Contributor Post Created with Sketch. Progressively Bankrupt

 

A recent story in the Wall Street Journal foretells a grim financial future for Connecticut, the wealthiest state in the union by per capita income. Its great wealth, however, does not translate into financial stability. For this coming year, the state expects a $400 million shortfall in tax collections that will only compound its looming budget deficit of some $5.1 billion, attributable to the usual suspects: service on existing debt, a lowered credit rating, surging pension obligations, runaway health care expenditures, and a declining population. In both 2011 and 2015, Connecticut Governor Dannel Malloy sought to fill the fiscal gap by engineering two tax increases on the state’s wealthiest citizens, so that today the state’s highest tax bracket is 6.99 percent. Under the state’s tax pyramid, about one-third of the state’s $7-billion budget is paid by the several thousand people earning over $1 million per year.

But reality has finally set in. Kevin Sullivan, head of Connecticut’s tax commission, has conceded that “you can’t go back to that well again.” Determined progressives may claim the path to prosperity remains blue. But sooner or later, the bubble has to burst. Even the well-heeled individuals willing to pay high taxes for superior services will cut back their business activities or flee when fleeced. Massive government wealth transfers cannot succeed if those whose wealth is to be transferred end up leaving the state altogether. Indeed, in some cases, the departure of just one billionaire can lead to a hole in the budget, as with David Tepper’s departure from New Jersey.

But if Governor Malloy has thrown in the towel on higher taxation, he has not offered any alternative program that will allow Connecticut to escape from its economic doldrums. Yet there is a path forward. His state can return to financial health if it reverses its policy course and removes many of its vaunted restrictions on labor and real estate markets. Fortunately, states have no power over interest rates and the money supply, so in order to survive, they are forced to look inward to make the necessary changes.

The situation in Connecticut is mirrored by equal, if not greater, problems elsewhere, including in my home state of Illinois, which is in the midst of an unending fiscal crisis. But fortunately in Illinois there is a nascent movement for more genuine reform being spearheaded by the Illinois Policy Institute that recently released a book, An Illinois Constitution for the Twenty-First Century (for which I wrote the Introduction). The situation in Illinois (and Chicago) is dire. Once again, the simple explanation is that the state has long lived beyond its means. Right now, it has over $14.3 billion in unpaid bills, and growing.

As this volume indicates, Illinois needs a full-court press that addresses such key governance issues as redistricting, term limits, sunset laws, and its Constitution’s Amendment process. And politically, it is imperative to end Michael Madigan’s decades-long rule as Speaker of the Illinois Assembly.

Just last week, Butterball announced that it is closing its Montgomery factory west of Chicago, costing the state some 600 jobs. In response, it is easy to point to cheap imports from Mexico and other low-cost labor centers as the source of the problem. But that form of economic myopia ignores the powerful truth that it is only the poorly run states that suffer systematic competitive losses. It might be wiser for Illinois to find ways to reduce its sky-high worker’s compensation premiums, which help explain why companies like Hoist Liftruck have shuttered its Illinois plants, only to open up business in East Chicago, Indiana, taking many employees along for the ride. The difference in worker’s comp premiums between the two states is more than two-fold, with Illinois at $2.23 per $100 of payroll and Indiana at $1.05. The bottom line is that doing business in Indiana saved Hoist over $1 million in worker’s comp premiums in its first year alone.

But the long-term economic focus shouldn’t be exclusively on existing plants that move across state lines. Equally important is the business of attracting new firms with high growth potential, all of which have extensive choices on where to locate their new facilities. States like Illinois, Connecticut, and California are often last on the list of possible destinations.

Fortunately, under our federalist system, Illinois cannot do anything to stop current firms from leaving. But it can do something constructive to keep existing firms and lure new ones in. It can make the business climate more attractive by reducing the combined tax and regulatory burden. One useful indication of how this all works is found in Kentucky, which was able to attract a $1.3 billion investment in a state-of-the-art aluminum mill, creating some 550 new jobs in the state. The mill company’s CEO, Craig Bouchard, had previously been burned in dealing with unionized steel plants, which is one reason why he chose Kentucky, a right-to-work state, for the new plant. There, he does not face the same risk of union interference as he did with his previous steel mill in Illinois, where the United Steelworkers (whose labor contracts gave it powerful leverage to block any sale) forced Bouchard to do business with a Russian company that subsequently went out of business, costing Illinois yet more jobs.

