On the verge of fiscal implosion for years, Illinois' latest solution of a $5 billion tax is driving residents—and their businesses—toward tax friendly states.

On Sunday, the Illinois House of Representatives considered legislation that would increase tax revenue by $5 billion adding tax rate increases on personal and corporate income taxes and adds services taxes on previously untaxed service industries, among other reforms. Lawmakers passed the measure; however, Rauner has vowed to veto the bill coming from the General Assembly because it would raise taxes drastically—a 32 percent tax increase was attached to this bill.

Illinois is ranked as the most tax-burdened state in the union, according to a WalletHub analysis, with an average combined tax rate--state income tax, local property taxes, other taxes--of 14.76 percent.

Because of the already high tax burden, several Illinoisians wish to leave the state for relief, according to a survey by the Paul Simon Public Policy Institute in October 2016. In fact, that survey reports that 47 percent of respondents wish to leave the state.

Migration out of the state isn't just reserved for the citizens as several companies are shuttering operations or are moving out of state to more business friendly environments.

Taxes would increase for individuals and corporations who wish to remain to shore up the loss of revenue. Simply put, the debt of the state government will drag the state's economic health down with it as corporate, sales, and personal tax obligations continue to increase.


Cash-Strapped Governments Turn Toward Taxes

We have seen cash-strapped governments turn toward taxes many times before. The concept happens before our very eyes. And the Illinois budget crisis is the most salient real-world example of public debt run amok.

For several years now, the state has gone without a budget deal to responsibly fund functions of the state government. Because of a very bad case of partisan gridlock among Republican Gov. Bruce Rauner and the Democrat-controlled state legislature, fiscal policy has been a point of contention.

The reason for the state of Illinois going three years without a balanced budget varies to whom you ask; however, one of the main issues--and quite possibly the most costly--is the state's growing unfunded pension commitment.

According to the Illinois Policy Institute, the pension crisis in the state has contributed to the financial climate the state is in with the added potential for the continual increase of taxes, across the board. One estimation suggested that the overall cost to0 pay down the pension crisis--apart from the other major financial commitments the state has--is estimated to be $56,000 per household, per year.

Consider these facts with that projection:

  • The combined total cost of unfunded pensions for public retirement funds maintained by local and state governments exceeds $267 billion.
  • The average household income for Illinois is $59,588 for 2015.
  • The average combined tax rate is 14.76 percent, according to the WalletHub analysis.


A Funding Black Hole

The pensions only serve as only one part of the budgetary crisis. Years of overspending and exhausting credit lines has resulted in a funding black hole, so to speak. With a major poverty crisis, the state government manages a portfolio of very generous social welfare and public assistance programs that drive costs higher, as well.

Not to mention, the regulatory regime within the state makes it one of the worst in the country for being "small-business friendly" and accessible for individuals to enter into business for themselves.

So, naturally, the cost to run all of these government programs, a sprawling bureaucracy, a nifty paycheck for lawmakers--among other commitments--adds up. What is the solution for a government to replenish its coffers with fresh revenue? Raise taxes on the citizens and spread the costs among the populace.


'What Not To Expect'

The proposal serves as the Democrat's budget proposal despite Rauner's, and other Republicans, wish to balance the budget without increasing taxes. Ultimately, the wish of the governor's administration was to advocate for and ensure the passage of a budget proposal that has several cuts in select areas of the state government's operations.

To make matters worst, the state legislature failed to reach a budget agreement before the new fiscal year began on July 1st. Such a failure marked three years without a budget.

Regardless, the sentiments held on both sides of the aisle could stall the budget once more or a gubernatorial veto will be levied. All that can be said is to write off the budget crisis in Illinois as a "what not to expect" if a state government is fiscally responsible.

No wonder residents are eyeing tax friendly states.