Governor Blagojevich came into office promising to end business as usual.  His first budget seems more geared toward just ending business.

An Econ Lesson for Governor Blagojevich

By Greg Blankenship

When government hikes taxes government tends to receive less revenue than expected, and when government cuts taxes government tends to lose less revenue than opponents of tax cuts contend.  This is because changes in tax policy influence the way economic actors behave.  It’s simple — really — if you want less of something tax it, if you want more,  don’t.

This simple generalization is important to know to if you are going to successfully govern a large state.

One person apparently oblivious to this is Illinois Governor Rod Blagojevich.  Governor Blagojevich’s FY 2004 Budget imposed some $1 billion in business fee and tax hikes.  But just as the general rule defined above says, it is unlikely Illinois will generate that kind of revenue as businesses and individuals seek to avoid the new taxes.  As a result Illinois can expect to see less business economic activity.  In fact, we already see this developing in one of the more controversial industries — the state’s riverboat casinos.

Businesses are tax collectors, not tax payers.  When confronted with tax hikes business managers will pass along the costs to customers in myriad ways.  They might raise prices on their products and services, or cut out discounts and no longer offer perks to patrons.  Others may cut back efforts to produce products and services because it is plainly evident that it is no longer worth effort to go the extra mile only to hand over the returns to the tax collector.

Illinois casinos pay taxes based on adjusted gross receipts, license fees and an admissions tax.  After tax hikes last year, Illinois anticipated riverboat casinos would contribute an additional $130 million in revenue. Instead only $114.7 million made it into Illinois coffers .  In this year’s budget, the Governor hiked taxes by $200 million with a top rate of 70 percent on the largest riverboat casinos.   Last year to adjust to the new 50 percent tax rate the riverboats began cutting corners, thus making casinos less fun . As a result, casino attendance began to drop off .

In response to all these tax hikes, casinos have increased admission fees, implemented parking fees, increased prices of food and drinks in an effort to adjust to the new tax environment. Here, the casinos have opted to pass the burden of new tax increases on to customers. This has resulted in customers fleeing to competing Indiana casinos where fees and costs are lower.

The situation has become so acute that the state Economic and Fiscal Commission has noted, "That a disturbing trend may be developing in the riverboat industry…" The Commission is expected to release a report on state gaming this month.   If attendance continues to spiral downward, then riverboat revenue will fall significantly short of the projected $200 million by Governor Blagojevich, according to the Commission.

Another strategy is to simply not work as much.  Riverboat casinos have asked the state gaming board to allow riverboat casinos to reduce their hours to save money.  According to newspaper reports, at least 4 riverboat casinos have laid off 200 or more workers.  Moreover, the casinos are canceling construction projects that have resulted in the evaporation of potentially 29,000 new construction jobs.

Whether you are a proponent or opponent of the casinos, riverboat casinos continue to prove themselves to be a great example of how businesses avoid earning that extra dollar if doing so results in being taxed at a confiscatory rate. It also demonstrates the folly of leaders who don’t understand basic economics.

The Governor charges that the casino industry’s actions are "cynical" attempts in tax avoidance.   The casinos claim they are reducing costs to pay increased taxes.  Economists would agree that the casinos  are the ones acting rationally here, not our Governor.

Leaving aside the fact that any business has a moral and legal responsibility to its shareholders to maximize profits and reduce costs, there will be numerous other industries working to avoid the new business and tax fees as well.

One example is the transportation industry. It is being socked with a $1.50 hike in tire disposal fees to $2.50 and new taxes on rolling stock that means businesses that purchase fleet vehicles are now forced to pay sales taxes on new vehicles.  Will the Governor label them cynical for holding off on new purchases of vehicles and tires? Will auto makers be labeled as cynical for laying off autoworkers who build the vehicles that won’t be purchased thanks to the Governor’s budget? 

The Governor came into office promising to end business as usual.  His first budget seems more geared toward just ending business. Let’s hope that he learns this important but simple lesson.

Greg Blankenship is Founder and Director of the Springfield-based Illinois Policy Institute (www.illinoispolicyinstitute.org).

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