Importantly, right-to-work laws don’t mean the end of unionization. In fact, as the Mackinac Center reports, union job growth is greater in right-to-work states than in non-right-to-work states. Two factors account for this. First, when businesses relocate to right-to-work states, the relative size of those states’ respective work forces increases, providing a larger base of employees for unions to draw from. Second, since right-to-work laws give employees an easy exit option out of union membership, unions have incentives to offer better terms to their members, and to shy away from the confrontational strategies with employers that lead to strikes and other counterproductive activities. Further, once employers know that unions are more constrained, their resistance to them should, and does, soften. As in all areas, the first job of sound public policy is to expand the overall size of the pie, not to try to increase the size of one single slice, as progressive policies routinely do.

The powerful position of labor unions in the public sector also accounts for a second major dislocation in state and local governments, which is the persistent and unsustainable increase in pension obligations. In states like Illinois and California, public pensions created vested rights that give government employees, by state constitutional mandate no less, first-dibs on state revenues, making it increasingly difficult to discharge the standard functions that states have in providing police protection, educational services, roads and many other obligations. No one advocates ending all pensions, but it is critical to pare down the size of benefits for existing pensioners, and to require additional contributions from current workers to bring the system back into balance. State and local pensioners have to take their share of the hurt.

The size of the problem is well-captured in this thumbnail summary of the Illinois pension problem by economist Diana Furchtgott-Roth: “The actuarial unfunded liabilities for Illinois’s pension plans stood at $111 billion for fiscal year 2015, according to government estimates. The liabilities increased by more than 600 percent between 1999 and 2013 in nominal terms, and by more than 450 percent in real terms.”

This is clearly unsustainable, and no ill-conceived set of tax increases will be able to cover such an enormous expense. With respect to future employees, a shift to defined contribution plans should help matters, because under these plans, the worker has full responsibility for pension contributions, so these contributions do not constitute a major liability on the government balance sheets. But those future gains are too little and too late unless current pension liabilities can be pared back to prevent a looming fiscal crisis. The difficulty of this task has been compounded by the Illinois courts, which have refused to allow the legislature to narrow the ruinous state guarantee of pension payments.

It is quite clear that Illinois has passed the point of no return, even if Connecticut has not. But owing to the embedded political powers, little if anything can be done to salvage a situation that is careening toward disaster. Fortunately, the damage will be confined within the borders of the state unless the United States supplies an ill-advised bailout. That’s the beauty of our federalist system. In perhaps the most famous single remark on the matter, Justice Louis Brandeis wrote in 1932 that “a State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.” Some of those experiments succeed. But many of them—as even the progressive Brandeis knew—fail.

© 2017 by the Board of Trustees of Leland Stanford Junior University

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  1. Petty Boozswha Member

    There is no chance that when the Blue State model finally implodes that the parties responsible will accept that they caused it. It will almost certainly be blamed by the MSM and the usual suspects on Republican tinkering with the state tax deduction on federal returns or some like excuse. We should be ready for it. A couple of items should be non-negotiable if bailouts eventually come about: state constitutional amendments barring public employee unions on the Walker model; amendments barring rent control after a brief phase out; amendments requiring defined contribution rather than defined benefit pensions.

    • #1
    • May 23, 2017, at 3:50 PM PDT
    • 2 likes
  2. jonb60173 Member

    I’m an Illinoisan and I find it sadly amusing the Chicago media casts the now Republican Governor as some sort of a crazy Republican whenever he broaches the subject of a balanced budget. Sadly the Dem’s in Springfield are numb to this states plight.

    • #2
    • May 23, 2017, at 4:10 PM PDT
    • 1 like
  3. Belt Member

    I genuinely curious here – What are the odds that Illinois won’t be bailed out? I figure it’s in the single digits…

    • #3
    • May 23, 2017, at 4:29 PM PDT
    • 1 like
  4. Chuck Enfield Coolidge

    Richard Epstein: Indeed, in some cases, the departure of just one billionaire can lead to a hole in the budget, as with David Tepper’s departure from New Jersey.

