No Way Out

One of my favorite movies of the 1980's was the Kevin Costner and Gene Hackman film, "No Way Out" (1987).

A similar title could be given to the plight of Illinois in dealing with its public pension plan crisis.

I have written several times about the challenges facing Illinois regarding its massive underfunded public pension plan liabilities. The sad truth is that the State of Illinois has literally put itself in a situation where there is "no way out".

This is what I wrote in February about the position Illinois finds itself in where it recently passed a $5 billion tax increase but is already on track to run a $1.3 billion deficit for the current fiscal year.

The budget problems in Illinois are most directly tied to those pension benefits for public sector employees. The result is that most everything else that most people want their state to prioritize (K-12 education, higher education, public safety, roads, human services) is getting crowded out.

All of this is resulting in more and more people leaving the state. Just short of 115,000 Illinois residents left the state in the last year. Since 2010, the net population loss in Illinois has been 650,000 according to the Illinois Policy Institute. Illinois is now estimated to have fallen behind Pennsylvania in total population--- dropping from 5th to 6th.

Of course, all of this just will make the budget problems of Illinois worse. With people leaving the state, so goes their money. This means fewer taxpayers are left to pay the bills. Tax increases will inevitably push more people out of the state and the vicious economic cycle continues.

Since the state of Illinois has "no way out" three economists from the Federal Reserve Bank of Chicago have apparently concluded that the best way to solve the migration issue and pay off the pension debt is to levy an additional tax levy on residential property in the state for the next 30 years.

The economists, Thomas Haasl, Rick Mattoon and Thomas Walstrum, propose that a 1% additional property tax be levied on residential real estate. For example, a $250,000 house would bear $2,500 in additional taxes and a $500,000 house would see their tax bill increase by $5,000 per year.

This would be in addition to the property taxes in Illinois that are already the highest in the nation.

Bear in mind, these are median tax rates. That means that half are higher and half lower than this rate. This article on the proposal indicates that in south Cook County property taxes on homes already average over 5% of value.  Most of these homes are owned by working class African Americans.

From an economist's perspective, this might be an "artful" proposal.  After all, human capital can flee the state easily and move to another locale with lower taxes. The same is not true for real property.

However, the result of such a proposal would be to effectively lower the value of every residential property in Illinois. Due to the additional costs to own the home a new buyer will naturally discount the current price they are willing to pay. Thus, a $500,000 house might only sell for $425,000 after the tax increase as purchasers calculate that they are on the hook for $150,000 in additional taxes on the house over the next 30 years ($5,000 x 30 years).

Every residential real estate owner in the state of Illinois would see their home equity reduced by this provision. Many might find themselves underwater and quickly discover that they also have "no way out" of the state. Their property will become an anchor around their necks.

Those lower house prices are all part of what the economists see as beneficial from their perspective.

“New taxes wouldn’t affect people thinking of moving to Illinois. While they would have to pay higher property taxes, that would be offset by not having to pay as much for their new homes. In addition, current homeowners would not be able to avoid the new tax by selling their homes and moving because home prices should reflect the new tax burden quickly.”

This proposal may be an economist's dream.

It may be the best of a bad array of choices to raise revenue.

However, this proposal makes it clear once again.

For Illinois...

There is "No Way Out".