Moody’s: New taxes could accelerate Illinois exodus

Ahead of Gov. Pritzker’s first budget address, one of the “big three” credit rating services warned the new governor against raising taxes.

Illinois Gov. J.B. Pritzker campaigned on a promise to bring a progressive income tax to Illinois, but as he prepares his first budget address one of the biggest credit rating agencies gave him reason to reconsider.

Moody’s Investors Service in a report Feb. 5 underscored the top fiscal challenges the state faces in the coming year. Among them: “massive” pension debt, “chronic” annual deficits and a years-long outmigration crisis threatening to shrink the state’s tax base.

Illinois’ population shrank on net for five straight years, a trend primarily driven by Illinoisans leaving.

According to the report, Illinois faces a “conundrum” in which current revenue sources are unable to keep pace with the state’s “escalating fixed costs,” but new or higher taxes “threaten to increase the outflow of residents.”

So how smart would it be to create a progressive income tax in this economic climate? Pritzker has declined to specify rates, but a progressive tax would require hiking taxes on some Illinoisans. Increasing their tax burden gives them incentive to leave and erodes the tax base on which a progressive tax relies, Moody’s suggested.

New York is facing a $2.3 billion revenue shortfall, and the state’s aggressive progressive tax coupled with the new federal limit on deducting state and local taxes is to blame. New Yorkers are moving out. Gov. Mario Cuomo put it this way: “‘Tax the rich! Tax the rich! Tax the rich!’ We did. Now, God forbid, the rich leave.”

Illinois lawmakers should only pursue a progressive tax in the event that “new revenues help address the state’s pension liabilities and that any adverse economic impacts are minimal,” Moody’s stated. The structural costs driving the state’s pension debt, and economic pressure from past tax hikes, would prevent a progressive tax from meeting either of those benchmarks in Illinois.

When Pritzker delivers his first budget address Feb. 20, he will do so facing a $2.8 billion budget deficit, $133 billion in pension debt and a $7.8 billion backlog of unpaid bills. State leaders cannot expect to fix the state’s fiscal mess unless they address the root causes.

The Illinois Policy Institute has unveiled a plan that would help the state clear those obstacles and cut taxes within five years. Only by delivering relief to overtaxed Illinoisans – and providing certainty about the state’s future tax climate – will the state spur the economic growth needed to stop moving vans from heading for the state line.