    I missed this story. How long will it be before billionaires start shopping for their state of residence the way that companies shop for states in which to locate their factories and headquarters?

    • #4
    • May 23, 2017, at 4:34 PM PDT
    • Like
  5. Brian Clendinen Member
    Brian Clendinen Joined in the first year of Ricochet Ricochet Charter Member

    A 5.1 billion dollar deficit on an 7 billion dollar budget. If that is a one year deficit and not a accumulate deficit that leaves me speechless. A lot of someones should go to jail for something like that.

    • #5
    • May 23, 2017, at 4:44 PM PDT
    • Like
  6. The Reticulator Member

    I thought the whole purpose of taxing the rich was to fail to produce the desired results, which then gives the necessary excuse to say, “Well, we tried taxing the rich and it wasn’t enough, so now it’s everyone else’s turn to pony up.”

    • #6
    • May 23, 2017, at 4:59 PM PDT
    • 4 likes
  7. Chuck Enfield Coolidge

    The Reticulator (View Comment):
    I thought the whole purpose of taxing the rich was to fail to produce the desired results, which then gives the necessary excuse to say, “Well, we tried taxing the rich and it wasn’t enough, so now it’s everyone else’s turn to pony up.”

    Good point, but why are we still going through the motions? Everybody who says the rich should pay more taxes also says that tax rates don’t matter because the rich don’t pay taxes anyway. If everybody knows this, can’t we just skip ahead?

    • #7
    • May 23, 2017, at 5:10 PM PDT
    • 1 like
  8. Seawriter Contributor

    Chuck Enfield (View Comment):
    How long will it be before billionaires start shopping for their state of residence the way that companies shop for states in which to locate their factories and headquarters?

    What makes you think they have not already? Taxes are one of the reasons Rush Limbaugh moved to Florida and that was back in the 20th century. He is not a billionaire, but he is pretty rich. I don’t doubt others have done so as well.

    Stupidest thing Boeing did was choosing Chicago over Dallas when they relocated their HQ from Seattle. Talk about going from the frying pan into the fire.

    Seawriter

    • #8
    • May 23, 2017, at 6:12 PM PDT
    • Like
  9. Chuck Enfield Coolidge

    Seawriter (View Comment):

    Chuck Enfield (View Comment):
    How long will it be before billionaires start shopping for their state of residence the way that companies shop for states in which to locate their factories and headquarters?

    What makes you think they have not already? Taxes are one of the reasons Rush Limbaugh moved to Florida and that was back in the 20th century. He is not a billionaire, but he is pretty rich. I don’t doubt others have done so as well.

    Stupidest thing Boeing did was choosing Chicago over Dallas when they relocated their HQ from Seattle. Talk about going from the frying pan into the fire.

    Seawriter

    I understand that lots of well-off people have left high-tax states for lower-taxed ones, but I haven’t heard of anybody calling the governor’s office looking for tax incentives to move to a new state the way businesses do. That said, why don’t they? What’s better, 1% of $1B, or nothing? They should negotiate a personalized deal.

    Edit: Sorry, that’s a stupid question. Living in the Northeast most of my life I sometimes forget that there are states with no personal income tax.

    • #9
    • May 23, 2017, at 6:28 PM PDT
    • 2 likes
  10. The Reticulator Member

    Chuck Enfield (View Comment):
    I understand that lots of well-off people have left high-tax states for lower-taxed ones, but I haven’t heard of anybody calling the governor’s office looking for tax incentives to move to a new state the way businesses do. That said, why don’t they? What’s better, 1% of $1B, or nothing? They should negotiate a personalized deal.

    Actually, that’s a brilliant idea. I hope somebody tries it and gets a personalized tax incentive.

    It’s not that I like personalized (businessized?) tax incentives for businesses. I hate them, and think they’re one of the most destructive things in our country. I think they account for much of the growth of big government. It’s just that the public outrage and attention given to a personalized tax incentives might result in tearing the whole works down for businesses, too.

    • #10
    • May 23, 2017, at 6:38 PM PDT
    • 1 like
  11. Chuck Enfield Coolidge

    The Reticulator (View Comment):
    It’s just that the public outrage and attention given to a personalized tax incentives might result in tearing the whole works down for businesses, too.

