Despite the record increase in pension expenditures in the past several decades, Illinois’ pension system remains the nation’s worst by multiple measures. According to Moody’s Investors Service, Illinois’ pension debt was equal to 500% of the state’s revenues in fiscal year 2018 and almost 30% of the entire state economy, both the highest rates in the nation. At the same time, Illinois’ credit rating has been in precipitous decline and now sits at the lowest credit rating in the nation.
As pension debt continues to increase, so do required pension contributions. Pension contributions now consume 26.5% of the state’s general funds budget, up from less than 4% during the years 1990 through 1997.
Illinoisans who thought new House Speaker Chris Welch might change the direction Illinois is headed in just got a dose of reality. Welch recently said he wants Illinois to have a second go at a progressive tax scheme, this time committing the tax hike proceeds to pensions. Illinoisans rejected Gov. Pritzker’s first attempt, he said, because they didn’t know where the tax hike dollars would go. “…folks don’t trust us,” Welch said.
Welch is right about the trust factor, but he’s wrong to think Illinoisans will suddenly approve a tax hike just because the legislature promises to funnel the new revenues to pensions. They know it’s unlikely politicians will keep their promise. And Illinoisans know the state’s unreformed pensions are a corrupted mess – that they’d be throwing good money after bad.
Numbers out of context are meaningless. Why not raise taxes by $200 billion, or heck, $90 trillion? But in the context of the New York state budget, $50 billion is an unprecedented hike. Without the pandemic and lockdowns, the state likely would have taken in $90 billion in taxes this coming fiscal year, meaning the bill’s proponents want to raise taxes by close to 60 percent.
A sample of the new taxes: first, on high-income labor. A single filer with $1 million in income would see a 23 percent state tax hike, to 8.41 percent, up from 6.85. A filer making $10 million would see a 48 percent hike, to 12.14 percent, up from 8.82 percent.
Real-estate veterans and hedge-fund executives believe a seismic shift is under way, one that is moving vast amounts of Wall Street wealth from New York to South Florida. For the past several years, Wall Street has been colonizing the Sunshine State, attracted to more favorable tax policies and sunnier climes. And the momentum is only accelerating amid the pandemic.
While prices are under pressure in New York amid an oversupply of high-end condominiums on the market, price tags in Palm Beach and Miami appear to be on an unstoppable upward trajectory.
Last week, private-equity executive Scott Shleifer, a co-founder of Tiger Global Management, paid over $120 million for an oceanfront mansion in Palm Beach, setting a price record for the state. New Jersey hedge-fund executive David Tepper is also in contract to buy a $73 million house on the ocean nearby, The Wall Street Journal reported.
While he maintains a $238 million home in New York and another luxury condo in Chicago, Citadel founder Ken Griffin has also been on an acquisition spree in South Florida, spending hundreds of millions of dollars to buy land in Palm Beach and Miami, and is opening an office in Miami.
Last month, Pritzker announced he would delay the implementation of economic incentives outlined in the so-called Blue Collar Jobs Act passed in 2019, and this week he announced he’d be seeking the closure of “corporate tax loopholes” in order to shore up the state’s budget.
Individual income taxes are a major source of state government revenue, accounting for 38 percent of state tax collections in fiscal year 2018, the latest year of data available.
Forty-two states levy individual income taxes. Forty-one tax wage and salary income, while one state—New Hampshire—exclusively taxes dividend and interest income. Eight states levy no individual income tax at all.
Of those states taxing wages, nine have single-rate tax structures, with one rate applying to all taxable income. Conversely, 32 states and the District of Columbia levy graduated-rate income taxes, with the number of brackets varying widely by state. Hawaii has 12 brackets, the most in the country.
The Quarterly Summary of State and Local Government Tax Revenue provides quarterly estimates of state and local government tax revenue at a national level, as well as detailed tax revenue data for individual states.
