What Wisconsin can learn from Illinois' fiscal predicament

By JAY MILLER | Jan. 7, 2015

One of the benefits of having 50 states, our so-called laboratories of democracy, is that we can examine different states’ policies and learn from them. The lessons learned might be particularly instructive with respect to states in the same region. In that regard, Wisconsin is fortunate to be situated next to Illinois.

Illinois has the lowest credit rating among the 50 states and a fiscal outlook described as the nation’s “most dire.” Topping the list of problems fiscally for Illinois is a grossly underfunded government pension system. Although last year the then-Democratic governor, Pat Quinn, and Democratic legislature, passed tepid pension reform legislation, a court struck it down as unconstitutional.

To aggravate the situation, Illinois now has let expire a four-year tax hike. Starting in 2015, its flat individual income tax rate falls from 5% to 3.75%, a 25% drop. Revenue forecasters predict that this drop alone will cause Illinois to lose billions in revenue, at a time arguably when it can least afford it.

Whereas Wisconsin faces a budget deficit of about $824 million, Illinois’ deficit is projected to exceed $12 billion for fiscal year 2016.

Does that mean Wisconsin is poised to exploit Illinois’ misfortunes by luring its businesses to set up shop across the border? Don’t count on it.

Despite Gov. Scott Walker’s reputation for being a tax-cutting maven, Wisconsin’s top income tax rate sits at 7.65%, more than double the Illinois rate. A  nearly 4% differential in the two states’ rates is huge and might even sway businesses in Wisconsin to move to Illinois, rather than the other way around. That, in turn, could lead to more money in Illinois’ state coffers than otherwise predicted.

True, Illinois has a higher sales tax (much higher in Chicago, where it’s 9.25%) than does Wisconsin. But both states have high property taxes, and the hundreds more that consumers may pay in Illinois sales taxes annually does not offset the thousands more in income taxes that individuals face in Wisconsin.

Of course, given the size of its deficit problem, Illinois could be forced to take measures that will be politically unpalatable to all concerned. At this point, its newly elected Republican governor, Bruce Rauner, has not tipped his hand on how he plans to proceed.

Wisconsin should not assume, however, that it will gain from Illinois’ predicament, unless it takes steps to improve its own income tax competitiveness. To date, Walker, like Rauner, has been reticent about his plans for the upcoming legislative session.  Indeed, there has only been discussion, in public at least, about increasing the gas tax to cover the cost of road building.

To review the bidding, here’s where we are today. As one might expect, Wisconsin’s fiscal house is in much better order than Illinois’. Yet, the income tax disparity between the two states, one whose government is mostly blue and the other mostly red, creates a picture that is the opposite of what one would expect, given the respective philosophies of the two parties.

Wisconsin would be well-advised to be proactive in the matter of taxes, because one thing we know for sure: Illinois already has dropped its rate 25%. Moreover, as the Democratic Illinois Senate President John Cullerton noted, even at a 5% income tax rate, Illinois is competitive with Wisconsin. Our state leaders need to be mindful of that, rather than simply stand pat.

Jay Miller of Whitefish Bay is a tax attorney and an adjunct professor at the University of Wisconsin-Milwaukee’s Lubar School of Business. This column expresses his personal opinion.