Governor's forecasters: Even with spending cuts, taxes must be raised to balance budget

SPRINGFIELD - A new report from the Governor's Office of Management and Budget suggests the state will have to raise taxes on individuals or businesses or both to offset years of multibillion-dollar deficits, even if the spending cuts Gov. J.B. Pritzker has directed are made.

According to the report, one of the options being considered is some form of tax increase or elimination of corporate and business tax "loopholes."

"As the cuts that would be required to bring Illinois' budget to balance would harm education and human services programs and damage essential areas of the state's economy, the governor continues to believe that cuts alone cannot be the solution, and revenue adjustments need to be considered as well," the report states.

The credit rating agency Moody's has said raising the state's flat tax rate by 0.7 percentage point, to 5.65%, would generate nearly same amount as the graduated tax that Pritzker proposed and voters rejected this month. But Pritzker so far has expressed reluctance to consider an across-the-board tax hike.

"There's a lot on the table," Pritzker said during his daily COVID-19 briefing Monday in Chicago. "We've got to look at cuts first, and we're all looking at that. I think those cuts will be somewhat painful, and then we'll consider all the other options about what we need to do in order to get to balance for FY21 and moving forward."

The report notes that Pritzker remains hopeful that the federal government will provide another round of economic stimulus to help troubled state and local governments offset the revenues they have lost during the pandemic. But it also acknowledges that federal aid will not solve Illinois' ongoing budget problems.

The agency's report says the state would face a budget deficit of $3.9 billion in the current fiscal year and continuing deficits of $4 billion or more in each of the next five fiscal years without significant cuts or revenue increases.

It also projects that the state's backlog of unpaid bills could grow to as much as $33 billion by fiscal year 2026, up from the current backlog total of about $7.8 billion, if lawmakers do not make structural changes.

The report, released late Friday, attributes much of the current fiscal year's deficit to the economic impact of the COVID-19 pandemic, which has resulted in dramatic revenue losses for state and local governments throughout the country.

But it also notes that voters' rejection of Pritzker's proposed constitutional amendment to allow for a graduated income tax on the Nov. 3 ballot - which would have allowed higher tax rates to be levied on people with higher incomes - means the state will have fewer tools at its disposal to address its ongoing "structural" budget deficits.

Revenue officials had estimated that passage of the amendment would have brought in an additional $1.2 billion during the last six months of the current fiscal year and roughly $3.2 billion per year after that.

"Looking ahead to the fiscal year 2022 budget (which begins July 1, 2021) and recognizing that Illinois continues to face significant financial challenges, there are limited ways to address the structural deficit of the state budget in the absence of the tax rate structure flexibility that would have been provided under the changes in the proposed constitutional amendment," the report stated.

Earlier this year, Pritzker advised state agency directors to prepare for a 5% budget reduction this year, and to make plans for a potential 10% cut in fiscal year 2022, which begins July 1.

But the report says even that would not be enough to close the gap between anticipated revenues and expenditures, and that Pritzker is unwilling to make deeper cuts, which means he will have to seek legislative approval for some form of tax increases.

"The governor will work with the legislature to identify corporate and business tax loopholes that can be closed and tax adjustments that can be made that will minimize the impact to lower- and middle-class families while ensuring that Illinois can meet its financial responsibilities," the report itself said.

Another short-term option is to borrow from the Federal Reserve's Municipal Liquidity Facility, which lawmakers authorized during their special session in May, but the budget report notes that would only add to the state's debt obligations and the projected budget deficits in future years.