Today marks the 239th anniversary of the first Constitution of the United States. On January 30, 1781, Maryland becomes the 13th and final state to ratify the Articles of Confederation. The Articles of Confederation were adopted by the 13 original states creating our first Constitution which prevented the Federal Government from imposing any direct tax. Happy Articles of Liberty Day to all Taxpayers!
A recent article by Mark Glennon of Wirepoints states that turning Illinois around is vital to the national economy. Illinois is a drag on the national economy, and the state’s GDP has lagged the nation’s significantly for ten years. According to Glennon, “A federal bailout is happening automatically, at least in a small sense, in the form of food stamps, housing assistance, Medicaid and similar programs. A fresh start for Illinois would reduce its federal tab for those costs and grow Illinois’ tax base for federal revenue.”
For a state to formally go bankrupt, the U. S. Congress would have to pass legislation enabling that. In Illinois’ case, Glennon thinks Congress would.
David Skeel, a law professor at the University of Pennsylvania who also serves on Puerto Rico’s oversight board wrote that the “constitutionality of bankruptcy-for-states is beyond serious dispute.”
Congress would only be offering states the option of using bankruptcy, just as it has already done for municipalities; nothing would be forced on states.
As for the left’s fear that the power of bankruptcy would reduce pension payments, the Bankruptcy Code would not be expanded “as is” to states. Changes would be made on which all sides could find common ground. For example, a bankrupt government can opt to keep or renegotiate whatever labor contracts it has.
As for bondholders, says Glennon, one should “shed no tears for existing bondholders. They took the risk that bankruptcy law could be changed to impact them.”
“It’s becoming clear that there is no long-term alternative,” said Jim Tobin, president of Taxpayers United of America (TUA). “As Glennon points out, “This isn’t about whether bankruptcy is a good option. It’s about whether it’s the only option.”
“Illinois is functionally bankrupt,” said Tobin, “and the cause is runaway government employee pensions with unfunded liabilities so huge that it is mathematically impossible for the state and its municipalities to tax their way out of this financial black hole.”
“Illinois is the nation’s extreme outlier when it comes to pension shortfalls. The state has a $241 billion shortfall in its five state-run pension funds. Illinois’ pension shortfalls equal 28 percent of the state’s GDP. Illinois’ death spiral gets worse and worse, and bankruptcy for the state looks more and more desirable.”
“While we’re waiting for this drastic measure, the state of Illinois can help its citizens by passing a law to enable all local governments to declare bankruptcy. It also should cut state taxes to stimulate its sluggish economy.”
Illinois is one of the worst states for business tax climate, according to the just-released report of The Washington, D.C.-based non-partisan Tax Foundation. According to its 2020 State Business Tax Climate analysis, Illinois ranks 35th out of fifty states. (https://statetaxindex.org/state/illinois/)
The State Business Tax Climate Index is a measure of how well states structure their tax systems. It enables policymakers, business leaders, and taxpayers to gauge how their states’ tax systems compare, and provides a roadmap for improvement. “This new report illustrates just how hard it is for our high-tax State of Illinois to compete with its surrounding states,” said Jim Tobin, president of Taxpayers United of America TUA).
“Four of Illinois’ five neighboring states are significantly better in structuring their tax systems: Indiana is #10, Missouri is #14, Kentucky is #24 and Wisconsin is #26.” “Of the individual components of the index, Illinois is 36th on corporate taxes, 40th on property taxes, and 40th on unemployment insurance taxes.”
The foundation also points out that the absence of a major tax is a common factor among many of the top 10 states. Several states do without one or more of the major taxes: the corporate income tax, the individual income tax, or the sales tax. Wyoming, Nevada, and South Dakota have no corporate or individual income tax (though Nevada imposes gross receipts taxes); Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire, Montana, and Oregon have no sales tax.
This does not mean, however, that a state cannot rank in the top 10 while still levying all the major taxes. Indiana and Utah levy all of the major tax types, but do so with low rates on broad bases.
“Illinois is hemorrhaging jobs and population,” said Tobin. “In order to bring back businesses and taxpayers, at the very least the Springfield politicians should cut taxes across the board. This result would give them breathing space while they tackle the really tough problem of the state’s government pensions.”