How's this for starters? Illinois dropped in the nonpartisan Tax Foundation's ranking this year more than any other state, based on the competitiveness of the states' respective business taxes. After massive tax increases two years ago, Illinois now ranks 45th for corporate tax, 44th for property taxes, 43rd for unemployment insurance taxes and 33rd for sales tax. In three out of five categories, we rank in the bottom 10. Overall, we rank in the bottom half (28th from 16th a year ago).
Despite having raised taxes aggressively (while many of our regional competitors like Indiana, Wisconsin and Michigan were moving in the opposite direction) Illinois still faces a multibillion-dollar budget deficit. Its pension system is teetering on the brink of insolvency. And its unemployment rate remains one of the highest in the country.
In other words, the tax increases that were supposed to have solved our budget problems have made us less competitive economically without having made a significant dent in the state's persistent fiscal problems.
Advocates for higher taxes seem not to have learned from experience. Lawmakers and activists in Springfield have been pushing for years to expand the state sales tax to include services. And with another gaping hole in the budget, the temptation is getting stronger. Crain's columnist Joe Cahill argued, based on various studies, that the state's fiscal problems are the result of a “narrow” tax base that exempts “half of the state's economy” from taxation.
There are two problems with this view: First, it fails to consider the relationship between taxes and economic activity. It is basic economics that higher prices result in lower demand. Higher taxes increase prices and therefore consumer behavior. Even President Barack Obama seems to understand. He thinks that higher energy prices will discourage the consumption of fossil fuels, and that subsidies for green energy that reduce its cost artificially will make it more attractive for consumers. It's the same theory behind higher cigarette taxes, higher alcohol taxes and higher taxes for people who don't buy insurance.
The point is that even the cheerleaders for higher taxes know that they change consumer behavior. Where conservatives want lower taxes to encourage consumption, liberals want higher taxes to dampen the demand for products and behaviors they don't like. Whether that's the proper role for government — to use the tax code to manipulate personal behavior — is a debate for another day. But there's really no debate that higher taxes on the service economy will weaken the demand for services.
Mr. Cahill seems to dismiss this theory by stating, “Sorry, but I just don't believe that Illinoisans will start cutting their own hair if they have to pay sales tax at the barbershop.” He may be right about haircuts, but many border communities for years have complained that folks are going across the state line to buy cheaper gas, cheaper alcohol and cheaper cigarettes. Isn't it likely that if a service tax comes to Illinois, consumers will seek lower prices where they can find them, including across the border?
The second problem with Mr. Cahill's view is that it misdiagnoses the real problem with Illinois. We're not in this mess—ranked among the worst-run states in the country—because taxes are too low. Illinois is a fiscal basket case because its politicians over the years have increased the cost and size of government far beyond the rate of inflation and population growth. They promised too much to too many groups and now the bill is coming due.
More than half of all of the jobs in Illinois are provided by small businesses. They can't wave a magic wand and increase their sales by 6.5 percent, and their customers can't give themselves a raise. Expanding the sales tax would hurt both groups precisely when we need more consumer activity. The remedy for Illinois is fiscal discipline. It's time for government to start making the kind of sacrifices which small businesses and consumers make every day.
Kim Clarke Maisch is Illinois director of the National Federation of Independent Business. Her op-ed was first published in Crain's Chicago Business.