    That occurred to me too. But if a low income tax rate is important to somebody they’ll just move to a state with no income tax and avoid the publicity. Unless we find some rich guy who want’s the publicity. Doctors are rich, right? Hey, @docjay, you in?

    • #11
    • May 23, 2017, at 6:55 PM PDT
    • Like
  12. Muleskinner, Weasel Wrangler Member

    Richard Epstein: In both 2011 and 2015, Connecticut Governor Dannel Malloy sought to fill the fiscal gap by engineering two tax increases on the state’s wealthiest citizens, so that today the state’s highest tax bracket is 6.99 percent. Under the state’s tax pyramid, about one-third of the state’s $7-billion budget is paid by the several thousand people earning over $1 million per year.

    One reason that high taxes on the rich are so unstable is that the top few thousand taxpayers in any state are never the same people from year to year. Very high income is typically generated by sales of businesses or unusual circumstances that can’t be repeated by one individual year after year. High and progressive taxes are also a good way to make sure that these events are even more rare.

    • #12
    • May 23, 2017, at 10:17 PM PDT
    • 3 likes
  13. I Walton Member

    The US is a mirror image of the same public choice issues only we can print our own money as long as the world accepts our dollars. Our pensions aren’t the problem because the Federal government privatized government retirement in the 80s so that issue is getting better not worse, but then we have SS which we refuse to privatize, and health care which we can’t even tweak with seriousness in spite of it being the issue that drove so many elections and we hand cuff entrepreneurship at every step. Many businesses have been leaving the US for the same reasons and we’re looking for ways to stop them rather than fixing the tax and regulatory mess that gives rise to it. Democrat run corrupt decaying cities cannot fix themselves unless they go into receivership, but at least they have that. Can we fix the same problem nationally? There is no receivership.

    • #13
    • May 24, 2017, at 4:35 AM PDT
    • Like
  14. Seawriter Contributor

    I Walton (View Comment):
    Can we fix the same problem nationally? There is no receivership.

    There is always the Venezuela solution. Always.

    Seawriter

    • #14
    • May 24, 2017, at 4:43 AM PDT
    • Like
  15. I Walton Member

    Seawriter (View Comment):

    I Walton (View Comment):
    Can we fix the same problem nationally? There is no receivership.

    There is always the Venezuela solution. Always.

    Seawriter

    I’m not sure one of our parties isn’t already working on the Venezuelan approach but what’s the Venezuelan solution? Actually, thinking about it as I wrote that, we’re in similar positions; Venezuela only has oil and oil allows them to print foreign exchange so they just import what the leaders need, the rest is black market or doesn’t exist. We can print foreign exchange as well and will continue to do so, like Venezuelans leaders, as long as we can.

    • #15
    • May 24, 2017, at 6:59 AM PDT
    • Like
  16. Seawriter Contributor

    I Walton (View Comment):
    but what’s the Venezuelan solution?

    Complete collapse and a return to a state of nature.

    To quote Blackstone:

    The legislature would be changed from that, which was originally set up by the general consent and fundamental act of the society; and such a change, however effected, is according to Mr. Locke at once an entire dissolution of the bands of government; and the people would be reduced to a state of anarchy, with liberty to constitute to themselves a new legislative power.

    I do not say it would be a good thing. I say it would be a thing.

    Seawriter

    • #16
    • May 24, 2017, at 7:30 AM PDT
    • 1 like
  17. Profile Photo Member

    Seawriter (View Comment):

    Chuck Enfield (View Comment):
    How long will it be before billionaires start shopping for their state of residence the way that companies shop for states in which to locate their factories and headquarters?

    What makes you think they have not already? Taxes are one of the reasons Rush Limbaugh moved to Florida and that was back in the 20th century. He is not a billionaire, but he is pretty rich. I don’t doubt others have done so as well.

    Stupidest thing Boeing did was choosing Chicago over Dallas when they relocated their HQ from Seattle. Talk about going from the frying pan into the fire.

