In Illinois, things are even worse. There, the current deficit accounts for more than half of the state’s annual budget – easily the highest percentage in the nation. Of course the “cure” could be worse than the “disease” for these borderline insolvent states – particularly if extricating themselves from the consequences of their bad decisions puts them at a competitive disadvantage with their neighbors.
Earlier this month, Illinois’ lame duck Democratic legislature voted to raise the state’s individual income tax from 3 to 5 percent while raising corporate taxes from 7.3 to 9.5 percent. Almost immediately after these tax hikes were announced, the newly-elected governor of neighboring Wisconsin – which is facing a comparatively manageable $3 billion shortfall over the next two years – unveiled an aggressive tax-cutting campaign aimed at luring Illinois businesses to his state.
Indiana Gov. Mitch Daniels – whose state is facing a much smaller $1 billion shortfall – also wasted little time courting Illinois businesses.
“The contrast between the choice we’ve made and the one they have (made) is stark,” Daniels said, pointing to recent spending cuts that have softened Indiana’s deficit crunch. “They’ve been borrowing from the poor businesses that are suckers enough to do business with the state.”
He’s correct. In addition to its budget shortfall, Illinois has a stack of unpaid bills totaling $8 billion. The state’s unfunded pension liabilities are currently estimated at nearly $80 billion, and to balance its budget in 2012 a recent study estimated that Illinois would have to raise its corporate income tax rate to 11.3 percent, its sales tax to 13.5 percent, and cut spending by 26 percent.
Therein lies the dilemma for states that have plunged themselves into the abyss: How do they climb out without sending thousands of companies and millions of taxpayers scurrying to more favorable economic climates?
From 1910 to 1990, California’s share of the U.S. population nearly quintupled. Over the last two decades, however, that growth has slowed dramatically. After gaining only one seat in the U.S. Congress following the 2000 Census, California failed to gain a seat in the 2010 Census for the first time in ninety years. Illinois lost a Congressional seat in 2010 – after losing three seats during the previous two Census counts.
And based on their current state of fiscal disrepair, things could get even worse for these states in the decade to come – shifting jobs, investment and political power to states that have better managed their finances.