Higher revenue leads to tax cuts in 11 states, but not Illinois
State revenue losses around the country have ranged from far less than expected to non-existent. Fiscally healthy states are giving back to taxpayers. That doesn’t include Illinois.
In April 2020, shortly after the COVID-19 pandemic began, state and local governments were projected to experience a net $300 billion budgetary shortfall through fiscal year 2022. The University of Illinois projected Illinois could lose $28 billion during a three-year period under the worst-case scenario.
More than a year later and after almost $6.8 trillion of stimulus spending by the federal government, states and local governments have made a comeback. After an aggregate dip in revenue of 4% early in the pandemic, state and local revenues recovered and ended the year with an aggregate gain of over 1%.
Virtually every state has fared better than expected, but some states have translated that good news into benefits for taxpayers. Eleven states – including Illinois’ neighbors Missouri, Iowa and Wisconsin – have cut income taxes, corporate taxes or both, according to a July report from the Tax Foundation, a nonpartisan research organization.
Illinois went the opposite direction and in June passed tax increases of $655 million that specifically hit job creators. The latest unemployment numbers show Illinois holding steady at 7.1% unemployment since March, while the rest of the nation is recovering.
State tax collections exceeded expectations
With the country continuing its economic recovery from the COVID-19 pandemic, the Tax Foundation noted in their July report that state revenues substantially beat expectations. This was owed largely to the mobilization of $6.8 trillion in legislative and administrative federal aid nationwide. The Federal Reserve allocated an additional $6.5 trillion for monetary stimulus.
The federal stimulus helped states’ economies in two ways. First, federal spending gave the private sector aid for individuals and businesses to keep their income and spending levels up – which, in turn, helped keep up government income and sales tax collections. Second, various forms of direct aid, such as grants to health care providers and transit organizations, kept vital entities such as hospitals and buses running during the pandemic.
In response to the extra revenue accumulated, the 11 states passed reforms to return money to taxpayers by reducing taxes. Several of these states – Arizona, Idaho, Iowa, Louisiana, Montana and Ohio – have also consolidated the number of income brackets to make their tax structures more neutral.
The Tax Foundation report noted the 11 states that implemented tax reform all saw tax revenue growth between fiscal years 2019 and 2021, with gains ranging from 5% to 35%.
The report encouraged other states in strong fiscal positions to consider tax reform to boost competitiveness in business investment and resident growth, while warning against policies of states such as California and New York. California is facing multiple bills in the legislature that would increase the state’s already highest-in-the-nation tax rates. New York has already slammed individuals and corporations with tax increases worth $4.3 billion despite revenue losses never materializing.
Illinois in comparatively worse fiscal shape, passes anti-competitive measures
Illinois not only is lagging other states, but is actually heading in the opposite direction with its continued attempts to solve its budgetary and fiscal stability issues through tax hikes.
From 2019-2020, Illinois fared slightly worse than the national average in its revenue collections, but far better than projections from the beginning of the pandemic. Analysis from the University of Illinois revealed the Prairie State lost around $1.45 billion in individual income, sales and corporate income tax revenue. That loss is relative to what Illinois expected to receive prior to the pandemic, not relative to prior year collections. Governing magazine reported Illinois was one of 29 states that collected more revenue in the 12 months after the pandemic began than in the 12 months prior. It’s still far less than both initial loss projections and federal dollars received by Illinois.
In total, the state government will receive over $13.7 billion of federal aid, consisting of over $3.5 billion in Coronavirus Aid, Relief and Economic Security Act funds, over $8.1 billion in American Rescue Plan funds, and almost $2.1 billion in additional Medicaid matching funds.
Despite the influx of money from the federal government, Illinois’ fiscal year 2022 budget included $655 million in tax hikes aimed at job creators just as they were struggling to recover. Financial forecasts have shown the federal aid received by Springfield represents a temporary improvement to the state’s expected long-term debt.
Although Illinois recently received a credit upgrade from Moody’s Investors Service to two notches above junk, it still maintains the lowest rating in the nation. The state has ended every fiscal year with a budget deficit since 2001. Despite the tax hikes, this year will be the 21st with a state budget deficit.
Illinois’ spending grew 30% faster than the personal income of its residents between 2010 and 2021. That means lawmakers spending is outpacing taxpayers’ ability to pay.
But the increased spending has not been put toward programs that provide value to Illinoisans. It has been siphoned off by pensions and other public sector benefit costs, crowding out services residents want and need. Spending on pensions increased by 533% between 2000 and 2021, and public employee health insurance spending increased by 126%. Meanwhile, education spending increased just 21% and spending on all other services fell by nearly 15%.
If Illinois wants to be able to lighten the tax burden for its residents and increase its competitiveness the way 11 states recently have, it needs to adopt significant fiscal reforms to end its chronic budget deficits and keep its spending at a level taxpayers can afford.
A constitutional amendment to allow true pension reform provides the only path to permanently fixing Illinois’ failing finances and creating a path forward for its residents.