By John F. Di Leo -
Let’s begin with a quick refresher: In July, 2017, the Democrat-dominated legislature of the State of Illinois, a state already suffering the loss of 95,000 residents per year, voted to override its governor and increase both the business and personal income tax by a third.
To be specific, that’s a 32% increase in the individual income tax, and a 33% increase in the corporate income tax…thereby adding to a regulatory and tax structure that’s already so crippling, it’s driving out people and businesses at a rate faster than any other state, even states as famous for such flight as California and New York.
And still, the legislature voted to hike the income tax by another third. The reason given most often by politicians trying to explain themselves, particularly by the ten Republican state house members facing furious constituents, was our debt of honor to the creditors to whom we are in arrears.
To boil this down: These vendors haven’t stopped working for Illinois, even though we’ve been terribly late in paying our bills, so we needed to increase your taxes – not by another five or ten or fifteen percent, but by a whopping additional third – in a futile effort to get caught up again.
Springfield’s Shame
There is a level of embarrassment in going over two years without a state budget, no question about that. When Illinois voters sent Bruce Rauner – experienced investment whiz but political novice – to the Executive Mansion, he had a mandate to bring fiscal sanity to Illinois governance. So he set forth some logical goals – workmen’s comp reform, public employee pension and compensation reform, etc. So House Speaker Michael Madigan dug a moat around the status quo, filled it with alligators, and refused to budge for 700 days.
As a result, Illinois had two failed budget cycles – Madigan and his minions refused to consider reforms, and Rauner wouldn’t sign a budget without at least some effort at addressing the issues that are driving employers and employees alike out of the state at a record pace.
The state continues to take in revenue – more and more every year – but without reform, the outlays have outpaced receipts. Some vendors go a month, or two, or three, without their bills being paid. This is a problem. This is irresponsible. And this is the fault of Mike Madigan and his party’s intransigence.
But there’s an old saying, one that appears on signs, posters, and notebooks in private sector business offices across the country: “Failure to plan on your part does not create an emergency on mine.” It’s not entirely true, of course; we may indeed respond with the urgency they want (and we charge them appropriately for it), but at least in the private sector, we have an understanding of responsibility. That sign on our desks keeps us mindful of the fact that the blame for this mess is the other guy’s fault. If nothing else, it keeps us sane.
Increasingly, our government has no such consciousness of the reason for the emergencies it faces. From the criminal justice system to the welfare state, our governments see needs and try to fund them, regardless of the causes of those needs, regardless of whether in fact those needs are the result of the people’s own personal choices, regardless even of whether the funding will make things better or worse.
We face emergencies every day – a pension crisis, a school crisis, a healthcare crisis, a road condition crisis, and most serious of all, a fleeing-businesses crisis – and we try to deal with the symptoms rather than addressing the causes.
Bruce Rauner and the Republican minorities in both houses spent two and a half years trying to address the causes, while the Democrat majorities insisted on addressing the symptoms and allowing the causes to keep getting worse.
It was a 2.5-year-long stare-down, and in July, 2017, ten Republican state reps blinked.
Who Are Our Creditors?
Nothing changed in those 2.5 years for the Democrats, and nothing changed for the governor or for most of the Republican legislators… but there were a few – just enough, unfortunately – for whom one important thing did change. It was a feeling of shame brought on by years of watching the state Comptroller have to juggle bills, constantly trying to manage the payment process so that every creditor got something without withholding services.
We all know people – or have been people ourselves – in that situation. Whether in our private life or our workplace environment, there are times when you can’t pay everything due this month, so you postpone some of it, sometimes until the next bonus check or the next big sale. Some of us are paid on the 15th and 30th, while some are paid every two weeks, getting two “extra” checks per year that help to catch up on such matters. That’s just life.
So the state owes money to hospitals, schools and colleges, construction companies, and employees. The state issues welfare checks for food and housing. The state writes checks to utilities that it regulates and partners with and licenses. The state issues grant money to nonprofits in the arts and entertainment, in science and charity. The state government even writes checks to other governments – to counties and townships and villages and cities.