    Seawriter

    Around 1987, Nebraska’s Unicameral passed legislation regarding the provisioning of corporate tax breaks. This was designed to help Omaha-based ConAgra stay in the state and build a new suburban campus right along the banks of the Missouri River. The campus spurred a lot of downtown redevelopment.

    Fast forward to late 2015. ConAgra announces it will take about 1000 jobs to a new headquarters in…Chicago’s Merchandise Mart. Reason for this illogical move: The desire to be closer to all that Big Ten-educated talent (spitting in the face of new Big Ten member Nebraska!).

    These are…slightly different times from the late 1980s-early 1990s.

    • #17
    • May 24, 2017, at 9:52 AM PDT
    • 1 like
  18. The Reticulator Member

    Brad2971 (View Comment):
    Around 1987, Nebraska’s Unicameral passed legislation regarding the provisioning of corporate tax breaks. This was designed to help Omaha-based ConAgra stay in the state and build a new suburban campus right along the banks of the Missouri River. The campus spurred a lot of downtown redevelopment.

    Fast forward to late 2015. ConAgra announces it will take about 1000 jobs to a new headquarters in…Chicago’s Merchandise Mart. Reason for this illogical move: The desire to be closer to all that Big Ten-educated talent (spitting in the face of new Big Ten member Nebraska!).

    These are…slightly different times from the late 1980s-early 1990s.

    Big agribusiness and its malevolent influence on the Republican party is one of reasons why we have Trump.

    • #18
    • May 24, 2017, at 10:11 AM PDT
    • 1 like
  19. Profile Photo Member

    The Reticulator (View Comment):

    Brad2971 (View Comment):
    Around 1987, Nebraska’s Unicameral passed legislation regarding the provisioning of corporate tax breaks. This was designed to help Omaha-based ConAgra stay in the state and build a new suburban campus right along the banks of the Missouri River. The campus spurred a lot of downtown redevelopment.

    Fast forward to late 2015. ConAgra announces it will take about 1000 jobs to a new headquarters in…Chicago’s Merchandise Mart. Reason for this illogical move: The desire to be closer to all that Big Ten-educated talent (spitting in the face of new Big Ten member Nebraska!).

    These are…slightly different times from the late 1980s-early 1990s.

    Big agribusiness and its malevolent influence on the Republican party is one of reasons why we have Trump.

    Maybe. I’m just saying businesses are relocating to major metropolitan areas for reason that involve being “close to talent.” Even if, in this case, a move from Omaha to Chicago, arguably, goes against a CEO’s fiduciary duty to his shareholders.

    But, again, I wouldn’t get too agitated about this turn of events. Metro Omaha got both a lot of new jobs and a beautifully redeveloped downtown out of the deal. Not to mention, public park access to the Missouri River.

    • #19
    • May 24, 2017, at 10:38 AM PDT
    • 1 like
  20. Petty Boozswha Member

    Maybe. I’m just saying businesses are relocating to major metropolitan areas for reason that involve being “close to talent.” Even if, in this case, a move from Omaha to Chicago, arguably, goes against a CEO’s fiduciary duty to his shareholders.

    This is a surprising [to me] aspect of this issue that cuts against my preconceptions and has made me rethink some ideas. It helps explain why Jerry Brown, the Moonbeam, has been pretty successful in California pursuing policies I would have thought disastrous while Sam Brownback is floundering in Kansas pursuing policies I ideologically agree with. I was surprised when GE moved out of Connecticut and did not go to a low tax state but instead moved to Boston, where they will pay mucho taxes but have access to more talent.

    • #20
    • May 24, 2017, at 12:23 PM PDT
    • Like
  21. The Reticulator Member

    Brad2971 (View Comment):
    Maybe. I’m just saying businesses are relocating to major metropolitan areas for reason that involve being “close to talent.” Even if, in this case, a move from Omaha to Chicago, arguably, goes against a CEO’s fiduciary duty to his shareholders.

    But, again, I wouldn’t get too agitated about this turn of events. Metro Omaha got both a lot of new jobs and a beautifully redeveloped downtown out of the deal. Not to mention, public park access to the Missouri River.

    Sorry for getting distracted. When you start talking to me about giant agribusiness, that’s a good way to divert my attention and turn my eyeballs into smoldering fire.

