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Fred Giertz, expert on the Illinois economy
J. Fred Giertz is a University of Illinois professor of economics and member of the Institute of Government and Public Affairs at Illinois. In an interview with News Bureau Business and Law editor Phil Ciciora, Giertz discusses the effect of the state of Illinois raising personal and business tax rates one year later.
Was raising both the state income tax rate by 67 percent and the corporate tax rate by 46 percent the right thing to do?
In retrospect, it was certainly something that had to be done; whether that exact amount had to be done or not is another question.
Illinois clearly needed extra revenue. Illinois was not a healthy state one year ago. If you had a healthy state, where bills were paid, it wouldn’t make a lot of sense to have a substantial increase in taxes. But for the past five to eight years, Illinois has been teetering on the edge of insolvency. Business doesn’t like to pay higher taxes, but business also doesn’t like to operate in a state that’s totally irresponsible – a state that doesn’t pay its bills or fix its roads, for example. So it wasn’t a choice between a well-run state government and low taxes or a well-run state government and high taxes; it was a choice between a very imprudent state with low taxes and a slightly more prudent state with higher taxes.
The tax increase was sold by Gov. Pat Quinn as a temporary measure. Do you foresee these tax rates being repealed or phased out to former levels in near future?
No. The state has had a long-term situation where it hasn’t been paying for what it has been spending, and that was true before the tax increase and to a lesser extent today. Even in this last year, we’re still running a shortfall, but one that’s just not as big as in the past. So there’s virtually no chance we’ll let the tax expire. The choice will be between having a huge cut in state government spending, which I don’t think we have the political will to do, or continuing with something like the current tax rate.
If you look back to last year’s elections, Illinois was not like many other states – we didn’t throw our politicians out, we validated what was going on. We re-elected the same governor who has been spending billions of dollars per year more than we’ve been taking in. We re-elected Democrats to the House and Senate, and the leadership has stayed the same. So nothing really changed in terms of the politics, so it wasn’t very likely that we were going to have huge cuts in spending. But given the fact that we were on the brink of insolvency, something had to be done.
This past year, though, we have had some measure of discipline, much more so than in the past. Under the leadership of Speaker Michael Madigan, the Illinois House chose a relatively low budget target, and tried to keep spending within that target. In the past, we didn’t even worry about revenue. We simply spent money and then worried about how to pay for it later. So there was actually an improvement in the process this year.
What effect have the tax increases had on the Illinois economy? Many predicted this would drive businesses out of the state to Wisconsin and Indiana. Has that happened? Or is it just a matter of time before it happens?
The state of Illinois is not in a great position right now, but the counterfactual is, how would we have done if the state were spending an extra $5 billion more every year than it took in?
It’s very difficult to tell what the actual impact is. A tax increase in and of itself is not a very good idea for business, but if the state is not behaving in a prudent way, that’s also not a very good thing for business. Some businesses have threatened to leave, while others have received tax breaks after threatening to leave. It’s probably too soon to tell, but I don’t think there’s been any huge impact in the short run.
Do you foresee more tax increases in the future, or more service fee increases and gambling revenue?
I don’t see another major across-the-board type of hike because that can only be done so often. The state has to worry about living within its means. In a normal situation, that would be a challenge but not an insurmountable one. But the problem with the state of Illinois is, in addition to all these other problems, we also have the large amount of unfunded pension liability that has to be dealt with, which because of past inaction by the state, makes the degree of difficulty that much higher.
The pension liability issue is still an open question. One possibility is that there will be some sort of pension reform that will reduce pension costs in the future. That’s been talked about for a year or two but it’s very difficult to enact because of the constitutional restrictions on reducing benefits that have already been earned. The question then becomes, can you take away benefits from people currently employed. That’s still an open question, from a constitutional perspective.
The biggest thing is the state needs to set up a tax system that is stable and pays for the activities of government and is not punitive for individuals and businesses.
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