Illinois has been losing population steadily for years, falling from No. 4 to
No. 5 in the list of the largest states and causing its U.S. House delegation to steadily shrink in size.
While residents have been leaving, state elected officials have adamantly refused to take serious action to address the state’s serious budget woes.
So here’s the question — are the get-out-of-Dodge former residents and the dodge-all-serious-problems legislators the smart ones?
There’s a school of thought that claims they are, but it’s based on speculatively grim forecasts that depend on a variety of factors.
Will Congress pass a third hugely expensive bailout of state and local governments in the wake of the coronavirus pandemic and economically devastating lockdowns ordered by governors across the country?
Will Gov. J.B. Pritzker’s much-loved proposed constitutional amendment establishing a progressive income tax be approved by a supermajority of voters in November?
If a progressive income tax becomes law, will it be the permanent solution to Illinois fiscal problems that Pritzker has claimed it will be?
Questions, questions, questions. Answers won’t be forthcoming until later, perhaps when it’s too late.
Ike Brannon, a former senior economist of the U.S. Treasury and the U.S. Congress, has some thoughts on those issues and others that will be hard for taxpayers to gag down.
Calling Illinois the “poster case for state bankruptcy,” Brannon writes in Forbes that the state will “soon need (U.S. Sen. Mitch McConnell) to make good on his alternative plan to create a path to bankruptcy for the states” if a divided Congress — Republican Senate and Democratic House — does not pass out a “very big dollop of federal dollars” to financially-troubled states like Illinois.
The legislature recently passed a nearly $43 billion state budget for the fiscal year beginning July 1 that contains a $6.2 billion deficit. Pritzker is hoping the federal government will provide $4 billion to
$5 billion in grants to the state to paper over the hole. If no grants are forthcoming, he plans to borrow
$5 billion from the Federal Reserve Lending programs.
That, unfortunately, is just a part of the massive borrowing on which Illinois relies to stay afloat.
But even if borrowing continues unabated, Brannon said Illinois is, one way or another, doomed to insolvency.
He said Illinois has “no hope” of its five underfunded state pensions “ever returning to solvency” because of their multibillion-dollar underfunding problems that are compounded by fleeing residents taking their incomes and the taxes they pay on those incomes elsewhere.
He predicts that, even if voters sign off on Pritzker’s plan to replace the mandated flat tax with a progressive income tax, it “won’t be enough to fix things.”
He also asserts that the governor is telling a whopper when he contends that only upper-income taxpayers — $250,000 and up — will be hit by high progressive tax rates.
“... income taxes will have to go up a lot and for everyone, sooner rather than later,’ Brannon said.
Illinois’ bond rating is near junk status, and Brannon posits “the market for Illinois bonds” will freeze up when investors realize “there’s little hope that the state” can repay them.
“At that point, negotiations between the state and its creditors will ensue — and the federal government will need to get involved,” he said.
Here’s what Brannon predicts the ultimate deal will look like — lenders “take a haircut” on the money they’re owed while the state raises taxes, cuts services and gives “less money” to pensioners “one way or another.”
That’s why he contends that legislators’ “do-nothing” approach is, altogether by accident, the smart move.
“... the state’s adamant refusal to tackle its pension mess makes tactical sense: since creditors will demand pension reforms in any negotiations, it may be wise” to put off reforms “until they can get something in return, like reduced bond payments,” Brannon said.
Although it’s unclear when the end will come, there will be no happy ending.
How could there be?
Twenty years, if not longer, of fiscal irresponsibility will take a huge toll on those left holding the bag, including income-tax rates that may be more than double the current 4.95 percent.
When all is said and done, Brannon predicts “the state will have top income tax rates approaching 10 percent, and everyone, rich or poor,
will be paying more in income taxes, sales tax, property taxes, tolls and fees than they are now. The public pension cost-of-living adjustment will likely go down, the health care benefits for public sector retirees will be less generous, and Chicago — along with other communities in the state — will enact their own tax and spending reforms.”
Critics of Illinois’ relentlessly and militantly irresponsible fiscal policies have been saying for years that they can’t go on forever. Brannon’s grim picture of the future represents what circumstances will be like when they finally come to a stop.