The real problem in Illinois
Every year state legislators struggle to pass a General Fund budget, and FY 2027 was no different. But in the wee hours of the last day possible, they cobbled together a $55.9 billion budget for FY 2027, of which $16.5 billion covers hard costs Illinois has to pay by law or contract, while the remaining $39.4 billion finances public services. Fully 95% of those service expenditures fund the core areas of Education, Healthcare, Human Services and Public Safety. That percentage allocation comports with state spending priorities historically, irrespective of which party controlled Springfield.
Given that service priorities have remained relatively constant over time and across political ideology, why is it always so difficult for Illinois lawmakers to pass a budget? According to Republicans like Rep. Patrick Sheehan, “The problem is with spending. Illinois does not have a revenue problem.” That’s great GOP rhetoric. It’s also completely wrong.
True, in nominal dollars net service appropriations for FY 2027 are $204 million, or one-half of one percent, greater than in FY 2026. But that ignores inflation, which drives up the cost of providing public services annually, just like it increases private sector household and business costs. After inflation, FY 2027 spending on public services will actually be 1.7% less than in FY 2026. Considered over the long haul, FY 2027 service appropriations are fully $7 billion less in inflation-adjusted terms than they were back in FY 2000, under Republican Gov. George Ryan. Ergo any complaints about over spending are, well, over blown.
So what’s compelled Illinois to continually disinvest in core services for over two decades? Again the facts are clear: Illinois’ two primary revenue sources, its income and sales taxes, aren’t designed to work in the modern economy. Hence they don’t generate sufficient revenue growth to maintain funding the same level of services over time.
Fortunately, legislators can consult any fiscal policy textbook to find definitive solutions to remedy Illinois’ tax policy flaws. Start with the state sales tax, which predominately applies to transactions involving goods, not services. Illinois taxes only 29 out of 176 consumer services — far fewer than the national average — even though service-related transactions account for 73% of Illinois’ GDP. That economic mismatch causes revenue underperformance.
Levying the sales tax on consumer services would generate $2 billion in new, recurring revenue, while also making sales tax burden less regressive than current law, because high-income households spend five times more on untaxed services than low-income households.
Then there’s Illinois’ income tax. Under its 1970 Constitution, Illinois has to assess one, flat income tax rate, currently 4.95%, irrespective of income level and hence ability to pay. Unfortunately, using a flat rather than graduated rate is indefensible from both a fiscal and a fairness standpoint for one simple reason: since Illinois’ constitution was ratified, income inequality exploded. Between 1979 and 2022, real, average annual incomes for the top 1% in Illinois jumped from $501,320 to $2,132,780 — a 325% increase. Meanwhile, real, average annual incomes for the remaining 99% of Illinoisans grew from $62,734 to $81,845 — a 30.5% increase. A flat rate simply cannot respond to this economic reality.
Despite its constitutionally mandated flat rate, Illinois can still generate additional income tax revenue — and make state tax burden fairer — by increasing its rate, while simultaneously implementing a tax credit targeted to low- and middle-income earners, to offset any additional income taxes the rate increase would otherwise generate for them.
At the end of the day, all the data confirm that Illinois does in fact have a revenue, not a spending problem, and that can’t be fixed without comprehensive tax reform.
• Ralph Martire, rmartire@ctbaonline.org, is Executive Director of the Center for Tax and Budget Accountability, a fiscal policy think tank, and the Arthur Rubloff Professor of Public Policy at Roosevelt University.