By: Mark Glennon*
It’s a claim that has persisted for decades and has become such a part of the received wisdom that Illinois politicians and reporters never question it. It’s that Illinois is a “net-giver” to the federal government, in effect, bailing out other states that are “net-takers.” Illinois, the claim goes, is among a few states that pay more to the federal government in taxes than comes back to the state in federal spending.
It’s a myth, but now it’s being used to justify federal bailout requests for Illinois.
The claim is false primarily because it assumes that poorer Americans are undertaxed and richer ones are overtaxed. That would be a particularly odd assumption to make, especially for progressives who are most aggressively claiming that Illinois has a deficit because they overwhelmingly favor taxing the rich still more progressively than the federal government does, and making Illinois’ state income tax progressive.
In essence, those claiming that Illinois has a deficit with the federal government might as well be saying, “Sure we think it’s right that the rich have paid more taxes, but now we want it back.”
Pick whichever study or year you want on the subject and you will see that the simple fact that the rich pay more in taxes accounts for any supposed deficit of Illinois with the federal government. In fact, if you accept that taxing wealthier people more than poorer ones at the federal level is fair and is the reality – as you should – then you will see that Illinois has a very positive balance of payments with the federal government. (Progressive tax rates at the state level are an entirely different matter, which we will be writing about extensively.)
Moreover, the latest and most commonly cited study of the balance of payments between states and the federal government shows that Illinois is a net taker. That is, even using the false assumption, it’s other states that are bailing out Illinois.
Here are the details.
Many Illinois politicians have, in recent months, rekindled the claim that Illinois is a net-donor state. They include Governor JB Pritzker and Chicago Mayor Lori Lightfoot, who used the claim to defend themselves when President Trump said Illinois and Chicago are poorly run and deserves no bailout. And in response to charges that Illinois is looking for a federal bailout, Comptroller Susanna Mendoza said that was “laughable,” noting that Illinois receives less in federal benefits from Washington than it pays into Illinois.
Reporters and commentators in Illinois have never questioned the claim, and some fully support it. Eric Zorn of the Chicago Tribune recently wrote a full column purporting to explain why Illinois has been bailing out other states for decades, which justifies a federal bailout now for Illinois. A Chicago Magazine column also claimed Illinois was a “donor” state.
The facts plus a little common sense say otherwise.
The most comprehensive and commonly cited study on the balance of payments between the federal government and states is done annually by the Rockefeller Institute in New York. Its most recent one is here.
For starters, things have changed. That study concludes for the first time in many years that Illinois is a net taker. Below are the numbers from the study for Illinois, showing it with a small surplus, and the eight states supposedly have a deficit – all based on the faulty assumption that we will get to.
However, it’s true that Illinois, using only Rockefeller’s and similar methodology, has run a deficit for years earlier. The Rockefeller Institute calculated the four-year average deficit for Illinois to be $5.6 billion. An earlier study by The Tax Foundation found deficits going back to 1981.
And a different current study by the New York Comptroller purports to show that Illinois is still a net donor to the federal government — $11.4 billion in 2018.
But there’s a glaring problem with all those numbers, whichever ones you choose to believe: They are entirely meaningless given widespread acceptance of progressive federal tax rates. Because the rich pay higher rates, richer states pay far more to the federal government than poorer states. That’s primarily why richer states have consistently been those with supposed deficits with the federal government. New York, New Jersey, Massachusetts, Connecticut, California and Illinois have the highest average supposed four-year average deficits, according to the Rockefeller Foundation.
And in the case of Illinois, progressive rates account for the overwhelming share of the balance of payments calculation, which more than cancels out any alleged deficit.
To see how much difference progressive tax rates make, take a look at the IRS data on 2019 total tax collections. They show that Illinois paid in a total of about $162 billion, but it’s proportionate share based on population would be only $137 billion — a $25 billion difference. That’s the additional price that Illinois pays to the federal government for being richer than most of America. Take that out and you would more than wipe out, by far, even the largest estimate of Illinois’ supposed deficit, discussed above.
Or you could look at income tax receipts alone and come to much the same conclusion. The New York Comptroller study shows Illinoisans paying $73 billion in federal income taxes net of refunds. That would be only $65 billion based on population, an $8 billion difference. That is more than enough to wipe out the supposed annual $5.6 billion reported by the Rockefeller Foundation.
The point is that the studies presuppose that it’s unfair to tax the rich at higher rates, which makes the balance of payments unfair for wealthy states. The assumption, instead, should reflect the reality that we as a nation have decided that taxing higher earners is fair and just, whether you like that or not. It’s therefore entirely appropriate also to assume that those progressive rates should be recognized as a given when calculating whether the balance of payments between states and the federal government is fair.
If you do that and adjust the studies accordingly, any supposed deficit for Illinois disappears.
There are further reasons for questioning studies that show a deficit for Illinois.
First, much of the supposed surplus states have many retirees, particularly Florida, and big Social Security payments help make them appear to be in surplus. But that shouldn’t mean that Florida is being treated too well by the federal government compared to states with supposed deficits.
A recent Wall Street Journal column challenged even the notion that New York is a deficit state, New York, being routinely shown by the studies to have the biggest deficit, but it applies to Illinois as well. The studies treat all federal spending the same. But as the Journal article said,
It isn’t so simple. A food stamp isn’t the same as a serviceman’s paycheck. The former can reasonably be characterized as a federal subsidy—“a gift” in Mr. Cuomo’s parlance—while the latter cannot. The Rockefeller report treats both as gifts, distorting who gets what.
The Journal article goes on to point out that The Rockefeller report also leaves out the federal subsidization of municipal debt issuance, which benefits Illinois immensely:
High-tax, high-debt blue states dominate this market. The four biggest—California, New York, Illinois and New Jersey—issued almost $91 billion in tax-exempt munis in 2018, about a third of all issuance, collecting nearly $24 billion in federal subsidies. These states reap the benefits while exporting the costs to entrepreneurs, who have to pay more for scarcer capital. Rather than conducting diligence on a small business looking for capital, wealthy households have been absorbing municipal issuance. They own most of it.
But it’s that point about rich states paying more in taxes that is most important. You cannot claim that Illinois has an unfair balance of payments deficit with the federal government if you also believe that progressive federal tax rates are fair.
*Mark Glennon is founder of Wirepoints.