Why Illinois needs to reform its tax policy

Gov. Pritzker just issued an executive order that, among other things, requires state agencies to identify cuts totaling 4% of their current year appropriations. Pritzker claims the order was compelled by President Trump’s “disastrous economic policies,” as well as the costs of Trump’s seminal legislation, the “Big Beautiful Bill,” imposed on Illinois through a combination of tax breaks for the wealthy and significant cuts to programs like Medicaid and SNAP. Leading Illinois Republicans disagree, arguing the executive order was needed because the current General Fund budget so irresponsibly overspends that it created a massive fiscal hole. Who’s right?

Start with the Republican claim of overspending. Today, the General Fund sits at roughly $55 billion — but not all of that is for service expenditures. After subtracting mandatory costs like debt service payments, service appropriations total about $40 billion, the vast majority of which go to the core areas of education, health care, human services, and public safety. And while $40 billion sounds like a lot, in real, inflation-adjusted terms, it’s actually 14.3% less than what Republican Gov. George Ryan spent on services 25 years ago. Bottom line: the data simply do not support the Republican claim that Illinois is overspending.

What about Pritzker’s contention that Trump policies are the culprit? Well, the U.S. economy is experiencing a broad economic slowdown. Job growth is well below expectations, and disposable income growth is stagnating. S&P Global projects real GDP growth will be just 1.5% in 2025 and 1.8% in 2026. This is down from 2.5% in 2024.

While numerous factors contribute to these worrying economic trends, there is a broad consensus among economists that Trump’s ill-informed tariffs, mass layoffs of federal workers, and crackdown on immigration bear a large part of the blame. When the economy goes south, it creates two distinct fiscal problems for Illinois’ General Fund. On the one hand, tax revenue tends to flatten out or decrease, while on the other, demand for public services tends to increase. Less revenue, coupled with growing demand for public services, creates one inescapable outcome: budget shortfalls.

In what can only be described as piling on, the fiscal strains the slowing economy creates will be significantly exacerbated by the “Big Beautiful Bill.” Fully offsetting that legislation’s tax cuts for rich folks, and reductions in Medicaid and SNAP expenditures, would cost the General Fund $4.4 billion next year alone.

Covering those costs would be challenging even if Illinois’ fiscal system were well designed, but it’s not. State tax policy is so flawed that the General Fund has a “structural deficit,” which means revenue growth is inadequate to continue funding the same level of services over time. So while Pritzker’s executive order will help Illinois handle a small portion of the new costs flowing down to the state as a result of Trump’s irresponsible policies, it won’t redress the structural shortcomings in Illinois’ fiscal system. To do so will require fixing the state’s two primary revenue sources — the income and sales taxes.

The good news is that there are textbook approaches available to guide the design of this needed tax reform that would simultaneously eliminate the structural deficit and more fairly impose the tax burden on people. The bad news is that it’s always difficult to generate the political will required to get tax reform, no matter how needed, passed into law.

But as former Chicago Mayor Rahm Emanuel once said, “You never want a serious crisis to go to waste.” No doubt, Trump’s policies have created a serious crisis. If anything positive comes out of the fiscal chaos Trump’s created, it’ll be incentivizing Illinois lawmakers to eliminate the structural deficit by reforming Illinois tax policy.

Ralph Martire is Executive Director of the Center for Tax and Budget Accountability, a nonpartisan fiscal policy think tank, and the Arthur Rubloff Professor of Public Policy at Roosevelt University. rmartire@ctbaonline.org