The Great Lakes region offers a test of different economic policies

Posted by Wall Street Journal

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If the states are laboratories of democracy, then a great comparative policy experiment is taking place in America’s Great Lakes region. Democrats in Illinois have been pursuing their blue-state model of higher taxes and union-dominated government. Neighboring states since 2010 have gone for lower taxes and union reform…

So did it work out? One way to judge is to compare Illinois with four other Great Lakes states that the federal Bureau of Economic Analysis (BEA) lumps together for its annual survey of economic performance by the 50 states.

Start with Illinois’s 8.7% jobless rate, which is the country’s second highest after Rhode Island’s 9% and has fallen by a mere 0.7 percentage points since Democratic Governor Patrick Quinn began his second term in January 2011. That’s when Illinois increased its flat income tax to 5% from 3% and the corporate rate to 9.5% from 7.3%.

This is in sharp decline with Michigan, where Republican Governor Rick Snyder and a GOP legislature cut corporate taxes. In the last three years, the unemployment rate has fallen to 7.7% from 11% in the Wolverine State, to 6.5% from 9.1% in Ohio, to 6.1% from 9% in Indiana, and to 6.1% from 7.7% in Wisconsin. Only Illinois has raised taxes, while Ohio cut taxes, Michigan and Indiana have passed right-to-work laws and Wisconsin famously reformed collective bargaining.

Illinois has also recorded the slowest personal income growth in the Great Lakes. Between 2012 and 2013, personal income rose by 2.1% in Illinois versus 2.7% in Wisconsin, 2.5% in Michigan, and 2.3% in Ohio and Indiana.

But get this—about a third of Illinois’s personal-income growth last year was driven by “transfer receipts” (i.e., food stamps, workers’ compensation, disability, welfare, Medicaid, Social Security, Medicare, earned income tax credits, unemployment benefits). According to BEA, these payments increased 5.2% in Illinois in 2013, the third most in the U.S., while wages and salaries ticked up only 1%.

Some 31,000 Illinois workers left the state’s labor force in 2013, while Michigan’s workforce expanded by 2,000 and Indiana’s grew by 11,000. Illinois also lost about 9,000 manufacturing jobs in the last year while Michigan gained 17,000 and Ohio and Indiana each added 12,000.

AM Manufacturing and Carl Buddig & Co. recently announced plans to move operations a few hundred yards across the Illinois border to Munster, Indiana. Kenall Manufacturing, Hanna Cylinders and EMCO Chemical are relocating to Wisconsin.

It’s easy to see why. Illinois’s 9.5% corporate tax rate is the highest in the Great Lakes and fourth in the U.S. Michigan levies a 6% corporate tax, and Indiana Governor Mike Pence recently signed legislation to cut his state’s corporate rate to 4.9% from 7.5% by 2023. Nine years is an overlong phase-in, but at least businesses know taxes are trending down.

Democrats say Illinois taxes aren’t all that high and have room to grow. The state’s 5% flat personal income tax is lower than the top rates in Ohio (5.392% on income over $208,500) and Wisconsin (7.65% over $240,190), but higher than the flat rates in Michigan (4.25%) and Indiana (3.4%). However, sales taxes are 14% to 33% higher in Illinois than in other Great Lakes states, according to the Tax Foundation. Property taxes are the second highest in the country (after New Jersey) and climbing.

Democrats want to impose a progressive income tax because they don’t want to extend their “temporary” tax hikes on their low and middle income constituents. They’d try to sell a progressive tax to voters as a tax cut for the middle class, even though legislators could later ratchet up rates on everyone when they want more revenue, which they always do. Public unions have proposed top tax rates starting between 9% to 11%.

The real reason Democrats want higher taxes is the state’s exploding government-employee pension costs, which will increase this year despite the nips and tucks legislators made in December. Illinois this year will spend $7 billion from its general fund (not counting federal funds) on primary and secondary education—but another $7.5 billion on pensions. According to the Illinois Policy Institute, teacher pensions have gobbled up 70% of new education spending. The next tax increase would be, like the last one, a more or a less a straight income transfer to government worker pensions.

Democrats in Springfield are also teeing up a bailout for Chicago’s pension funds, which are $30 billion in arrears. The city must make a $1.07 billion balloon payment next year while Chicago schools must cough up an additional $405 million this year.

Taxes and public union governance aren’t the only policy differences in these states, but they have been the most notable since 2010. Judging by the record so far, nothing would make the four Republican Governors of neighboring states happier than for Illinois to keep soaking its millionaires.