Exit and voice in Illinois

Larry Ribstein —  13 January 2011

Illinois politicians, many of whom had already been voted out of office, as their last act in the old session yesterday raised the state’s individual and corporate taxes 67% and 45% to try to bail Illinois out of the results of their fiscal profligacy. Remember that the voters who elected this gang were the same ones who elected Rod Blagojevich.  Twice. 

But as summarized in today’s WSJ, there is, more than ever, an “exit” response to political “voice.”  First in the capital markets:

Investors have closely monitored Illinois’s financial woes. The spread on the state’s municipal bonds, a measure of the perceived risk of its bonds above a broad market benchmark, is the widest in the country. Investors have been concerned about the state’s willingness to right its finances. Ratings firms said they would review the state’s creditworthiness in light of the legislature’s actions.

The state is particularly worried about these markets because it has to use them to pay its bills. As the WSJ noted:

the failure in the legislature of a proposed $8.75 billion restructuring bond means the state won’t immediately be able to start paying off its backlog of about $6 billion in unpaid bills. That leaves hundreds of state vendors, including hospitals, schools and the maker of bullets for the state prison system, facing continued uncertainty

But raising taxes is not necessarily the logical solution.  That’s because of jurisdictional competition– there are many other places the would-be taxpayers can go:

The new corporate tax rate would bring the total percentage Illinois corporations pay on income, including a separate personal property replacement tax, to 9.5%, one of the highest in the nation. That would make the corporate income-tax rate in Illinois the third-highest in the country when combined with an assumed 35% federal corporate income tax, following Pennsylvania and Minnesota, said Scott Hodge, president of the Tax Foundation, a conservative-leaning Washington research outfit. Illinois currently ranks 21. As other states cut taxes and Illinois raises them, the state “will be even more of an eyesore by comparison,” Mr. Hodge said.

A spokesman for Caterpillar Inc., one of the largest manufacturers in Illinois with 23,000 employees in the state, said in a statement that “such a tax increase will make it more difficult for Caterpillar to compete in today’s global economy from our operations in Illinois.”

On Wednesday morning, newly inaugurated Wisconsin Gov. Scott Walker sought to capitalize on the tax increase: He said he would renew a long-ago campaign to lure tourists to Wisconsin called “Escape to Wisconsin”—but target it at Illinois companies. His state’s corporate tax rate is 7.9%.

Illinois’s Governor responded that

Chicago is the capital of the Midwest, and “if we want to talk about the capital of the Midwest, the state that is the strongest is Illinois.”

Yes, and remember when Detroit was Motor City?  Detroit would seem to be a good example to keep in mind when thinking about Peoria without Caterpillar.  Remember that any company considering moving to or staying in Illinois not only has to pay corporate-level taxes, but has to pay its executives about $4,000/year more just to make up for Illinois income taxes in order to provide the same compensation as it did last year.

Obese states should remember that the best way to lose weight is to stop eating.  This will lead to reduced services, which will anger voters.  But the tax “solution” will drive out the most mobile residents and investors.  It’s not pretty, but unfortunately for profligate governments, push has come to shove.

And, by the way, the U.S. also has to worry about residents and capital markets.

Larry Ribstein

Posts

Professor of Law, University of Illinois College of Law

5 responses to Exit and voice in Illinois

  1. 

    Looks like IL will follow CA into bankruptcy. Dem governance at its best.

  2. 

    Rustbelt:

    Nice snarky comment. Too bad you didn’t notice that I wasn’t criticizing the tax increase (which was voted mainly to save my pension) or suggesting budget cuts, merely pointing out the situation that Illinois has found itself in and that it illustrates the exit vs. voice tradeoff, a significant theme of my work.

    Nor was I suggesting that the Detroit situation was similar to Peoria other than in its dependence on an industry for its survival.

  3. 

    I wonder if Boeing has any regrets about choosing Chicago over Dallas for its HQ.

  4. 
    save_the_rustbelt 14 January 2011 at 7:10 am

    Given the wild excess of lawyers in the US Illinois could do a significant service by closing most of its law schools.

    Oh wait, that could impact Prof. Ribstein.

    Good for thee but not for me. Cut somebody else.

    The Detroit analogy does not exactly work. The Big 3 received favorable tax treatment from the State of Michigan and taxes had very little to do with the problem (throwing away 45% of US market share over 30 years was the problem).

Trackbacks and Pingbacks:

  1. Daily Pundit » Leftist Hubris - January 14, 2011

    […] Exit and voice in Illinois « Truth on the Market Chicago is the capital of the Midwest, and “if we want to talk about the capital of the Midwest, the state that is the strongest is Illinois.” […]