The Illinois Supreme Court fired a shot across the bow of any business considering growth in Illinois with its pension ruling on May 8. Illinois Supreme Court justices suggested in their decision that the state should just raise taxes to pay for its utterly broken pension systems. The court declared that the pension clause of the Illinois Constitution makes government-employee pension benefits sacrosanct, even protecting those future pension benefits that have not yet been earned.
Though the justices pointed to more tax revenue as the answer, recent history proves tax hikes cannot fix Illinois’ pension problem. In 2011, the General Assembly raised income taxes on every household by a staggering 67 percent, bringing in an additional $31 billion in tax revenue that largely went to pension contributions over the next four years. Despite an additional $7.5 billion per year in additional funding, the state’s pension liabilities continued to skyrocket, increasing by $7.2 billion in 2011, then by $11.5 billion in 2012, then by $6 billion in 2013 and $10.5 billion in 2014. The state staggered along with billions more in borrowing and unpaid bills.
For the four years from 2011-2014, during which income-tax hikes brought in an additional $31 billion in revenue for pensions and the Standard & Poor’s 500 index rose for a net gain of 64 percent, the state’s total unfunded pension liability still rose by a staggering $35 billion. These are the makings of a completely broken system.
The 2011 tax hikes also had a prohibitive effect on the state’s economic performance. A dramatic slowdown in employment growth and job creation followed soon after the phase-in of the tax hikes. Illinois’ monthly employment growth shrank by 39 percent after the tax hikes compared to before. Meanwhile, the rest of the Midwest and the rest of the U.S. began to accelerate in employment growth.
Illinois’ policy malfeasance was marked by the drumbeat of repeated state and local tax hikes with a result that was as predictable as it was devastating: the single worst employment recovery in the entire country. There are 236,000 fewer people working in Illinois today compared with before the Great Recession, the worst employment recovery in the nation and far out of line with neighboring states.
Massive tax hikes have been tried and have simply failed to fix the problem. Here’s what Illinois has to show for the 2011 experiment: busted budgets and growing pension liabilities at the state and local level; the worst employment recovery in the nation; and record out-migration as Illinoisans leave in droves for other states.
In 2014 alone, there were 95,000 more people who left Illinois for another state than who moved into Illinois from another state, making 2014 Illinois’ single worst year of out-migration on record.
Even with the sunset of the 2011 tax hikes, the current state income-tax rate of 3.75 percent is a whopping 25 percent increase over the income-tax rate of only five years ago. Taxpayers in the Land of Lincoln have long since declared they are fed up, and have been exiting Illinois at record rates, taking their incomes, dreams and opportunities with them.
The General Assembly should finally address the root cause of the state’s fiscal illness by putting a constitutional amendment on the ballot so that voters can have a choice between real pension reform and ever-increasing taxes. The sooner this move is made the better, as any forward-looking businessman will quickly understand what Illinois’ sea of red ink and impending downgrades mean for the prospects for business growth. Employers will do their hiring elsewhere.
Illinois should learn from its tried and failed tax-hike disaster of 2011. There is little else that can be done to restore confidence in Illinois’ finances other than bold and deliberate legislative action. The General Assembly should:
- Put a constitutional amendment on the ballot to allow for pension reform
- Authorize Illinois’ worst-off municipalities to seek Chapter 9 bankruptcy protection
- Get all new employees out of the system and onto solid ground by putting them into 401(k)-style savings accounts
Decades of failed leadership built this problem. There is no magic wand to wave to make it go away. Springfield leaders are now faced with the stark choice between finally doing the right thing and careening toward financial ruin.
Michael Lucci is Director of Jobs and Growth for the Illinois Policy Institute.