Democratic governor Pat Quinn of Illinois is being excoriated, along with a lame-duck Legislature, for pushing through sharp increases in both personal and corporate income taxes. There are many things to criticize. The increase was twice the 1 percentage point increase Quinn had called for in his election campaign. The higher taxes will hurt the state’s rankings on favorability to businesses. One could go on.
Naysayers need to recognize one thing, however: Illinois, like many other states, faces a fiscal crisis that has been brewing for years. Quinn and the Legislature took concrete action. There is more work to do in Illinois, including cuts in state spending and limits on public employee compensation, particularly in the form of retirement benefits. But the government of Illinois has taken a firm step that neighboring states have not.
Illinois’ problems go back years, well through the corruption-scarred administrations of Quinn’s two immediate predecessors, Democrat Rod Blagojevich and Republican George Ryan. They also go back over several legislatures. As in most states, one can fault both governors and legislators for bad decisions. But one also must fault voters who consistently opt for candidates who make promises they cannot keep.
Illinois faces a budget deficit of $13 billion, has at least $6 billion in accounts payable and has the most-underfunded pension plans of any state in the nation. It already had taken the step of selling bonds to fund these plans, an unprecedented symbol of fiscal irresponsibility.
The problem of unpaid bills is such that the state faces growing refusals by social service nonprofits and other vendors to provide more goods or services until they are paid for ones already delivered.
All in all, Illinois is in a fiscal crisis if any state is, and the only way out is to cut spending, increase taxes or some combination of the two. The fact that tax increases predominated over spending cuts in this bill does not mean the new Legislature — in which Republicans have gained seats, though they remain a minority — cannot enact further cuts in spending.
In Wisconsin, newly inaugurated Republican governor Scott Walker is keeping a campaign pledge by introducing legislation to reduce state taxes on businesses with annual sales under $500,000. The measure is projected to reduce revenues by $40 million a year. This is small compared with a $3.3 billion deficit projected over the next two years. However, one can make that argument for myriad individual spending categories or tax breaks. Coupled with a promise not to raise any other taxes, any cut means all the adjustment must come on the spending side. The new governor has not showed similar speed in proposing a realistic set of cuts to close the gap.
Leaders of the Republican majorities in both bodies of the Minnesota Legislature have called for larger tax cuts for businesses, estimated at $200 billion over two years, that would come through a reduction in corporate income tax rates for all businesses rather than a special credit for small firms as in Wisconsin.
Advocates of business tax cuts in both Minnesota and Wisconsin argue the measures will boost employment. That may be, but economic theory and lots of experience show any resulting increases in business activity will not be sufficient to offset lost revenue. And as in Wisconsin, the budget deficit is the pressing problem right now.
Skeptics argue the tax-cut proposal in Minnesota is window dressing. Its proponents know Gov. Mark Dayton, a Democrat, would veto the measure and that an override would be difficult. It is easy to introduce a bill everyone knows won’t make it into law and hence won’t add to the budget deficit. And it will force Dayton to issue a veto that can be used against him in future campaigns.
Both Minnesota and Wisconsin are at the very openings of their legislative sessions. In both states, dogged anti-tax elected officials have time to introduce cuts that would close deficits even with tax cuts. But in neither state has anyone introduced a specific set of cuts that would win majority support of voters even in their own parties. The ball is in the legislators’ court. Until they act, Quinn and the Illinois Legislature hold the prize for pragmatism.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.