| This edition of The Policy Shop is from chief economist Orphe Divounguy. |
| Gov. J.B. Pritzker claimed his budget proposal would achieve an unprecedented $1.7 billion surplus this year. We’re not buying it. Why? Documents released by his budget office show Illinois would end the year with a $1.5 billion deficit. Pritzker is only able to promise tax relief – through temporary cuts in grocery taxes, pausing the annual gas tax hike and a one-year increase in property tax rebates – because an unprecedented flood of federal aid is supporting state cash flow. But this one-off tax relief will lead to permanent hikes in the future because the governor is doing nothing to get spending under control. In reality, Pritzker’s budget proposal and the State of the State address Feb. 2 set us up for two things: campaign gimmicks and economic failure. Smoke and mirrors: Without spending reforms, any tax cuts Pritzker passes ahead of his re-election are just a quick salve to placate angry voters, and the long-term result will be tax hikes and service cuts that are more painful than what we face today. Given the current economic environment – too little production to satiate stimulus-induced consumer demand – an effort to reduce the income tax would boost local economic output by attracting investments and young workers from other states, while also potentially pulling many older workers out of early retirement. However, this would require pension reform to decrease unsustainable government spending. What is the state of our state? Stricter than average COVID-19 restrictions in Illinois kept economic activity suppressed for longer and caused job openings to lag relative to the rest of the country. The lack of opportunity and the decline in economic freedom pushed many residents out of Illinois, exacerbating years of population decline. Actual gross domestic product is estimated to be $31.4 billion smaller than where it would have been without population losses. Even before the pandemic, population losses also mean that potential GDP – the value of output the economy would have produced if workers and capital are employed at maximum sustainable rates – is much lower today than before Pritzker became governor. |
| The opportunity to build wealth through homeownership – often a family’s largest asset – is among the leading reasons why Illinoisans have left the state. It also reveals that Illinois is relatively less attractive to plant roots than other nearby states. While housing prices in Illinois surged 11.4% in 2021, the state’s experience was a far cry away from the 18.4% appreciation on average in most of the country. The pandemic migration surge meant that areas that experienced rapid population growth also saw faster economic recovery. Population growth in those states boosted employment and housing wealth. By contrast, Illinois is still missing 251,900 jobs from its pre-pandemic peak. And, population loss means aggregate employment will likely remain permanently lower than pre-pandemic levels. As of December 2021, Illinois was still missing 4.0% of its pre-pandemic employment level. This is compared to 2.8% on average across the country. In fact, of all Midwestern states, only Michigan and North Dakota are missing more jobs than Illinois.More on Illinois’ economic recovery. Illinois is the least recovered state in the Midwest. We’re still missing 30% of the jobs that were lost at the start of the pandemic. |
| Illinois’ results are unsurprising because, relative to the size of its unemployed population, Illinois created fewer new job openings than most, making finding a job harder in Illinois than nearly every other state in the nation. From January to October 2021, there were 0.8 vacant jobs per Illinois job seeker on average each month, according to the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey, when compared to 1.1 per job seeker across the country. In most states, younger Americans who left the labor force during the pandemic are expected to return. However, population loss in Illinois, especially among working-age Illinoisans, suggests that even if early retirees return to work, aggregate employment will not return to its pre-pandemic level. Pritzker’s proposal won’t work. Here’s our plan: The Illinois Policy Institute’s five-year fiscal plan – Illinois Forward 2023 – offers a path to balancing the budget in the long run with no further tax hikes. It would eliminate the structural deficit and backlog of unpaid bills for good. The plan relies on commonsense pension reform, diverting wasteful administrative spending to classrooms and rightsizing taxpayer costs for state worker health insurance. Together, these reforms can reduce taxpayer costs in the state’s budget by nearly $3.6 billion the first year. |
| Illinois faces a decision. It can choose structural financial reform that will limit taxpayers’ burdens as much as possible and spur economic growth, or it can choose to continue decades of fiscal irresponsibility that left it on the brink of collapse when COVID-19 hit. |
