the 5th-highest taxing state—with government consuming 11.0 percent of state income. And this is before recent tax increases, which are forecasted to raise personal and corporate income tax by roughly $5 billion annually, according to the Illinois Policy Institute.
Focusing on the burden of taxation faced by business in the state, the results are no better. The Tax Foundation's "Location Matters" study provides a broad overview of the business tax climate faced by different types of business under a state's fiscal regime. The study calculates the tax burden of seven different model business types, both as infant firms and at maturity, for each state using the same assumptions. This methodology gets beyond top line overviews of tax climate and into the details of compliance faced by different types of firms.
Illinois ranks in the bottom 10 in almost every one of the seven categories in “Location Matters” and averages a rank of only 42.4 out of 50.
Worse still, Illinois' substantive policy uncompetitiveness extends beyond tax policy. Consider the analysis of ALEC's "Economic Outlook Index," calculated as part of their "Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index" study, published annually for the last 10 years. Across 15 equally weighted variables detailing relative state policy competitiveness, Illinois ranks a dismal 44th among the 50 states.
Proponents of big government frequently choose to dismiss these measures of economic competitiveness. But these dismissals should be considered with skepticism, as poor measures of competitiveness and poor measures of economic performance—detailed in the following section—track one another with strong correlation in Illinois.
Illinois’ Economic Performance
Illinois’ economy, despite being anchored by the strength bestowed on any state featuring a major “magnet” hub like Chicago, has seen a decade of pitiful performance that shows little sign of improvement on the horizon. Chart after chart and data point after data point detailed below will demonstrate this, but what should not be lost in the detailing of data is what the data mean for citizens in living in Illinois.
For example, weak income growth and the stampede of outbound migration affect the day-to-day life of those living in Illinois. The reality of those figures is the day-to-day struggle faced by Illinois citizens.
First, consider Illinois’ anemic income growth, as detailed in an Illinois Policy Institute analysis of Bureau of Economic Analysis (BEA) data. Illinois’ income growth ranks only 40th among the states for the most recent year of available data and 49th since the end of the Great Recession in late 2007.
Poor income growth is of little surprise given Illinois’ weak growth in state gross domestic product (GDP), a common measure of total economic production in a state or nation. According to BEA data looking at cumulative GDP growth across the states from 2007 to 2016, Illinois ranks just outside the bottom ten worst-performing states at 39th.
Turning to employment, data from the Pew Foundation show that employment as a percent of the population is only 79.5 percent, just barely above the national average. Illinois’ ranking of 23rd in this category—putting the state in the middle of the pack nationally—is among the state’s few bright spots, thus demonstrating the depth of the state's poor performance: mediocrity leads a list of the good news in Illinois.
Perhaps most depressing of all are Illinois outbound migration data. These figures are the tabulation of citizens leaving Illinois, net of those moving to the state, and come from the Internal Revenue Service data tabulated and visualized by the “How Money Walks” organization. Illinois has lost nearly three-quarters of a million citizens on net since 1985. Moreover, those citizens took $45.34 billion in income with them—dollars that can no longer fund public services through tax revenue, be spent at Illinois businesses, or fund start-up entrepreneurial efforts in the state.
The Illinois Policy Institute notes that millennials in particular have been fleeing the state: more than 80,000 on net have left Illinois since 2011 alone. Almost by definition, this figure illustrates the bleak future Illinois is facing.
A broader summation of the economic state of affairs in Illinois can be seen in the aforementioned "Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index," which includes a measure of economic performance over the most recent decade of available data. Illinois ranks only 44th overall. The state ranks 30th in GDP growth, 48th in absolute domestic migration, and 39th in non-farm payroll employment growth.
Illinois' Last Tax Hike: A Case Study in Fiscal Wastefulness
In an article by the Illinois Policy Institute ("Illinois' Temporary Tax Hike: $18 Billion Later"), the organization looked at the result of the last round of tax hikes in Illinois, which were sold to the public as a path out of the state's deep fiscal hole. The study notes that $18 billion in taxes were raised, yet the state's fiscal scenario worsened—debt increased, the tally of unpaid bills grew, the state’s credit rating was downgraded numerous times, and interest payments on debt grew. Illinois citizens were sold a false promise.
As they say in the world of finance, "past performance is no indicator of future results." Still, it provides a good indication of likely outcomes. And the likely result of this new round of tax hikes in Illinois is decidedly not a more sound or responsible state budget.
If policymakers in Oklahoma are looking for a cautionary tale in state economic policy, they could hardly find a more pertinent example than Illinois. Despite all the state has going for it with a world-class city like Chicago, the economic reality faced by Illinois citizens has been dismal.
Illinois has embraced a policy regime of big government, spending generously, and taxing with little concerns for economic consequences. And the Illinois fiscal experiment has been an unambiguous failure.
Living here in Illinois, I can see all the state has to offer, yet what I most acutely witness is the struggle and despair of my fellow citizens. It is painful and depressing to watch.
William Freeland is an independent public policy analyst, research economist, and data scientist with a decade of experience in public policy research and advocacy. He has worked as a research analyst and economist for the American Legislative Exchange Council (ALEC), as an economist at the Tax Foundation, and as a member of the research faculty at the George Mason University Law and Economics Center.