– June 15, 2018 Reading Time: 3 minutes
Chicago’s poor economic performance is prompting lawmakers to discuss its secession from Illinois. (AamerJaved)

Taking a page out of secessionist movements, State Representative Reggie Phillips (R-Charleston) has introduced a bill to remove Chicago from Illinois and turn it into “the 51st state of the United States of America.” The Windy City holds irreconcilable policy differences with Illinois, the lawmaker says, yet frequently asks the state government for more funding.

However, Chicago—the most populous city in the state with 2.7 million residents—is neither the sole nor the main problem of the state, and more realistic measures remain on the table.

Without a doubt, Illinois is in a dire situation: it has lost some 275,000 residents over the last 12 years, and its government has been adding an annual average of $10 billion to the public debt since 2008. In the latest 2018 Rich States, Poor States ranking, which measures the economic outlook of US states, Illinois dropped four spots to 48th place. In addition to burdensome corporate taxes, the ineffective legal system is taking a toll on Illinois’s competitiveness. 

Truth in Accounting, a transparency watchdog, shows in its Financial State of the Cities study that Chicago’s debt burden up to 2016 was $40.5 billion. As concerning as that may sound, it is less than one-fifth of the state’s $216.1 billion debt. Moreover, the report found that Chicago’s debt is inflated mainly by unfunded pensions and retiree health-care benefits, which are mandated by the state government anyway.

Instead, Illinois could work together with local governments to spur reforms that reduce public spending and make the state as a whole more attractive for businesses and people.

In January 2018, the Illinois Policy Institute—a free-market think tank—released a report identifying structural problems and recommending budget solutions that don’t raise taxes. The plan targets job creation and improved living standards by reducing the scope of state and local governments, increasing accountability, and redesigning the pension system and other welfare programs.

Inefficiency is at the core of Illinois’s problems, the report notes. The state has 6,963 local-government units at the municipal, town, and county levels, and they are the most inefficient among the US states with large populations. Each of them serves an average of just 1,843 residents.

In some areas, dozens of local governments overlap, which makes administration and accounting difficult. Consolidating and reducing local governments would be an important step toward reducing expenditures.

Illinois must also address two other factors fueling inefficiencies.

First, the state spends more than $3.5 billion annually on subsidies to local governments. According to the report, this grants state officials political control over these units and incentivizes excessive, irresponsible spending from local officials, who spend all they can of what seems like other people’s money.

Second, the state imposes on local governments rules for prevailing-wage and worker compensation, as well as for collective bargaining and pension systems. Giving back local officials power over their own budgets and policies is paramount.

Chicago’s reliance on the state government illustrates the perverse financial and political constraints at play. Since local authorities must abide with state-government mandates, they feel entitled to demand more funding and subsidies to fulfill their liabilities, instead of cutting them or discussing policy initiatives.

Unfortunately, fiscal reforms are not yet in the sight. Instead of streamlining bureaucracy and governance, Illinois keeps afloat three insolvent pension systems and is still seeking to expand government programs.

Governor Bruce Rauner (R) should remember his campaign promises of austerity, spending reduction, and tax cuts. Over the next year, Illinois will spend $38.5 billion and borrow $11.5 billion, while leaving tax rates untouched, which are a significant strain on firms and homeowners. For example, car dealer Mike McGrath recently told the Chicago City Wire that the business climate in Illinois is only getting worse, and his biggest concern is the mounting taxes on commerce, which ultimately harm consumers. He urged legislators to avoid an exodus similar to what he has seen in other high-tax states such as California.

If Illinois doesn’t downsize its bloated government and deficit, the financial troubles will persist even if it divorces from Chicago. Encouraging innovation and entrepreneurship can help the state in both attracting new residents and increasing fiscal revenues. Free-market advocate Tom Palmer shows in his book The Morality of Capitalism that this is only possible when there is a “constancy of the rule of law and security of rights.” Expelling Chicago will create unimaginable legal chaos, so it should remain a measure of last resort.

Daniel Duarte contributed to this article.

Paz Gómez

Get notified of new articles from Paz Gómez and AIER.