Two states — Illinois and New York — provide contrasting previews of what the U.S. economy may look like in the year ahead depending on the path chosen to reduce the federal budget deficit.
Both states are headed by Democratic Governors. President Barack Obama’s home state chose the “balanced” approach advocated by Democrats to reducing its budget deficit, matching tax increases with “spending cuts.” New York focused solely on reduced spending and will allow a “millionaires tax” to expire in December.
The difference in job growth between these two states indicates that President Obama and the Democratic Party will have to choose between policies that actually lead to job creation, and their commitment to raising tax rates on “the rich” as part of a so-called “balanced approach” in the budget battles that lie ahead.
Last January, Illinois Governor Patrick Quinn pushed a $6.8 billion tax increase through a lame duck legislature without a single Republican vote. The bill raised the flat personal income tax rate to 5% from 3%. Illinois voters were also told that profitable corporations should pay “their fare share” and the corporate income tax was hiked to 7% from 4.8%.
The governor and his backers claimed that these tax increases would not hurt the Illinois economy, pointing out that the now higher personal income tax rate was still below personal income tax rates in nearby Indiana and Wisconsin, and that the corporate tax rate applies to the proportion of income earned in Illinois based on sales within the state, regardless of the company’s headquarters. Moreover, by supporting investment in education and public services, the added revenue would allow the state to stay competitive.
These tax increases were linked to spending caps to limit the growth of spending. The state’s FY 2012 budget of $33.2 billion budget looks like a modest, 1% reduction in spending. However, according to the Illinois Policy Institute, the General Assembly did not reduce any contractual obligations or eligibility for state reimbursed medical care and the like. Instead, the legislature doubled the amount of time it has to pay many of its bills to 24 months, and then only appropriated enough money to cover 12 months of bills, effectively borrowing the rest in the form of an accounts payable to its suppliers. Actual spending will increase by 2% to $34.2 billion.
This combination of higher taxes and increased spending have already proven to be a job killing brew. Illinois payrolls peaked in April and then fell by 7,300 in May. In June, the state’s 25,000 in jobs lost were the highest of any state in the nation.
Meanwhile, the large corporations that were expected to pay more have been negotiating special deals to keep them in the state. According to a June Wall Street Journal editorial, the state’s department of commerce says that $230 million in subsidies to large corporations had been granted by the governor since passage of the tax increase. Other major employers, includingCaterpillar, and The Chicago Mercantile Exchange are lining up for their own subsidies.
And, what of the state’s credit rating? Moody’s Investment Services continues to rate Illinois A1 with a negative outlook, the lowest of any state in the nation.
Newly elected Governor Andrew Cuomo has charted a very different path for New York. And, his policies have produced dramatically better results.
The state’s 2011-2012 budget of $132.5 billion closed a $10 billion deficit withreal spending reductions. A cap on Medicaid expenditures will save $5 billion. Reductions in state aid to local school districts, state workforce reductions and the consolidation of state agencies also were important sources of reduced spending. In addition, the temporary increase in the state’s top personal income tax rate to nearly 9% from 7% will be allowed to expire as scheduled at the end of this year, eliciting howls of protest against the “tax cut for the rich” from those who claim to speak for the middle class and the poor.
This combination of lower tax rates and reduced spending has reversed the state’s falling employment. During the last half of 2010, non-farm payrolls in New York contracted by 28,000, even as the rest of the nation was recovering from the recession. But, in the first seven months of this year, payrolls have grown by nearly 100,000, providing welcome relief to men and women who otherwise would still be out of work.
President Obama and the Democrats could follow the lead of New York Governor Cuomo and begin the serious work of downsizing the size and scope of the federal government while avoiding tax increases. As the failure of the Illinois and the success of New York show, such a choice is not about party, but about policies that work.
When ordered liberty is increased, commerce among people expands spontaneously. A reduction in tax and regulatory barriers increases the opportunities for voluntary exchanges. The ensuing activity shows up as jobs, economic growth and an expanded tax base. As individuals are given more freedom to find ways to make a better future, they outperform government in taking care of themselves, their families and in the process, generate the resources to take care of the less fortunate and their communities as a whole.
Unfortunately, all indications are that President Obama and the Democrats will choose to advocate the policies that have failed in Illinois, while criticizing Republicans for advocating the policies that have succeeded under a Democratic governor in New York. Contrary to today’s talking points by Democratic strategists and Tea Party critics, it is President Obama and liberal Democrats who appear willing to put government and their redistributionist ideology ahead of the welfare of the very people they purport to represent. Given the choice between jobs and ideology, President Obama appears ready to choose ideology over what works.
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