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In these days of debt and deficit, Illinois is in the first rank of problem states. Last January the state legislature was finally forced to confront the fruit of decades of irresponsible spending policies and try to plug a $13 billion dollar hole, made up in part of $6 billion in unpaid bills to social service agencies, schools, funeral homes and other vendors, as well as $4 billion in missed payments to pension funds.
The outlook was grim enough that Moody’s ranked Illinois with California as the states with the lowest credit rating, although unlike California, Illinois had a negative outlook. Last year, the failed drug state of Mexico had a higher credit rating.
“The state has been spending $3 for every $2 it takes in, and borrowing to cover its current operating expenses,” warned Miles White, chairman of Illinois based Abbot Laboratories and of the Civic Committee of the Commercial Club of Chicago in an address last September.
After tumultuous debate, in mid January Governor Quinn signed a tax bill that increased the personal income tax rate by 67 per cent and the corporate rates by 46 per cent, retroactive to Jan. 1. A provision that would have granted property tax relief was dropped as state senators sought enough votes to pass the bill.
The tax hike passed both the Illinois House of Representatives and Senate without a single Republican vote, but Democrats promised that the legislation had built in mechanisms to keep future spending in check and that the new tax rates would be reduced after four years.
So what’s happening in the aftermath? Well, in early May the Illinois state Senate passed a bill to make it easier for the children of illegal immigrants to attend universities by participating in state-run prepaid tuition and college savings programs. So much for curbing spending.
Now Democrat Pat Quinn is pushing what he calls a debt “restructuring,” plans to issue billions of dollars of bonds which Republicans are unlikely to approve. For this scheme, the Governor faces a three-fifths majority vote requirement for passage in the legislature.
“This is not new borrowing,” said Quinn spokeswoman Kelly Kraft on Thursday. “The state of Illinois has a backlog of bills and in order to pay these bills we have proposed restructuring them at a lower interest. We will continue to work with legislators on the important issue of paying these bills in a timely manner.”
Moody’s Investors Service continues to rate Illinois at the lowest level among states (A1 with a negative outlook), and said issuing long-term debt to pay bills “would significantly increase the state’s bonded debt burden.”
Well, in addition to the worst bond rating in the country, the state lost the most jobs of any state last month. The Illinois Policy Institute reported the grim news that “Illinois lost more jobs during the month of July than any other state in the nation, according to the most recent Bureau of labour Statistics report. After losing 7,200 jobs in June, Illinois lost an additional 24,900 non-farm payroll jobs in July. The report also said Illinois’s unemployment rate climbed to 9.5 per cent. This marks the third consecutive month of increases in the unemployment rate.”
What is significant is the correlation between the January tax increase and the downward employment spiral as seen in the chart above. The graph could have been pulled from an Arthur Laffer textbook to illustrate the futility of trying to cover the sins of profligate spending by raising taxes.
The jobs started to go away just when the state’s Democrats enacted these punishing new rates rather than “eat their peas” and accept the inevitable medicine of austerity and spending cuts. It’s often said that we have a spending problem and not a tax problem, and this chart would seem to be just another illustration of the disease.
How long Lord, how long?