Report Highlights Changes to Medical Provider Taxes Could Have Substantial Impact on Medicaid Funding

Executive Summary

Current Condition and Future Concerns for Growth in Illinois’ State Revenue

IGPA’s Fiscal Futures project produces annual reports analyzing Illinois’s fiscal condition and long-term trends to inform policy decisions. This report examines FY2025 revenue trends with three main findings: (1) Re-categorization of individual and corporate income tax revenues has complicated data interpretation; (2) Evidence suggests long-term decline in state sales tax revenue, though COVID-era volatility obscures clear trends; and (3) Federal policy changes will significantly decrease health-care-related funding, posing serious longer-term challenges.

FY2025 Revenue Performance

Since 1998, total nominal (i.e. not adjusted for inflation) revenue has grown at almost five percent per year. As in past years, the largest categories of Illinois revenues continue to be the individual income tax, federal revenues for Medicaid, and the sales tax. Table 1 below presents major revenue categories for Illinois in FY2024 and FY2025, showing both absolute levels and compound annual growth rates (CAGRs) since 1998. Total revenues reached $93.5 billion in FY2025, up from $91.1 billion in FY2024. However, the one-year growth rate significantly lagged the long-term trend across most categories.

Table 1: Selected Illinois Revenue Sources, FY2024-FY2025

Income Tax Complexity

Corporate income tax showed apparent negative growth (-7.83%) while individual income tax grew rapidly (7.45%), but these figures require careful interpretation. Illinois established a pass-through entity tax allowing business owners to claim federal deductions for state tax payments made through business entities, resulting in substantial re-categorization from corporate to individual income tax. Without this technical adjustment, corporate income tax would have remained flat and individual income tax growth would have been 5.3%—nearly matching the long-term average. Additional factors affecting corporate income tax include corrections to over-disbursements in personal property replacement tax revenues and relaxed net operating loss deduction restrictions, reducing collections by approximately $526 million.

Sales Tax Concerns?

Sales tax revenue growth (1.67% in FY2025) has consistently lagged other major revenue sources and declined below even its modest long-term growth rate of 3.34%. While the 2021 spike in sales tax collections reflected temporary pandemic-related factors—including substantial federal aid, shifts from service to goods consumption, and rapid inflation—subsequent years show concerning patterns. Analysis using inflation-adjusted figures and five-year moving averages reveals persistently below-normal growth rates. This slowdown may represent a temporary correction following 2021’s surge, particularly for durable goods purchases. However, it could instead signal a longer-term structural decline in this critical revenue source, warranting close monitoring and potential policy responses.

Federal Policy Threat: Medical Provider Taxes

The most significant long-term fiscal threat comes from the “One Big Beautiful Bill” (OBBB; H.R. 1), which fundamentally alters federal rules governing medical provider taxes. These taxes generated $4.7 billion for Illinois in FY2025 and have grown 8.3% annually since 1998. Assessments on hospitals and managed care organizations (MCOs) comprise over 75% of all provider tax revenues.

H.R. 1 reduces the “safe harbor” cap on provider tax rates from 6% to 3.5% over five years beginning in FY2028. To this end, Illinois faces acute vulnerability; research indicates Illinois is the only state with both hospital and MCO tax rates above the new 3.5% threshold.

Table 2 presents baseline revenue loss projections assuming no growth in net patient revenues. Under this scenario, hospital and MCO assessment revenues would decline by $239 million in state FY2028 relative to pre-OBBB levels, with increasingly severe impacts as the safe harbor cap decreases through FY2032. When accounting for lost federal matching funds (assuming a 62% FMAP), the total revenue impact reaches $629 million in FY2028 alone.

Table 2: Projected State Revenue Losses from OBBB’s Caps on Provider Tax Rates

Policy Implications for Illinois

Federal legislation (OBBB) will significantly reduce Illinois revenues through changes to medical provider tax provisions. The total baseline revenue impact in FY 2028 is estimated at $629 million, combining lost state provider tax revenues ($239 million) and corresponding federal Medicaid matching funds (assuming 62% FMAP). Because Illinois uses hospital provider taxes to finance directed payments to providers, these revenue losses will create pressure to either curtail such payments or identify alternative funding sources. From this view, the OBBB’s numerous Medicaid and health policy changes affecting multiple stakeholders require state policymakers to remain vigilant and develop appropriate policy responses.

Conclusion

Illinois total state revenues grew during FY 2025 at roughly half their long-term average rate. While this slowdown could threaten the state’s fiscal condition if sustained, it is premature to conclude this represents an established downward trend. The deceleration in federal revenues and sales tax revenue appears consistent with expected normalization following COVID-era surges, and aggregate income tax sources are performing as anticipated despite distortions from federal tax policy changes. The primary long-term concern centers on federal Medicaid financing changes affecting provider tax revenues, with projected losses of hundreds of millions over five years. However, limited detailed data and implementation uncertainty constrain this analysis, underscoring the need for state government to undertake comprehensive, transparent research.