Author Archives: Ben VanMetre

About Ben VanMetre

Ben VanMetre is an MA Fellow at the Mercatus Center at George Mason University. Before joining Mercatus, Ben earned his Bachelor of Arts degree from Beloit College where he double majored in Economics and Management and Psychology. His research interests include international and state-based development issues, entrepreneurship, institutional arrangements, and economic freedom. His work has appeared in Forbes, Economic Affairs, the Cato Journal, the Journal of Business and Economic Perspectives, the Journal of the James Madison Institute, the Free Market Foundation, and the second volume of the Wealth and Wellbeing of Nations.

Illinois’ Bad Habit Continues: More Targeted Tax Incentives

Illinois’ Community Development Commission is scheduled to meet today to discuss bringing the JMC Steel Group Inc to Chicago by means of tax incentives. The CDC’s plan includes providing the company with $1.1 million in tax-increment financing.

Providing targeted tax incentives is one of Illinois habitually-employed development policies.  However, the recent hike in the corporate income tax rate coupled with the nearing expiration of some of these tax incentives has caused many companies to consider leaving the state.

In 1989 Sears threatened to leave Illinois but was convinced to stay after receiving $178 million in state and local subsidies. Not surprisingly, Sears’ threat to leave surfaced again earlier this year and Illinois’ solution was to offer more tax incentives to get the company to stay.

Other companies that have threatened to leave Illinois this year include, among others, First Navistar International, Motorola Mobility, and CME Group.  Although the plans to convince CME Group to stay are still in the making, $100 million in financial incentives seemed to be enough to keep Motorola around for a while longer.

Not only should Illinois stop focusing on providing targeted tax incentives to get companies to move to the state but it also needs to stop providing additional tax incentives every time a company threatens to leave Illinois. This is a dangerous habit considering tax breaks are set to expire for a 107 companies in Illinois over the next three years.

If Illinois continues to turn to its portfolio of targeted tax incentive programs as a means of achieving development then it will further deteriorate the state’s ability to foster business activity.

 

 

In Less Than One Month the USPS will Face Financial Insolvency

According to a report that the GAO released yesterday, “By the end of this fiscal year—in less than one month—the U.S. Postal Service (USPS) projects that it will incur a $9 billion loss; reach its $15 billion borrowing limit; not make its $5.5 billion retiree health benefits payment; and thus, become insolvent.”

The GAO report examines a series of structural policy recommendations, focusing largely on making changes to pension benefits for new employees, employee health benefits, collective bargaining agreements, and retail services.

However, other ideas for reform that have become more popular in the media, such as getting rid of Saturday delivery, are often marginal in nature and fail to address the underlying structural issues that the USPS faces. It is unlikely that a few minor tweaks to the largest federal civilian employer will significantly improve its current financial crisis.

One key factor contributing to the inefficient performance of the USPS is simply that it is an outdated organization. As Maurice McTigue argues, the USPS is “trying to run a 1920s business in a 21st Century economy….The current system is poorly configured with archaic facilities in the wrong places.”

Joshua Hall and I further argue that the main concern with the USPS is that it is a quasi-monopoly. The Federal government has implemented barriers to postal delivery that directly prevent people from reaping the benefits of competition. Removing these barriers and letting markets work would allow competitive forces to eliminate inefficiencies and determine better ways of operating.

Therefore, with the USPS nearing financial insolvency, it seems that there are three possible paths for its future: 1) making minor tweaks that will result in little (if any) improvement, 2) making structural reforms to the current system, or 3) letting the market process work via privatization of postal delivery.

Illinois’ Fiscal Breaking Points

In a forthcoming paper with Eileen Norcross,“Illinois’ Fiscal Breaking Points,” we un-pack the current crisis in Illinois.

Our review of Illinois’ fiscal and economic indicators shows in addition to a $7.7 billion deficit in the state’s General Fund, Illinois faces $173 billion in unfunded pension liabilities as well as $70 billion in outstanding bonded debt.

To make matters worse the policies currently in place to keep state spending in check are loophole-ridden.  For example, the state has a balanced budget requirement but Section 25 of the State Finance Act allows the legislature to defer Medicaid claims and other payments into the next fiscal year in order to balance the budget.  This budgetary loophole has resulted in over $20 billion in deferred payments since FY 2000. The loophole is slowly being phased out as a budget balancing maneuver.

The recently enacted spending cap limits government spending to 2 percent of year-to-year growth in General Expenditures through FY 2017 and thus for the first time in Illinois’ history places limits on state spending.  However, as research by Mitchell (2010) shows, a TEL that limits budget growth to the sum of inflation plus population growth would be a much better option for the state.

Ultimately, Illinoisans have recognized that their state’s fiscal irresponsibility has resulted in a poor institutional environment and they are voting with their feet by leaving the state. Illinois lost a net of 1,227,347 residents from 1991 to 2009, the city of Chicago has fewer residents than it did in 1920, and the state consistently remains below average in its number of entrepreneurs.

In our paper Eileen and I argue that if the state of Illinois wishes to reverse this resident and business out-migration then the legislature and the Governor must stop focusing on revenue enhancements through increased taxation and borrowing and instead make serious institutional spending reforms.

Strengthen the state’s spending limit and balanced budget requirement, moving the state’s pension system to a defined contribution plan while also removing the constitutional protections to the current plan, and getting rid of tax incentive programs that target individual industries and/or activities.

Illinois is by no means a failed state. If the state continues to promote its growth enhancing policies, such as its flat rate income tax, while also taking the necessary steps towards institutional reform then Illinois’ future may not be as bleak as it currently seems.