Is Illinois the trailer for the debt movie?

I assume you have been following the story.

Illinois is now grappling with $15 billion of unpaid bills and an unthinkable quarter-trillion dollars owed to public employees when they retire.

This would be the third year in a row that America’s fifth-largest state has failed to pass a constitutionally required budget.

The U.S. government, too, can only pay its bills with borrowed money. The U.S. government, too, has an unthinkable level of unfunded liabilities–I believe it is close to $80 trillion. The U.S. government, too, is unable to pass a real budget.

Politicians love to borrow other people’s money. They don’t know how to cope with paying it back.

If you want to see how the political process functions when confronted with unpleasant reality, watch Illinois.

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15 Responses to Is Illinois the trailer for the debt movie?

  1. Effem says:

    Sadly, the federal govt will simply end up bailing out the States. This will be a non-crisis

  2. Handle says:

    They’re probably just going to raise state income taxes again.

    The last time they ran into a budget crisis was in 2011, and they had to raise rates from 3% to 5%, which a built-in rollback to a 3.75% flat tax in 2015 (for corporationss from 7 to 5.25), where it’s been ever since, and which is near the low-end of the spectrum of state rates for high earners, at least, for those states that have any income taxes at all, which seven don’t. But compare NY-8.8, DC-8.9, and California at 13.3%! Lots of less prominent blue states also have sky-high rates for high-earners (somewhat subsidized by the deduction against federal taxes), but also don’t tend to have many high earners.

    Illinois collects $15.9 Billion from that income tax. It the top rate follows that above pack, they’ll have enough to pay all their bills, for a while.

    The trouble is, the high-earners in those other three locations are more-or-less a captive audience to the important metro area hubs. But Illinois and Chicago don’t have a lock on any particular niche, and the place is still largely living off the inertia of a heyday-era with a peak that is fading into the increasingly remote past. Think Baltimore, Detroit, etc.

    That means Illinois doesn’t have the luxury of placing uncompetitive burdens on people and companies for a long time without gradually watching them evaporate and move elsewhere.

    Which is my guess for the future of Illinois and Chicago – a slow, ‘adverse-selection’ death spiral. And to kick it off to “solve” the short-term crisis, they’ll probably just implement the first of a likely sequence of tax hikes.

    • baconbacon says:

      “But compare NY-8.8, DC-8.9, and California at 13.3%”

      Illinois already has the #10 sales tax rate (8.2%), so while they are below average in income tax they are average to above average in revenue/overall ta rate.

    • Slocum says:

      “Which is my guess for the future of Illinois and Chicago – a slow, ‘adverse-selection’ death spiral. ”

      It has already started. Chicago — not just the city, but the overall metro area —
      is now losing population. So is the state:

      http://www.chicagotribune.com/news/local/breaking/ct-chicago-census-population-loss-met-20170322-story.html

    • GU says:

      For even more context on the income tax hike, IL already has the 2nd highest property taxes on a statewide basis (and #1 if you only count Chicagoland). Also, the sales tax in Chicago is 10.25%, the highest of any large US city (the suburbs range from 8% – 10%). Plus lots of high miscellaneous taxes and fees.

      So while it is true that IL’s income tax rate is relatively low, you have to look at the whole tax package. Moreover, IL didn’t enact an income tax until 1969, and only then to replace the personal property tax. It was constitutionally mandated to have a flat rate. The tax was not enacted to appease progressive politics.

      Finally, Mike Madigan, who has been in office for 30+ years and who runs the Democratic party in IL owns a property tax law firm that makes him millions every year. The level of corruption in Illinois politics should not be underestimated.

    • Handle says:

      Called it, “Under the terms of the budget agreement, Illinois personal tax rates will rise from 3.75% to 4.95%, while the corporate tax rate will go from 5.25% to 7%.”

      Taxes will rise in the short term, revenue sources will leave in the long-term. That’s the trailer for the other near-bankrupt states too, e.g. Connecticut.

  3. cfh says:

    This is a situation in which Tolstoi’s Unhappy Family Theorem applies: no two states will bankrupt in the same way.

  4. Thucydides says:

    Politicians pander to the economic ignorance of the public that only wants stuff paid for by others. Democracy is a race to the bottom. Politicians are parasites on the process.

  5. Handle says:

    Lots of states have balanced budget requirements, but has any state passed any reforms that deal with the fundamental problem of politicians being able to make promises that incur these unfunded future liabilities?

  6. collin says:

    Sure Illinois is the trailer but Japan is the movie.

  7. mike shupp says:

    Illinois is kind of a strange place — three quarters of the population and state economy are in the Chicago metropolitan area, which is quite Democratic in its voting habits. The rest of the place is traditionally rural (there are smaller cities of course) and dominated by Republicans. The Republicans and Democrats don’t like each other and have been squabbling basically since WW II ended. Also the politics are notoriously corrupt — one of the great stories in any Federal election is watching how upstate and downstate Illinois drag out counting votes with the intention of “adding” extra ballots to make the vote come out “properly.”

    So yeah, the place is poorly governed, but blaming its fiscal problems on “ordinary” American politics misses what’s going on.

  8. ColoComment says:

    The Madigan family, primarily IL House Speaker Michael Madigan, has ruled Illinois and Illinois politics, for over 30 years. Nothing happens without his imprimatur; his will is done.

    http://www.reuters.com/investigates/special-report/usa-illinois-madigan/

    Much as with the d’Allessandro* family in Baltimore, and the Daley family in Chicago, everything you see happening today is the result of one family’s local political dominance. This is not “democracy.” It is mini-imperialism.
    * Nancy Pelosi was born a d’Allessandro.

  9. Ivan says:

    FWIW – estimates vary, but alternate estimates of federal unfunded liabilities for the USA have run as high as $222 trillion (Laurence Kotlikoff). Veronique de Rugy did a piece: https://www.mercatus.org/system/files/debt-in-perspective-analysis.pdf

  10. Ricardo says:

    “The U.S. government, too, can only pay its bills with borrowed money.”

    Doesn’t the federal government have an option (monetization of debt) that Illinois lacks?

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