Just as State Treasurer Judy Barr Topinka was making headlines all over the state yesterday for her proposal to fix Illinois' long festering budget woes, I was putting the finishing touches on our newsletter. The main feature of this week's missive was on some new data provided to me by Dan Clifton, Chief Economist at Americans for Tax Reform, that shows how increasingly difficult it has become for states to hike taxes. Here is what I said:
"Is the gubernatorial debate over hiking taxes in Illinois meaningless? After examining trends around the country, it certainly seems so. The debate surrounds Governor Blagojevich’s “pledge” to not raise general income and sales taxes while the Republican nominee, State Treasurer Judy Baar Topinka, refuses to rule out a tax increase and says that everything is on the table. Topinka has gone so far, in fact, to disparage tax pledges. Many, and the Governor would like us to believe it, argue that because Republican candidate refuses to take the pledge, Judy Baar Topinka intends to raise taxes.
So, what do trends in the rest of the country have to do with this? Well, if we were to look at the experience over the last 25 years, we can predict that drastic action is unlikely. Last week, Americans for Tax Reform chief economist Dan Clifton released “State Tax Trends Over Twenty-Five Years: Tax Increases Down, Revenue Sources Shifting“(.pdf) that identifies a major shift in state tax policy since the 1990 recession.
Clifton’s findings suggest that the Governor’s pledge is meaningless because states find themselves locked in a competition for labor and capital. It also leads me to speculate that Topinka’s position that tax increases are on the table really aren’t. Consider these findings:
• Over the past 25 years, state tax policy has fundamentally changed as restructuring of state economies forced policymakers to enact more competitive policies and as the tax issue has become potent in political campaigns.
• Over that period 1) Tax increases are getting smaller (particularly in recessions); 2) Tax cuts during growth periods are becoming more prevalent; and 3) Revenue sources have shifted away from income taxes to more targeted tax increases such as tobacco and other forms of double taxation on consumption.
• States have moved to cutting taxes during periods of sustained growth unlike previous growth periods which were characterized with tax increases. In the 1990’s states cut taxes seven consecutive years saving taxpayers $37 billion.
• During the 1990s recession, states raised $5.15 in income taxes for every $1 of tobacco tax increases. In the 2001 recession, states raised just $0.86 from income taxes for every $1 of tobacco tax increases. Tobacco tax increases represent 30% of all tax increases since the 2001 recession.
Both of these candidates may want to raise taxes, but doing so creates a new set of problems – people vote with their feet and move to other states (see the chart below).
Clifton also found that the nickel and dime approach that Blagojevich adopted in his first budget – targeted tax hikes at politically acceptable things such as tobacco – are a far more likely strategy. But these have become politically impossible in the short term. Recall that when Governor Blagojevich went back to the well in subsequent budgets, the General Assembly balked. In the long term, the damage to the state economy and the state’s ability to raise revenue are also harmed because, over time, these targeted tax hikes have a negative economic impact.
In sum, Governor Blagojevich is vowing that he won’t do what he can’t do. Topinka is keeping options open, when they really aren’t. This is all in the name of attracting the other guy’s voters rather than serious fiscal policy.
More Good News
Another important trend that seems to cut across the grain in Illinois is that Illinois’ competitors are, in fact, reducing the tax burden. In “When Less Is More” Andrew Hollingsead, who recently left the Institute to join the Illinois House Republican staff, added to the debate by offering two salient points on supply side tax cuts. First, when candidates and political leaders talk about cutting taxes, people respond positively:"While tax policy dropped from the public’s radar screen during the latter years of the Clinton presidency, Bush has seemingly used the largest bully-pulpit in American politics to reinsert tax relief into the public discourse. A May 2006 poll conducted by Rasmussen in thirty-three states finds that the tide of public opinion has shifted more strongly in favor of tax cuts. At least a plurality in all thirty-three states believed that tax cuts are beneficial to the economy than those who believed cuts are harmful; a majority in twenty-four states believed that tax cuts are a boon for the economy (Rasmussen, 2006)."
Second, Hollingsead points out that the tax cuts are moving from the White House to the Statehouse:
“In 2005, states returned a portion of their increased revenues via $739.2 million in personal income tax reductions and other reductions. In 2006, Nebraska,Oklahoma,Rhode Island, and Arizona have instituted tax cuts that include slashed personal income, corporate income, sales, property, estate, inheritance, and other tax rate reductions (National Governors Association, 2005).
"Other state lawmakers have decided to make tax cuts a part of their agenda in an election year in which thirty-six governorships and eight percent of all state legislative seats are up for grabs. Utah, California, Massachusetts, Hawaii, Florida, New York, Kansas, Wisconsin, Idaho, Georgia, and all have tax cut proposals on the table. Some include tax credits intended to off set high home heating oil costs during the winter months, while most are geared toward economic development and making the respective states more a more desirable place to do business in an increasingly competitive global economy (Hunter, 2006).”
Nowhere have the competitive aspects of this state tax competition been felt more than in Illinois. According to Census bureau figures provided to the Institute by Americans For Tax Reform,Illinois is a loser in the competition for jobs and growth (see the chart below). For example, in 2003 – 2004 almost 30,000 households left the state, costing
Illinois $1.7 billion in income - or about $1,700 per person. Hiking taxes only makes the state poorer, which hinders the state’s ability to generate revenue creating further budget pressures. The real debate isn’t over hiking taxes, it’s over cutting them. And given the evidence provided by 25 years of rate reductions, that isn’t much of a debate either."
The conventional wisdom among conservatives in Illinois I've spoken with is that Judy Baar Topinka was going to raise taxes. Her detailed proposal makes a point of saying that we don't have to raise taxes. I wonder what role, if any, state competition played in the Topinka campaign's deliberations.
Link: Illinois Policy Institute Newsletter Volume 1 Issue 2.