    Back to your topic, I sometimes wonder how much of this desire to move a company’s world headquarters to another, larger city, say 50 miles away (in one case I’m thinking of) is social. The CEO and top executives want to hang out with people like them, not with icky proles. This might not be entirely separate from the desire to be close to talent.

    • #21
    • May 24, 2017, at 1:01 PM PDT
    • 3 likes
  22. Seawriter Contributor

    The Reticulator (View Comment):
    Back to your topic, I sometimes wonder how much of this desire to move a company’s world headquarters to another, larger city, say 50 miles away (in one case I’m thinking of) is social. The CEO and top executives want to hang out with people like them, not with icky proles. This might not be entirely separate from the desire to be close to talent.

    Hanging with Chicago’s elite was a major reason for Boeing relocation decision. It not only hurt the company (due to the higher corporate taxes, but it costs the top executives about 12% over what they would have kept had they moved to Dallas, with no city or state income taxes – to say nothing of the premium they pay for housing in the Chicago area rather than Dallas.

    I guess money isn’t everything. Approval of your peers is so much more important. (Worse than high school girls about that.)

    Seawriter

    • #22
    • May 24, 2017, at 1:16 PM PDT
    • 3 likes
  23. Chuck Enfield Coolidge

    The Reticulator (View Comment):
    Back to your topic, I sometimes wonder how much of this desire to move a company’s world headquarters to another, larger city, say 50 miles away (in one case I’m thinking of) is social. The CEO and top executives want to hang out with people like them, not with icky proles. This might not be entirely separate from the desire to be close to talent.

    I suspect this is part of it. But while I think that social capital is currently over-valued, I won’t dispute that it has value.

    We have to learn to accept that business leaders don’t know what they’re doing much better than anybody else. They make decisions with the information they have (which is always incomplete, and sometimes fictitious), experiment, assess risk, measure results, and adjust. For business as a whole this system works out, but for any given business sometimes not so much.

    • #23
    • May 24, 2017, at 2:25 PM PDT
    • 1 like
  24. Muleskinner, Weasel Wrangler Member

    Brad2971 (View Comment):

    The Reticulator (View Comment):

    Brad2971 (View Comment):
    Around 1987, Nebraska’s Unicameral passed legislation regarding the provisioning of corporate tax breaks. This was designed to help Omaha-based ConAgra stay in the state and build a new suburban campus right along the banks of the Missouri River. The campus spurred a lot of downtown redevelopment.

    Fast forward to late 2015. ConAgra announces it will take about 1000 jobs to a new headquarters in…Chicago’s Merchandise Mart. Reason for this illogical move: The desire to be closer to all that Big Ten-educated talent (spitting in the face of new Big Ten member Nebraska!).

    These are…slightly different times from the late 1980s-early 1990s.

    Big agribusiness and its malevolent influence on the Republican party is one of reasons why we have Trump.

    Maybe. I’m just saying businesses are relocating to major metropolitan areas for reason that involve being “close to talent.” Even if, in this case, a move from Omaha to Chicago, arguably, goes against a CEO’s fiduciary duty to his shareholders.

    But, again, I wouldn’t get too agitated about this turn of events. Metro Omaha got both a lot of new jobs and a beautifully redeveloped downtown out of the deal. Not to mention, public park access to the Missouri River.

    More likely, the new CEO is from Chicago, and didn’t want to move to Omaha. Those employees that had their jobs moved, and didn’t want to go were absorbed into the economy so fast that it didn’t leave a noticeable mark on the unemployment rate in the MSA, or any noticeable payout of unemployment benefits.

    • #24
    • May 24, 2017, at 9:00 PM PDT
    • Like
  25. Addiction Is A Choice Member

    An oldie, but goodie from the incomparable Iowahawk: Feed Your Family on $10 Billion a Day

    • #25
    • May 25, 2017, at 1:01 PM PDT
    • Like
  26. The Reticulator Member

    Addiction Is A Choice (View Comment):
    An oldie, but goodie from the incomparable Iowahawk: Feed Your Family on $10 Billion a Day

    I follow him on Twitter and have even read some of his blog, but hadn’t seen this one. You’re right. It’s a goodie.

    • #26
    • May 25, 2017, at 1:10 PM PDT
    • 1 like

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