Moody's warns tax hikes could accelerate exodus

By Ted Dabrowski, Wirepoints | Feb 11, 2019

Illinois Gov. J.B. Pritzker got a warning of sorts from Moody’s ahead of his first budget address. The rating agency’s most recent report highlighted the usual crises Pritzker must tackle: ballooning pension debts and chronic budget deficits.

But for the first time, the agency also included the flight of Illinoisans among its top concerns for the state. That matters because Pritzker’s number one prescription to “fix” Illinois is tax hikes – something that’s sure to accelerate Illinois’ out-migration trend and further erode the state’s tax base.

The agency calls the tax situation a “conundrum” for Illinois, saying current “revenue growth...will be too tepid to offset escalating fixed costs, while new taxes could threaten to increase the outflow of residents.”

That quote is significant because Moody’s has long said tax hikes are a budget-balancing option for the state. And that’s not surprising since the agency's priority is the well-being of bondholders, not taxpayers. Credit ratings reflect the likelihood that bondholders get repaid – and tax hikes make repayment more likely.

But that’s only true as long as tax hikes don’t destroy the state's tax base and, ultimately, make the repayment of bonds less likely. It appears the flight of Illinoisans has gotten so big that Moody’s, which already rates Illinois just one notch above junk, can no longer ignore it.

Moody’s reported: “From 2013 through 2018, Illinois lost 544,541 residents through migration to other states (net of people who migrated into the state). This number amounted to 4.2% of Illinois’ 2013 population, the third-highest ratio among states."

Moody's added Illinois is "one of only two states to lose population in each of the past five years.”

Moody's also reiterated its concern about the state's pension crisis: “Illinois faces burdensome – and growing – pension contribution requirements under state law, even though its annual pension payments are insufficient from an actuarial perspective.” Taxpayers have already seen state pension debts grow by $80 billion over the decade despite a quadrupling in the amount of money they’re putting in.

Illinois’ high tax rates, increasing out-migration, enormous debts and a near-junk credit rating should force Pritzker to pursue a constitutional amendment for pensions. A reduction in retirement debts – for both pensions and retiree health insurance – is Illinois’ only true option. But all indications show the governor is loathe to pursue an amendment.

Instead, look for Pritzker to ignore Illinois’ conundrum. And for the flight of Illinoisans to continue.

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