Illinois, a kleptocracy in action

January 14, 2011

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.”

4 comments

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[...] Illinois, a kleptocracy in actionReuters Blogs (blog)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 …and more » [...]

“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. … Yet it is unlikely the state will raise anywhere near that $7 billion…”

Because formulation is flawed from the start. A government can’t decide to raise taxes by a “dollar amount.” But they can CHANGE tax rates HOPING to raise tax revenue.

“Change and Hope”
That’s oddly similar to a one-time slogan turned strategy turned tactic turned presidential win. And it’s no less intellectually unsatisfying the second time around.

Dan

Posted by DanFarfan | Report as abusive

[...] This post was mentioned on Twitter by Dan Farfan and AlabamaINSIDER. AlabamaINSIDER said: Illinois, a kleptocracy in action – Reuters Blogs (blog): Illinois, a kleptocracy in actionReuters Blogs (blog)U… http://bit.ly/fRJMDd [...]

One-party kleptocracy also describes California, where the public employee unions and radical environmentalists misgovern through their wholly-owned subsidiary, the Democratic Party, with the help of their lapdog newspapers
the LA Times, Sacramento Bee and SF Chronicle.

Posted by mike98 | Report as abusive

[...] “. . . faced with a fiscal crisis, Illinois decided this week to raise taxes by $7 billion a y… GA_googleAddAttr("AdOpt", "0"); GA_googleAddAttr("Origin", "other"); GA_googleAddAttr("LangId", "1"); GA_googleAddAttr("Tag", "politics"); GA_googleAddAttr("Tag", "general"); GA_googleAddAttr("Tag", ""); GA_googleFillSlot("wpcom_below_post"); [...]

The big part missing from this analysis is that there are legislative barriers to cutting programs in both Illinois and (as another commenter noted) California. Whatever prompted these laws/rules originally has obviously outlived its useful shelf life and methinks it would be worthwhile for these respective govt’s legislative bodies to take a long hard look at these laws that protect spending, especially in such (pardon the hyperbole) perilous times. Frankly, for states to be held hostage by laws that require them to spend is profane and sounds like some kind of lobbying horror story.

Posted by CDN_finance | Report as abusive

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

[...] you think the numbers are? Jot your estimates down, and then click on the hyperlink. Finally, read this comparison of two states’ approaches to budget [...]

[...] Reuters columnist James Pethokoukis finds the Illinois outlook stark compared to its most fiscally responsible neighbor: [...]