Guest columnist Ralph Martire: Despite revenue surges, structural deficit will continue to hobble state

As you read this, the Illinois General Assembly and Gov. Pritzker are negotiating the state’s General Fund Budget for FY 2024. What they ultimately construct will impact every corner of Illinois, given that over 95 cents out of every dollar of General Fund spending on services goes to the four core areas of education, health care, social services and public safety. These are bread and butter services that make communities sustainable and bear directly on the quality of life for our most vulnerable citizens.

Given that the current fiscal year is projected to end with a revenue surplus of $4.9 billion, you’d think producing a General Fund budget for FY 2024 would be somewhat easier than usual. After all, since at least the 1990s, Illinois has been notorious for running General Fund deficits that carry forward from one fiscal year into the next. Potentially having extra revenue around is a luxury that simply isn’t commonplace for Illinois decision-makers.

I say “potentially,” because not one penny of the $4.9 billion surplus from FY 2023 is available to utilize in FY 2024. That entire surplus was used to pay-down existing debt, prepay pension liabilities, shore-up Illinois’ Unemployment Insurance Fund, cover about $524 million in supplemental spending on services in FY 2023 and build up the state’s Rainy Day fund to almost $2 billion — after it had been zeroed-out under Gov. Rauner.

Moreover, the economic factors that helped create the revenue surplus Illinois realized in FY 2023 are not likely to manifest in FY 2024. For instance, corporate profits hit an all-time high last year of $2.8 trillion, in part because of pent-up consumer spending that was released as pandemic restrictions were eased, in part because of inflation and in part because of price gouging.

Indeed, according to Paul Donovan, chief economist of global wealth management for UBS Bank, the record, 40-year high level inflation reached last year gave companies the confidence to raise prices faster than costs, because consumers were accustomed to an environment where prices for everything were increasing anyway. Meanwhile wages also were on the rise last year, so the state saw record growth in both its corporate and individual income tax receipts.

Needless to say, hitting a 40-year high is not an everyday occurrence and most projections are that inflation will decline over the next few years, eventually returning to the Federal Reserve’s target rate of 2%.

That will have a dampening effect on corporate profitability, and when corporate profitability drops, so do wages. When both profitability and wages drop, so do income tax collections. Which already seems to be happening, as General Fund revenue for April 2023 came in $1.844 billion less in nominal, non-inflation adjusted dollars than it was in April 2022.

Big picture, the design flaws in Illinois’ tax policy that have historically led to inadequate General Fund revenue growth still exist. So much so, that despite the record income tax collections realized last year, stagnation and decline typify the performance of the other state taxes that feed the General Fund.

In fact, when measured in 2023 inflation-adjusted dollars, Illinois has realized no net revenue growth over the past 24 years from its sales taxes, liquor gallonage taxes, insurance taxes, corporate franchising taxes and associated fees combined. Projected forward over the next 20 years, Illinois’ extant tax policy won’t generate sufficient revenue growth to cover the cost of both maintaining the same level of public services currently provided into the future and repaying existing debt service. Which is the definition of a “structural deficit.”

This structural deficit is problematic for a host of reasons, not the least of which is all the data show that, to meet demographically driven demand, Illinois should be investing significantly more in everything from human services to K-12 education and higher-ed. Which means until the state’s tax policy is modernized, decision-makers will always have a hard time creating a sound General Fund budget.

• Ralph Martire,, 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.

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May 19, 2023 at 06:55AM

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