Solutions to state's fiscal trouble will require difficult decisions
The current recession has affected every state in the union, but particularly those states with pre-existing budget problems. Worldwide economic difficulties have exposed a budget crisis in Illinois that has its roots in past decades, specifically in the continual decision to use short-term strategies to deal with a long-term structural deficit.
The growth rate of spending in Illinois surpasses the growth rate of state revenue. This consistent phenomenon, known as the structural deficit, is due to several diminishable factors. The economy has shifted from goods-based to service-based and the sales tax has not evolved with this trend. Moreover, corporate and income taxes have eroded, while there is a general reticence to update the tax code or increase tax burdens. The state has simultaneously been strapped with increased spending. Greater health care outlays and deferred pension payments are chief among the demands sapping state funds. Spending areas in greatest need of reform include: Medicaid, pensions and retiree health care, human services, K-12 education, and public safety.
These factors have led to an estimated general funds deficit of $11.6 billion in 2010. The recent budget, however, makes no long-term changes to address this growing structural deficit, instead borrowing $3.5 billion, using $1.8 billion in stimulus money and deferring one-third of spending cuts till later in the year. Solutions have been proposed. Shortly after taking office in 2009, Governor Quinn proposed increasing the personal income tax rate from 3 percent to 4.5 percent, with some corresponding increases in personal exemptions to help lower income taxpayers. Others have proposed expanding the sales tax to include services, making spending cuts in a broad range of programs, or implementing some combination of these solutions.
IGPA has developed a budget forecasting tool that might help answer the state’s financial questions. The Fiscal Futures Project uses past data to anticipate spending demands, revenue, and fiscal balances for years to come. Without long-term changes, this model projects a bleak financial future for Illinois with the structural deficit ballooning to $29 billion by 2030.
The model shows that the proposed tax policy reforms mentioned here would have a minimal effect on the growth rate of state revenue, meaning the structural deficit will persist. Major cuts in spending coupled with increases in revenue appear to be the twin solutions required to remedy Illinois’ budget problem. Illinois cannot continue to escape using short-term, quick fixes—it must start making tough choices.
The Institute of Government and Public Affairs at the University of Illinois
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