by Mike Flynn Or, how to turn a dynamic state economy into a basket case in just a few years. As you know, Illinois has raced past California to claim the mantle of most fiscally irresponsible state. Its bonds are just a tad above junk status and it has to patch up a $13 billion hole–half its general fund budget–within days, to pay a back-log of unpaid bills and cover a missed payment to the public employee pension fund. (Then they’ll have to do it all over again next year.)
Because the state government is dominated by Democrats, the legislators in Illinois have decided to increase taxes. By a lot! Again, because they are Democrats, they plan to hike the income tax by 75% and increase cigarette taxes by $1 a pack. Business taxes would almost double.
Okay…so far, so same-old-same-old. They’re Democrats. Raising taxes is what they do. Here is the part where Illinois’ budget gurus get into Apple Dumpling Gang territory:
The personal income-tax hike is expected to net the state roughly $6.2 billion, and a corresponding corporate income tax increase could raise an additional $1 billion…Brilliant!
[State Senate President] Cullerton said the state would use the income-tax hike to borrow $12.2 billion. Of that, $8.5 billion would pay overdue bills and $3.7 billion would cover a government worker pension payment lawmakers skipped when putting together the current budget
So…they are raising taxes in order to borrow even more money…putting taxpayers on the hook for, with borrowing costs, at least another $6 billion. (Another 75% income tax hike!)
And it isn’t like they don’t know this:
The move by Democrats in the closing days of the post-election session reflects a dramatic final effort to deal with a state budget reeling from years of overspending, the compounded effects of the recession on unemployment and tax revenue, and massive borrowing to cover the need for a tax increase.So, past ‘massive borrowing’ by Democrats has forced them to raise taxes so they can do more ‘massive borrowing’. What?
I get that the Democrats think the increased tax revenue in subsequent years will cover the costs of this new borrowing, but the taxes hikes won’t bring in anything close to what Democrats are assuming. Democrats generally suffer from an acute affliction where they actually believe people will exhibit exactly the same behavior regardless of tax rates. Healthy people know this is daft.
Smokers will cross state lines to buy smokes. Companies will shift their activity to other states. Some people will move or just hire more tax accountants. In fact, I’ll bet $1,000 the state doesn’t collect what it is projecting. (First taker only, please…I have to earn my money…I can’t pass a law forcing people to give it to me like Democrats can.)
But the shortfall could be even bigger if people really change their behavior. A few years ago, New Jersey hiked its cigarette tax, expecting to collect an additional few hundred million dollars. The following year, the state not only didn’t collect the expected additional money, it collected less than it did before the tax was increased. The state lost money on the tax hike!
And, of course, there is the very real risk that the tax hikes prolong or worsen the recession.
It is bad enough this budget ‘fix’ automatically puts the taxpayers on the hook for another $6 billion or so…with the certain revenue shortfall, the final tab will be even higher.
Exit Question: What is going to happen to the economy after a handful of states hike taxes next year?
Big Government
