After trying to tax Illinois to governmental solvency and economic dynamism, Pat Quinn, a Democrat who has been governor since 2009, now says “our rendezvous with reality has arrived.” Actually, Illinois is still reality-averse, so Americans may soon learn the importance of the freedom to fail in a system of competitive federalism.
Illinois was more heavily taxed than the five contiguous states (Indiana, Kentucky, Missouri, Iowa, Wisconsin) even before January 2011, when Quinn got a lame-duck Legislature (its successor has fewer Democrats) to raise corporate taxes 30 percent (from 7.3 percent to 9.5 percent), giving Illinois one of the highest state corporate taxes, and the fourth-highest combination of national and local corporate taxation in the industrialized world. Since 2009, Quinn has spent more than $500 million in corporate welfare to bribe companies not to flee the tax environment he has created.
Quinn raised personal income taxes 67 percent (from 3 percent to 5 percent), adding about $1,040 to the tax burden of a family of four earning $60,000. Illinois’ unemployment rate increased faster than any other state’s in 2011. Its pension system is the nation’s most underfunded, and the state has floated bond issues to finance pension contributions -- borrowing money that someday must be repaid, to replace what should have been pension money that it spent on immediate gratifications.
Quinn’s recent flirtation with realism -- a plan to raise the retirement age to 67 and cap pension cost-of-living adjustments -- is less significant than the continuing unrealistic expectation that some Illinois’ pension investments will grow 8.5 percent annually. Although the state Constitution mandates balancing the budget, this is almost meaningless while the state sells bonds to pay for operating expenses (in just 10 years, the state’s bonded debt has increased from $9.4 billion to $30 billion), underfunds pensions and other liabilities, and makes vendors wait (they are owed $5.6 billion).
The Illinois Policy Institute, a limited-government think tank, in a report cheekily titled, “Another $54 Billion!?” argues that in addition to the $83 billion in pension underfunding the state acknowledges, there is $54 billion in unfunded retiree health liabilities over the next 30 years.
To prepare for Illinois’ probable plunge into insolvency, read “Freedom to Fail: The Keystone of American Federalism” by Paul E. Peterson and Daniel Nadler in the University of Chicago Law Review. They note that only 25 of the world’s 193 nations have federal systems, and in most of the 25, the freedom of the lower tiers of government is more circumscribed by the central government than American state governments are by the federal government. American states’ greater freedom -- autonomy under America’s system of dual sovereignty -- from the central government’s supervision requires that they be disciplined instead by the market for government bonds, and the real possibility of default.
Constitutional jurisprudence affirms that states exercising substantial autonomous powers thereby assume concomitant risks. Federal loans or other bailouts of misgoverned states would remove bond market discipline, the only inhibition on the alliance between the Democratic portion of the political class and unionized public employees.
George F. Will is a columnist for the Washington Post Writers Group. Email: email@example.com.