SPRINGFIELD — Poor state finances and a weak housing market threaten to send Illinois back into recession, according to an economic outlook prepared for the Legislature's Commission on Government Forecasting and Accountability.
"Illinois' economy is in rough shape, and the odds of a misstep are high. The state is one of just a handful nationally in danger of falling back into recession. A weak housing market and poor state finances are largely to blame," says the assessment, written last month by Moody's Analytics.
Further, the report says that slow recovery in housing and government "will cause the state to trail the region and nation by an even larger margin in 2013. Though housing will shift to a significant tailwind for the national economy, it will continue to be a drag in Illinois for much of the year. Without housing as a support, the state will be more vulnerable to manufacturing weakness and federal fiscal austerity. State and local fiscal problems are also a bigger headwind because Illinois faces a huge pension gap and other budget holes."
The report is the latest to focus on the state government's bleak financial condition, calling it "a drag on the state's labor market, with government employment in the state down twice as much as nationally on a year ago basis."
Also, said Moody's, reliance "on unpredictable federal funding is one of several pressing fiscal issues facing the state, which has such severe budget troubles of its own that it cannot continue current services, provide promised benefits, and invest in education and infrastructure while keeping tax rates unchanged. The state's severely unfunded pension system is the biggest impediment to a sustainable budget."
The shortfall of Illinois' five retirement systems is estimated at $97 billion. So far lawmakers have been unable to agree on a pension reform program that either cuts expenses, finds new revenue or refinances the debt.
Among positive factors for Illinois, the report says, are its transportation, manufacturing, tourism and agricultural sectors.
"The state will continue to diversify into service-providing industries while nurturing its more efficient and smaller traditional manufacturing core," said Moody's. "Chicago will continue to develop as the transportation/distribution center for the Midwest, fueled by the recent push for a high-speed passenger rail that will also result in an upgrade and modernization of its freight rail system and will increasingly develop its tech industry.
"The best growth prospects for downstate are found in agriculture-related projects such as food-processing facilities, energy projects and distribution facilities."
The report also said that the state's business climate "outshines its regional rivals, although rising corporate taxes and fiscal uncertainty have begun to erode its competitive edge. Still, the state has what it needs to remain a top business center, as long as it can solve the fiscal problems that are eroding its edge in the competition for talent, jobs and capital."
In a separate section looking at negative factors, Moody's warns that the state government must resolve its fiscal issues "to prevent significant erosion in its business climate."
It says the income tax increase enacted two years ago "hurt Illinois' competitiveness to a degree." As a result, said Moody's, "Illinois now ranks in the bottom half of states in terms of tax climate, according to the Tax Foundation. The state's rank slipped one notch from 28th to 29th best last year as other states gained traction in areas such as sales and corporate tax."
Overall, Illinois' corporate, property and unemployment insurance taxes stack up poorly compared with other states, said Moody's. The corporate income tax increase "was the single biggest reason for the recent slippage in the state's tax climate. With the increase, corporate income tax rates in the state are now the fourth highest nationally. Among Midwest states, only Iowa had worse rankings in fiscal 2013."
The 67 percent individual income tax increase enacted two years ago hurt the state's economic climate only modestly, Moody's claimed.
Moody's also noted, perhaps looking ahead to what is expected to be a major issue in Springfield this spring, that the only Midwestern states with a more favorable individual income tax score than Illinois were Michigan and Indiana. All three states, Moody's said, have a flat income tax rate. The other nine Midwestern states have progressive tax rates for individuals.
But some Illinois lawmakers, including state Rep. Naomi Jakobsson, D-Urbana, are promoting a constitutional amendment to shift Illinois to a progressive income tax.