And for the past couple of years, the state has had to juggle these bills, unable to pay them all at once, prioritizing some vendors over others. This was embarrassing to some of our legislators, and understandably so.
But we must remember who these creditors are, and how they got that way.
These creditors are people who chose to perform services for the state of Illinois. Everyone has known for twenty years or more what a wreck the state of Illinois is. The City of Chicago, not to mention such disaster zones as East St Louis and Decatur, have been money pits for generations. Others have more recent problems, like Rockford’s precipitous fall. But as a whole, the rotten condition of Illinois government has been known for a very long while.
And yet, these creditors – these landlords and construction companies and other vendors – have continued to do business with Illinois. Why didn’t they cut us off?
In most cases, these people aren’t like a retail shop that has to accept every customer who comes in, selling to everyone who walks in the door, constantly afraid that a customer’s check will bounce, or that shoplifters will walk off with merchandise. In most cases, these vendors actually campaigned for the business.
So that means that during a time of Illinois’ utter bankruptcy, no secret to anyone, discussed in the business pages of both local and national publications for years, countless businesses continued to send lobbyists to Springfield campaigning for projects using their services, filing bids on both broad-bid and limited-bid opportunities, outright campaigning for more and more opportunities to be on the hook for government money. Despite the full knowledge that this money might be a challenge to collect.
Again and again, contractors and unions would offer to handle this road-repair or road-building job, again and again, teachers’ unions and other public sector unions would negotiate new contracts for more money and more benefits, social justice groups would beg the state (and the towns and townships, cities and counties) for ever more grants, and new departments, and new agencies, to employ ever more people to do things they hadn’t done before.
All this constant agitation for more, even though everyone knew Illinois was bankrupt.
Illinois’ pension crisis, for example, isn’t new; it’s been a subject in the national news since at least the Edgar administration, back in the 1990s. And still people have signed up, new employees have sought jobs as teachers for a bankrupt state, throughout these 20-plus years.
We know it’s cheaper to execute murderers and drug dealers for the capital crimes of which they’ve been convicted than to incarcerate them in expensive prisons for years, then set them free too early so they can commit crimes again, unnecessarily creating more need for police and prosecutors and courts to arrest and try and convict them again and again… but we choose to do so. The police and court stenographers and judges and jail guards knew that too, when they signed up. Our costly prison system’s revolving door has been a well-known condition for many years. And still people sign up to work in it, dependent upon it for the paychecks that fund their lives.
We know that many of our problems are caused by illegal immigration, particularly the Sanctuary City status that the city of Chicago hung on its name as a welcome beacon to invite the world’s indigent illegals to come here and enjoy our nonexistent largesse. The agencies begging for money wouldn’t need to beg for so much if they didn’t advocate for the election of the very politicians who invited all those costly illegal aliens to our city, to fill our free schools, eat up the free lunches, swell the ranks of our city’s drug gangs, fill our hospitals’ emergency wards with their foreign-born illnesses and their locally-acquired gunshot wounds. They didn’t have to invite this crowd to Illinois, in violation of federal law, but they did, and they continue to invite more.
Do we owe a debt of honor to the people who served the state, and accumulated pensions, and agreed to bonds forty years ago, before it was obvious that Illinois was a failed-state-in-the-making? Certainly. But the more recent ones? The more recent creditors knew what they were getting into.
That doesn’t mean we should renege on our obligations, of course. A debt is a debt. But when making decisions about public policy, the environment must be taken into consideration. We must never forget that these companies, these unions, these people, asked for it.
Credit Risk in the Private Sector
It is well worth considering how the concept of credit risk is handled by businesses in the private sector. Each private business has a credit department (or a credit desk in the finance department) which continually measures its accounts receivable, checking to see if milestone payments are being made, if regular customers are falling behind, if perhaps we should hold off shipping to a customer until he gets caught up on his account. Because we in the private sector know it’s an issue, a serious risk that, if unmanaged, could doom our business.