And that’s the context of that big $932 million tax hike on business Gov. J.B. Pritzker is pushing as part of his proposed 2022 budget.
Pritzker calls the proposal “closing corporate loopholes.” Arguably that’s true, at least in the sense that any tax break I don’t receive must be someone else’s undeserved loophole. But the proposal comes at the very time when population and jobs have begun to drop not only statewide but in the metropolitan area, and at a time when the state refuses to confront its ever-rising pension debt. Not to mention Chicago’s murder and car-jacking wave. Or what Cook County Assessor Fritz Kaegi is up to.
In fairness to Pritzker, Illinois is not the only state to be moving its tax structure in his proposed direction, at least in part. For instance, according to the Tax Foundation, a Washington research group that’s fairly conservative but also frequently cited in economic circles, only 16 states grant the full accelerated depreciation that’s now in federal tax code. Pritzker’s proposed change there is worth $214 million a year.
Budgetary pressures vary greatly, despite calls for more federal aid in general and tax hikes in some locales. In New York, state revenue collected from April through December 2020 was 4.1% lower than in the year-earlier period, according to data from the Urban Institute think tank.
In New Jersey, the drop was 2.4%. With tax revenue outperforming earlier projections, Democratic Gov. Phil Murphy on Tuesday proposed making a full payment to the state’s pension system for the first time since 1996. California has done even better, with revenue collections growing 1.2%.
While a governor can call on lawmakers to raise taxes, the odds of success for the various proposals depend partly on which parties control state legislative chambers. Additionally, Democrats in Congress have pushed to include money for cities and states in an economic-recovery package, which could shift the equation.
Then there are states like Hawaii, where cratering tourism has left the state in a $1.8 billion budget hole, with tax revenues not expected to recover until 2024. Florida and Nevada are also missing their frequent flyers after tax receipts plummeted by 7.9 percent and 13 percent, respectively. States dependent on taxing energy and mining, such as Alaska, North Dakota, Texas and West Virginia, have seen their own devastating budget hits. And sales-tax-dependent states like New York wound up in worse shape than those reliant on less volatile revenue streams like Vermont, where 32 percent of revenues come from property taxes. In all, 26 states saw their tax revenues decline in the first 10 months of 2020.
But every state’s been a winner this past year with the federal government, whose aid to states and localities rose an astonishing 42 percent. What might have been a $331 billion budget shortfall due to COVID-19 instead came to a $165.5 billion dip, according to Moody’s, and that’s before counting $79 billion in state rainy day funds. Federal aid also propped up businesses and households, which led to economic activity and hiring that boosted state and local tax revenues, while also hiking taxable unemployment benefits. Having the Federal Reserve goose the stock and housing markets with super-low interest rates didn’t hurt either.
In addition to the federal estate tax, with a top rate of 40 percent, some states levy an additional estate or inheritance tax. Twelve states and the District of Columbia impose estate taxes and six impose inheritance taxes. Maryland is the only state to impose both.
Hawaii and Washington State have the highest estate tax top rates in the nation at 20 percent. Eight states and the District of Columbia are next with a top rate of 16 percent. Massachusetts and Oregon have the lowest exemption levels at $1 million, and Connecticut has the highest exemption level at $7.1 million.
Of the six states with inheritance taxes, Nebraska has the highest top rate at 18 percent. Maryland imposes the lowest top rate at 10 percent. All six states exempt spouses, and some fully or partially exempt immediate relatives.
Of those states suffering at least a 3% drop in revenue since the start of the pandemic in March 2020, two-thirds (eight in 12) are red states. Alaska, Florida, North Dakota and Texas are seeing some of the worst revenue losses of 9% or higher over the comparable period in 2019, according to the latest data from the Urban Institute.
Across the 47 states from which the institute has full data, total state tax revenues were down by $14 billion in the first ten months of the pandemic (between March and December 2020) compared to the same period a year earlier. That’s an average drop of 1.8% and is largely driven by declines in sales tax revenue.