By George Will
WASHINGTON – 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.
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.
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.
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. Illinois, a stronghold of public employees unions, “is on pace to spend nearly $1 billion on retiree health care benefits in fiscal year 2013, more than double what it spent in 2003.”
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 from the central government’s supervision requires that they be disciplined instead by the market for government bonds, and the real possibility of default.
Peterson, a professor of government at Harvard, and Nadler, a doctoral candidate also at Harvard, say collective bargaining rights for government employees pose “a dramatically new challenge to the viability” of American federalism.
At least 12 percent of Americans change their residences each year, often moving to more hospitable economic environments. In a system of competitive federalism, Peterson and Nadler write, “If states and localities attempt in a serious way to tax the rich and give to the poor, the rich will depart while the poor will be attracted.” And government revenues and expenditures vary inversely.
From September through December 2008, the premium that investors demanded before they would buy California debt rather than U.S. treasuries jumped from 24 to 271 basis points (100 points equals 1 percent). The bond market, the only remaining reality check for state politicians, must be allowed to work.
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 Will’s email address is email@example.com. Will writes for The Washington Post Writers Group.