Higher Income Tax in Illinois?

Pat Quinn, the governor of Illinois, is looking to jack up the state’s income tax by 50 percent.

The Chicago Tribune reported today:

Gov. Pat Quinn is considering raising the Illinois income tax by 50 percent in a politically risky bid to address one of the biggest budget dilemmas in state history, sources said Thursday. An increase to 4.5 percent from the current 3 percent tax rate on individuals would include a corresponding hike in the corporate income tax on businesses, according to sources familiar with the new governor's preparations for his first budget address Wednesday.


(Other politicians are looking to jack up the state’s gas tax – another bad idea.)

What would be the result of increasing the income tax? Well, one of the few competitive advantages that Illinois now possesses – a relatively low personal income tax rate – would be wiped out.

The state’s current ranking on SBE Council’s “Small Business Survival Index,” which ranks the states according to their public policy climates for small business and entrepreneurship, is 24th among the 50 states and District of Columbia. An income tax increase would push Illinois down among the least competitive states.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Excuse Me, Can I Return This Bailout?

With government funds come government controls and meddling … and of course, costs.

This political/economic reality apparently was forgotten by various businesses that recently sought and received bailouts courtesy of U.S. taxpayers.

Everyone should read a front-page story in the March 11 New York Times. It serves as another reminder of the many costs that come with government sticking its nose deep into the private marketplace.

The article is titled “Some Banks, Feeling Chained, Want to Return Bailout Money,” and a few points are worth citing here:

• “Financial institutions that are getting government bailout funds have been told to put off evictions and modify mortgages for distressed homeowners. They must let shareholders vote on executive pay packages. They must slash dividends, cancel employee training and morale-building exercises, and withdraw job offers to foreign citizens.”

• “Some bankers say the conditions have become so onerous that they want to return the bailout money. The list includes small banks like the TCF Financial Corporation of Wayzata, Minn., and Iberia Bank of Lafayette, La., as well as giants like Goldman Sachs and Wells Fargo. They say they plan to return the money as quickly as possible or as soon as regulators set up a process to accept the refunds.”

• “[A] growing chorus of industry experts are warning that asking weak banks to carry out the government’s economic and social policies could increase the drain on the public purse. These experts say that the financial assistance, while helpful in the short run, could force weak banks to engage in lending practices that will lose even more money, and that the government inevitably will become more heavily involved in dictating how banks do business.”

• “Take Fannie Mae and Freddie Mac, the housing-finance companies that the government now controls. In recent months, they have been told to spend billions of dollars buying bundles of mortgages for which there are no other buyers, and to let homeowners refinance their loans — even if they have no equity. Such commands are echoes of the 1990s, when Fannie and Freddie tried to balance dueling mandates that required them to make a profit for their shareholders and to serve a public mission of increasing homeownership.”

The industry and businesses, their employees, investors and owners, and the taxpayers – it does not end well for any of them. Understand economics, politics and history, and none of this should surprise you.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

The Card Check War

The war is now intensifying over the Employee Free Choice Act, or card check bill, that would make it far easier to unionize a workplace. It is a war over how businesses and our economy function. Passage would mean a mighty blow to U.S. competitiveness, economic growth and job creation.

The card check bill would allow a workplace to be unionized if a majority of employees merely check and sign a card that they want to be unionized. No secret ballot election would be needed. Workers would lose the fundamental right to cast a private vote, and labor unions would be emboldened to strong-arm individuals for signatures.

In addition, once unionized, if a contract agreement is not reached within a certain period of time, then government appointees would impose compensation and work policies on businesses.

This is a pro-big-labor, pro-big-government, anti-worker, anti-small business bill.

What’s the outlook? Given the declared support of President Obama and Democratic congressional leaders, along with the enormous influence big labor has within Democratic Party politics, is this a done deal?

Thankfully, the answer is no. But entrepreneurs and their employees need to make clear their opposition to this anti-worker, anti-jobs, anti-small business measure.