Businesses utilize tools such as the Documentary Letter of Credit (also known as a Commercial LoC) to create escrow funds and utilize the banking industry to ensure that an exporter gets paid on a sale to a foreign importer. Writing up the LoC correctly, and honoring its many commitments to the letter, ensures that the vendor will be paid even if the client is in a distant country whose police would be uninterested in assisting a foreign vendor’s collection efforts. If the business is competent, the high costs of the LoC are built right into the sale price of the goods.
Businesses assess the relative credit risk of prospective and existing clients, and build that risk into their quotes, bids, and contracts. Who pays the list price, who gets a 20% discount, and who gets the 40% discount and the rebate package? Credit risk is built into these decisions. If a customer is known to be slow, he gets a lower discount than he’d get if he paid on time. If he doesn’t meet his commitment, he doesn’t qualify for that three or five or ten percent retroactive volume rebate.
By building such programs into a business’ pricing structure, it can afford it when some customers are late, even chronically late, with their bills. And if it’s all managed well, a business can even survive if some small percentage of customers fail to pay at all.
Our state representatives, ashamed that they have been bad customers, ashamed at falling behind with some of their bills, have apparently so little understanding of the private sector that they are unaware of the fact that their vendors – at least the relatively wise ones – have already built these risks into their pricing.
Why do car dealers charge one interest rate to people with 800 credit scores, a higher rate to buyers at 600, a still higher rate to buyers at 400? It’s the knowledge that some will fall behind, some may even stop paying entirely. Our state’s vendors have all bought cars too; they know how to grate their clients and build precautions into their pricing.
Landlords who rent to government offices, construction companies who fix our roads and sewers, vendors who sell the state office supplies – these private sector companies have all built the risk of Illinois’ slow payment into their pricing.
We pay more for road construction in Illinois than they do in Wisconsin and Indiana because the contractors know that we may be late, so, without saying it, they built in the late-payment fees and interest up front.
Our vendors knew what they were getting into, or at least, they sure should have.
And the politicians beating themselves up about late payment to these vendors don’t even realize it.
The Pyrrhic Victory
After two years of budgetary standstill in Springfield, the Democrats proposed a massive tax increase – in fact, not just one, but a bundle of them, but the foundation was this one-third increase in both the corporate and personal income tax rates.
They included no workmen’s comp reforms, no pension reforms, no reforms of the salary-and-benefits packages offered to new public employees. They didn’t do anything to reduce the regulatory burden on the businesses on which we all depend for employment. They just passed a huge tax hike.
And the only thing that changed was that, for ten gullible Republican assemblymen, riddled with largely-undeserved guilt, two years of sticking to principle was too much, and they caved.
With those few additional Republican votes (just a fifth of the Republican caucus), the Democrats were able to override the Governor’s veto, and the tax hikes went into effect.
What does this mean to the state? It will bring in more revenue from many of those who remain. The businesses that don’t flee will pay a higher percentage of their income to the state, and the employees who keep our jobs will pay a higher percentage of what we earn… Michael Madigan and his minions will be happy, for a while.
But if we were already losing 95,000 people and businesses per year before this tax hike, what will happen to that number afterward? Have we already bled everyone who might flee, or were there many who weren’t quite driven off before, but a one-third increase in income taxes might finally serve as the 100-pound weight that breaks the camel’s back?
As people and employers continue to flee Illinois, Arthur Laffer’s famous “Laffer Curve” will be proven right, once again: when the tax burden is already too high, tax rate increases end up producing negative revenue, not revenue growth, because they depress economic activity; they drive people and businesses away.
The only growth we’ll see as a result of this tax hike is in the moving business, as people and companies rush to more welcoming shores.
Mike Madigan may be proud of his political victory, but it came at a cost that none of us can afford.
Copyright 2017 John F. Di Leo
John F. Di Leo is a Chicagoland-based writer, actor, Customs broker and international trade trainer; among the classes he teaches to corporate audiences are the proper and cautious use of tools like Commercial Letters of Credit. Unlike the denizens of Springfield’s majorities, he lives in the real world.
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