The Tale of Two States

The Tale of Two States
March 23, 2007

Lee Walker

Lee H. Walker is president of The New Coalition for Economic and Social Change and a senior fellow... (read full bio)

Winning a second term, Governor Rod Blagojevich once again clothed himself in populist rhetoric during Wednesday’s address. This state-of-the-state speech, however, bordered on class-warfare. How else can one categorize a speech that demonized corporations for “not paying their fair share” claimed that “middle class and working families have paid more than their fair share of the tax burden” and promised free health insurance to 1.4 million uninsured residents?


While pandering to teachers unions and offering dim hope to the uninsured, Blagojevich’s speech was a slap in the face to state businesses and professionals, who see the cost of doing business in Illinois poised to skyrocket. By implementing the gross-receipts tax and trying to stick it to employers, Blagojevich risks killing the golden goose - otherwise known as employers - to fund his favorite projects. Once the goose is dead, one wonders where the revenue will come from to fulfill his bold promises.

Although the governor optimistically explained how his budget would raise $6 Billion in additional revenue from businesses, he seemed blissfully unaware of the incentives tax policies inevitably create. Businesses crippled by the intrusive gross-receipts tax - the governor proposed a 1.5 percent tax on service providers and a .5 percent tax on manufacturers, wholesalers and retailers - will expand or relocate to other states. Because the gross-receipts tax punishes even unprofitable businesses, the policy would discourage risk taking, entrepreneurship and businesses with thin profit margins. Put simply, the governor’s proposal would amount to the largest tax increase in Illinois’ history. Cue massive corporate emigration.


Because Blagojevich hopes to borrow $16 Billion to pay for his reckless spending, Illinois’ credit rating will deteriorate. Future borrowing, which is all but assured by Illinois’ unfunded pension liabilities, will be even more expensive. Blagojevich also intends to privatize the state lottery, a move generating $10 billion in revenue. However, the lottery currently raises $600 million annually for schools. By eliminating a reliable revenue source to pay down other debts, Blagojevich merely burdens his successor with the task of balancing the budget and paying for education. Eventually this road - higher taxes and out of control spending - leads to only one destination: broken promises, massive unemployment and negative economic growth.


But economic realities and fiscal responsibility do not seem to hold much interest for our noble-minded governor who “stands with the people.” Despite ending fiscal year 2006 with a $2.3 Billion deficit (outdone only by the $3 Billion deficit in 2005), Blagojevich wants expenditures to grow another 7.4%. Since much of the new spending would be for schools and health care, many of Illinois’ poor families might be tempted to applaud. However, the governor’s policies would actually harm poor families the most.


Along with driving out business, gross-receipts taxes are inevitably passed on to consumers in the form of higher prices. If acquiring raw materials, hiring marketing services and paying for legal counsel all become more expensive to a company selling finished goods, consumers will face higher price-tags at the store. Many economists argue the gross-receipts tax is in effect a hidden sales tax. And it is the poor who can least afford the universal price increases assured by a gross-receipts tax. The poor also suffer more acutely when unemployment rises. Middle-class individuals tend to be more geographically mobile and are better able to sustain short periods of unemployment. The working poor, however, will not find it as easy to locate new jobs outside of Illinois when their employers flee the state.


For all his talk of helping the workingman, Blagojevich’s proposals would throw more people onto the welfare roles. Faced with this eventuality, Blagojevich would likely hunt down the few remaining profitable businesses and squeeze them for revenue. Having lost 53,000 manufacturing jobs since taking office, Blagojevich seems hell-bent on stripping even more jobs from Illinois’ workers. Class warfare rarely achieves the utopian victories it promises.


Perhaps the most galling aspect of Blagojevich’s show-me-the-money speech was the complete absence of the word REFORM. Instead of demanding accountability from school administrators - already generously funded by Illinois taxpayers - Blagojevich instead promised to increase school funding by $3.6 Billion, a 23 percent increase. He further asked for $1.5 Billion in construction funds to build and repair schools. Does anyone believe that Illinois students are going to perform 23 percent better under the governor’s plan? More than any other proposal, the education budget reeks of a political payout to his teacher union supporters.


If the state legislature gives Blagojevich his wish list, we may see the day when every resident of Illinois is employed by the government and dependent upon the state bureaucracy for healthcare, retirement, education, housing and food. Blagojevich may deliver his class-warfare rhetoric with a smile, but let us pray our state legislators see through the charade. What Illinois needs is not more tax-and-spend irresponsibility, but fiscal discipline and pro-growth policies. A thriving business climate with robust employment is the best hope for those aspiring to enter the middle class.


Lee H. Walker is president of The New Coalition for Economic and Social Change and a senior fellow with The Heartland Institute. He can be reached at 312/377-4000 or lwalker@newcoalition.org.

Lee Walker

Lee H. Walker is president of The New Coalition for Economic and Social Change and a senior fellow... (read full bio)