An article in the Wall Street Journal on March 10 noted that perhaps as many as six U.S. senators who formerly supported the card check bill might be wavering, highlighting by name Senators Blanche Lincoln (D-AR), Mark Pryor (D-AR), Mary Landrieu (D-LA), and Arlen Specter (R-PA).

Of course, though, big labor is exerting big pressure. A March 11 Wall Street Journal editorial noted how labor leaders are pushing to silence lobbying efforts against their agenda by firms receiving taxpayer dollars. But, of course, it’s okay for unions to receive taxpayer dollars and continue lobbying. The Journal sums things up nicely:

Labor chiefs are desperate to pass their easy-organizing agenda this year, because they know liberal majorities on Capitol Hill won't last. They also know they haven't been able to organize workers with a level playing field, so they want to rewrite the rules so their organizers can see which individual workers are voting no and apply peer and other pressure. Most workers can see how unions have contributed to the destruction of Detroit, U.S. steel makers and so many other industries. That's why unions need government-sanctioned coercion to prevail both against business and with workers.

Absolutely on the mark!

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

The Credit Card Crunch?

Meredith Whitney – CEO of Meredith Whitney Advisory Group, LLC – has an important and sobering opinion piece in today’s (March 10) Wall Street Journal.

In “Credit Cards Are the Next Credit Crunch,” Whitney notes, “Currently, there are roughly $5 trillion in credit-card lines outstanding in the U.S., and a little more than $800 billion are currently drawn upon.” She projected six months ago that some $2 trillion in credit card lines would be reeled in by the close of 2010, but now projects that to reach $2.7 trillion.

Whitney discusses various factors in play here, including FICO score issues and home prices.

On the policy front, she observes:

Along with many important and necessary mandates regarding fairness to consumers, impending changes to Unfair and Deceptive Acts or Practices (UDAP) regulations risk the very real unintended consequence of cutting off vast amounts of credit to consumers. Specifically, the new UDAP provisions would restrict repricing of risk, which could in turn restrict the availability of credit. If a lender cannot reprice for changing risk on an unsecured loan, the lender simply will not make the loan. This proposal is set to be effective by mid-2010, but talk now is of accelerating its adoption date. Politicians and regulators need to seriously consider what unintended consequences could occur from the implementation of this proposal in current form. Short of the U.S. government becoming a direct credit-card lender, invariably credit will come out of the system.

How often have we seen so-called good intentions on the part of lawmakers turn into ugly realities for the economy? That will be the case here once again.

Also, keep in mind how important credit cards are to financing startups and small businesses. Another fact to consider the fallout of misguided government interventions in the credit card market.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Private Options on Public Infrastructure

Talking about “infrastructure” is all the rage of late. And of course, the so-called economic stimulus plan passed by Congress and signed into law by President Obama last month doles out big taxpayer dollars for infrastructure projects.

But is there another way to get the job done, then the typical experience of having politicians throw around huge amounts of tax dollars, and hoping that at least some of that money does not get wasted and actually funds something worthwhile in a cost-effective way?

Well, consider a March 9 Wall Street Journal article titled “Highway Upgrade Goes Private.” The piece notes:

Cash-strapped Florida is paying a private contractor to fix up and operate a toll road instead of doing the work itself -- and other states might follow.

In a deal struck last week, a Spanish-led group will be paid as much as $1.8 billion over 35 years to design, build, operate and maintain three new toll lanes along traffic-clogged Interstate 595 near Fort Lauderdale. The agreement came as something of a surprise during a period of turmoil in credit markets, and many experts called it a model for how states and private investors can work together to upgrade the nation's aging roads, bridges and other transportation infrastructure.

"This project is a harbinger of what we may be seeing over the next decade or so, as we don't have enough money for major construction," said Robert Poole, director of transportation studies at the Reason Foundation, a free-market think tank.

The Journal also noted: “Florida's funding issue is a microcosm of a national problem, and U.S. Transportation Secretary Ray LaHood has said the government should support public-private partnerships as one way to solve it.”

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council