James Pethokoukis

Politics and policy from inside Washington

Illinois, a kleptocracy in action

Jan 14, 2011 18:58 UTC

What should America do about its troubled economy? Sometimes the real world provides the best laboratory for political and economic experiments. Democratic capitalism vs. totalitarian communism? One quick look at East Germany and West Germany in the 1980s or North Korea and South Korea today provides easy analysis of which is the preferable way to create and organize a peaceful and prosperous society.

Now we have Illinois vs. Indiana. The Prairie State has the worst debt rating of any state in the union and heading into 2011 faced a funding shortfall equal to 40 percent of its total budget. Only Nevada, hit particularly hard by the housing depression, is as nearly bad off, according to the Center on Budget and Policy Priorities

Yet directly east of Illinois is the Hoosier State with a AAA credit rating. Indiana faces a 2011 shortfall of just 9 percent and expects to balance its budget even though the economic downturn has struck just as hard as in Illinois. Under Governor Mitch Daniels, a noted budget hawk who may run for the Republican 2012 presidential nomination, Indiana has continually pared back spending. It now has the fewest public employees per capita of any state. And it spends half as much per citizen as Illinois.

But faced with a fiscal crisis, Illinois decided this week to raise taxes by $7 billion a year, jacking up the individual rate to 5 percent from 3 percent and the corporate rate to 7 percent from 4.8 percent. That the state didn’t instead cut spending dramatically is not really surprising. One-party kleptocracies — and that pretty much is what Illinois is — always want more taxpayer money, not less.

Yet it is unlikely the state will raise anywhere near that $7 billion now that it chose to undermine its competitiveness. This, from the nonpartisan Tax Foundation:

Our 2011 State Business Tax Climate Index ranked Illinois 23rd in the country, middle-of-the-pack compared with its immediate neighbors. Illinois’s low, one-rate individual income tax offers the advantages of simplicity, stability, and a competitive rate relative to other states, outweighing more negative elements of the state’s tax system.

If this legislation enacted on January 12, 2011 had been in place on July 1, 2010 (the snapshot date for the 2011 State Business Tax Climate Index), Illinois would have ranked 36th instead of 23rd. This is a fall of thirteen places, past South Carolina, Georgia, Pennsylvania, Tennessee, Alabama, Nebraska, Oklahoma, Maine, Massachusetts, New Mexico, Arizona, and Kansas.

On the individual income tax sub-index, Illinois would have ranked 14th instead of 9th, a drop of five places. On the corporate income tax sub-index, Illinois would have ranked 45th instead of 27th, a drop of 18 places.

Three  lessons here:

1. Neither states nor countries exist in isolation. Just as it’s foolish for Illinois to act as if what Indiana and Wisconsin are doing fiscally is irrelevant, so to must the U.S. take into account that is has, for instance,  a marginal and effective corporate tax rate far above that of the average advanced economy. The Obama White House may call for a cut. If he doesn’t, the congressional GOP should.

2. As the Indiana experience shows, the earlier you get started on budget cutting the better. Even though Uncle Sam has been running trillion-dollar deficits in recent years, the bond market hasn’t seemed too worried about the accumulation of all that debt. This has given President Barack Obama and Congress a window to make fiscal fixes that are reasonable rather than radical.

But the window could easily, and even quickly, close someday. If it does, the Federal Reserve chairman and the Treasury Secretary may be forced to trudge up to Capitol Hill and beg for action to reassure markets, such as a big tax hike (like a VAT). This is exactly the scenario some GOP spending hawks fear.

3. States should realize that Washington is not coming to their rescue, unless making it possible for them to declare bankruptcy counts as a “rescue.”

COMMENT

We hear so much about the evil corporations. Who has caused the financial crises in these states: Corporations?
Unions?
Union-Politician collaboration?

Posted by Leon1 | Report as abusive

U.S. growth agenda must broaden beyond tax cuts

Jan 14, 2011 18:55 UTC

U.S. Treasury Secretary Timothy Geithner’s meeting with chief financial officers further suggests the White House may push for corporate tax reform. But with unemployment high, President Barack Obama’s efforts to boost growth shouldn’t stop there. More government investment in research and infrastructure is also warranted.

Trend GDP growth of 3 percent will little improve the nation’s dire jobs situation. The broadest measure of unemployment — which includes part-timers who would prefer full-time work — is double pre-recession levels, as is the percentage of the unemployed jobless for 27 weeks or longer. Clearly government must do more to foster long-term growth and job creation while also keeping an eye on the public purse.

Cutting the top corporate tax rate to a level more competitive with other advanced economies could boost investment, hiring and worker wages. Congressional Republicans like the idea so much they will push it even if Obama doesn’t. And as long as the rate reduction is paid for by reducing market-distorting corporate tax breaks and subsidies, Democrats may play ball, too.

The GOP, which opposed Obama’s 2009 stimulus plan, has been cool to any notion of using spending to juice growth. That may be short-sighted. For instance, government funding of basic research can have a significant economic payoff. But a plan by House Republicans to roll back non-defense discretionary spending to 2008 levels could result in an 11 percent cut to the National Science Foundation’s already skimpy budget. Republicans should instead listen to Newt Gingrich — a possible 2012 GOP presidential candidate — and triple NSF funding.

Republicans, as General Electric Chief Executive Jeffrey Immelt noted this week, have also shown little enthusiasm for Obama’s idea of creating a national infrastructure bank to prioritize and financially seed projects around the country. But there’s no ideological reason that a Republican shouldn’t support such a plan. Even Tea Partiers mostly want to shrink government rather than abolish it.

And it’s really not that much money. Dramatically boosting research and infrastructure spending would cost roughly $75 billion a year, or 0.5 percent of GDP. Anyway, the major cutting needs to come in entitlements and defense, which combined account for 70 percent of the budget. All spending isn’t alike when it comes to boosting the economy and putting people back to work — a lesson Obama has a chance to teach.

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