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Thursday, January 13, 2011

An opportunity for our laboratories of democracy

Now that Illinois has hiked up their taxes to make it even more expensive to do business in the state, we'll be able to see if it's possible for states to close their deficits through higher taxes. The 66% tax hike makes Illinois one of the most expensive places in the world to do business. Just what a state with a stagnant economy needs.
Under the legislation, the income tax rate would temporarily rise to 5 percent from its current rate of 3 percent, and the rate for corporate taxes would rise to 7 percent from its current 4.8 percent.
No wonder that the new Republican governor of Wisconsin, Scott Walker, is urging businesses to "Escape to Wisconsin." Mitch Daniels of Indiana is also laying on the welcome mat for businesses that want to leave. It's expensive for a business to pick up and leave its location, but some may make that choice. What is dang sure is that very few businesses will choose to move into Illinois. And the Illinois voters are getting just what they voted for. They chose Governor Quinn who quite openly promised them a tax increase, albeit a smaller one than the one approved yesterday. We'll get to contrast how Illinois does with its high-tax, high-spending policies in contrast to its neighbors who are moving in the opposite direction. It's as much of a natural experiment as we can get in real life and what makes our federal system so lovely.


Ron K said...

the income tax increase sounds on first blush really bad, I lived in the area a while back, if I had lived in Illinois I could have gotten a 100 a payday increase in pay, the income tax in Iowa is that much higher than Illinois, the quality of life I thought was better on the Iowa side of the river, worth the extra tax. Now they say the tax increases are "temporary" they took the residences of Illinois down that path a while ago also, when they increased the income tax from 2.3 to 3 percent that was temporary also, became permanent a few years later. I don't think I read anything about spending cuts, I know how that will turn out, the cuts will be the ones that affect the people most. As far a social experiment, they have that already in New Jersey, in the 70's new jersey didn't have an income tax, due to school funding issues, the state was sued that property tax funding of schools discriminated against poorer school districts, so enter the income tax, at first they did it right, if you lived in an apartment complex, the apartment owners had to rebate to the tenants the savings they acquired on property tax savings. But how did that work out, all it did was give the state way too much money to spend. doesn't seem to have worked out really well for the citizens of the state.

Rick Caird said...

A couple of thoughts come quickly to mind. First, no tax increase ever brings in as much revenue as anticipated because people change their behavior to compensate. Government never seems to understand this. I would love to know how underfunded SCHIP is after Pelosi's plan to fund it with a $1/pack cigarette tax. I expect not only is SCHIP under funded, but the previous tax revenue from cigarette taxes is now less than it was before. That is a double whammy. Illinois will see the same phenomenon.

Second, the destruction of a state's or country's economic situation takes a long time. California is an example. It is not like falling off a cliff. It is a prolonged decline, but the politicians look at each year of the decline and expect they can make it up "next year". As Betsy mentions, most businesses will not leave, they will just have to raise prices, not expand, or make long range plans to migrate out of the state. By the time the effects of bad tax and economic policy are felt, it will take just as long to reverse as it did to decline. Illinois did not suddenly find they had a problem with tax revenue keeping up with government promises. The situation just slowly got worse.

Southern Man said...

That's the beauty of having fifty states - each an economics workshop. Some states will enact policies that succeed; others will not. It does seem, however, that the blue states are slow to learn from failure.

Pat Patterson said...

Both Gray Davis and then Schwarznegger assumed busineses would never leave. Davis because he really had no idea what businesses did except provide tax revenue and Arnold because he could afford to eat at Gladstone's at Malibu every night and had no clue that a lot of businesses aren't here for the sunsets/

equitus said...

If there was any evidence Democrats learn from their policy mistakes, I'd have more faith in the "states as laboratories" argument.

Zeke said...

To clarify, Quinn won by just a hair and carried just 2 of 102 counties. Obviously, even with a higher turnout than usual elsewhere, Cook County almost always produces just enough votes for the Dems to win...imagine that. Chicago voted for this, the rest of us did not. It was also done in the lame duck session because a dozen dems lost or retired from their seats and the new legislature would never have agreed to this. They passed the bill in the Senate at 2 AM. The newly elected General Assembly took the oath at noon. More shenaningans. sigh.