Illinois' Fiscal Challenges

April 22, 2021

Illinois' Fiscal Challenges

Where are we now and how do we proceed?

Authors

Illinois’ fiscal challenges have been widely discussed, sometimes under-emphasized and sometimes exaggerated. The authors believe that dealing with the state’s fiscal challenges will require an objective and realistic assessment of the facts and potential paths forward. This analysis is provided in that spirit.

The authors used a comprehensive and consistent data set to quantitatively assess Illinois’ spending, revenue and fiscal gap over more than two decades. They show that Illinois has consistently exhibited a fiscal gap in which spending exceeded revenue. The categories of spending that have grown most rapidly are Medicaid and state pension contributions. Illinois’ sales tax and corporate income tax revenue have grown much more slowly than its spending. Personal income tax revenue has grown more rapidly than spending due to tax rate increases. 

Up to this point, it appears that the COVID-19 pandemic and ensuing economic disruption are less harmful to Illinois’ fiscal position than initially feared. Income tax revenue has held up well, probably due to significant federal fiscal stimulus and the fact that many high-income workers who pay a significant portion of the income tax revenue escaped much of the economic burden of the pandemic. Sales tax revenue has also held up better than initially feared. 

The analysis indicates that there are significant barriers to reductions in any of the largest categories of Illinois spending (Medicaid, pensions and K-12 education). The authors believe that it is not realistic for Illinois to expect significant additional short-term revenue from policy changes designed to raise economic growth because Illinois’ economic growth is closely tied to national and regional economic conditions over which it has little control. They conclude that the most plausible path for Illinois to achieve fiscal balance is for it to control spending growth and to comprehensively reform its revenue structure to incorporate some of the proposals that have been made by various groups in recent years.

 


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Research Area: Fiscal and Economic Policy

Policy Initiative: none

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