Illinois General Assembly OKs $1.1B in tax hikes for record $53.1B spending
Illinois state lawmakers’ spending plans came in $410 million higher than what Gov. J.B. Pritzker originally proposed. Taxpayers will be forced to pay $1.1 billion more so Illinois can spend record amounts in fiscal year 2025.
Members of the Illinois General Assembly managed to take Gov. J.B. Pritzker’s record $52.7 billion budget proposal and boost it into a $53.1 billion spending plan, which also required them to take his $898 million in new taxes and hike them to $1.1 billion.
Those tax hikes were what reportedly delayed lawmakers, who originally anticipated passing the state budget and adjourning their spring session by May 24. Pushback from Democratic members on aspects of the various tax hike proposals delayed adjournment until May 29. An hour of debate at 1 a.m. was followed by a 65-45 (7 abstaining) House vote that sent the 3,300-plus page budget to the governor.
Despite $1.1 billion in tax hikes and record spending, the 2025 budget continues Illinois’ long-standing tradition of failing to make an actuarially sufficient pension payment. Appropriations to the five statewide pension funds will fall $4.5 billion below what the plans’ own actuaries have determined is required to actually begin paying off the state’s pension debt.
Lawmakers ultimately chose not to include Pritzker’s plan to extend Illinois’ pension funding ramp by through 2048 in order to increase the state’s funding target from 90% to 100%. Illinois’ pension systems should be targeting 100% funding to be fully funded. In addition to continuing to target a lower funding ratio, the budget ignores the basic fact Illinois’ pension contributions, while statutorily sufficient, remain insufficient on an actuarial basis – meaning they won’t meet real-world needs.
The state’s funding schedule will not contribute above current actuarially determined contribution levels until 2039, but that figure will climb each year the state fails to make an actuarially sufficient payment. In fiscal year 2023, actuarially determined contributions were less than $14.9 billion, more than $1.1 billion below today’s actuarially determined contribution.
Revenue changes
Most notably, the approved budget implements a series of tax hikes that are expected to cost Illinoisans an additional $1.037 billion in 2025. Taxes paid to local governments will also increase by an estimated $120 million because of the changes.
Extend cap on net operating losses
The largest tax hike in the budget is the extension of Illinois’ cap on net operating losses, which will hike corporate income taxes for companies recently losing money by $526 million in the 2025 fiscal year. Because the state operates on a fiscal year that runs from July-June and Illinois corporate income taxes are paid quarterly, this tax hike could effectively be doubled in the 2026 fiscal year, resulting in a tax hike of more than $1 billion if current projections hold.
Illinois enacted the current cap on net operating losses beginning in the 2021 tax year to avoid large declines in corporate income tax revenue, as many companies began losing money during the pandemic. That cap is set to expire at the end of the 2024 tax year. The budget changes the threshold of the cap from $100,000 to $500,000 and extends the cap through tax year 2027, meaning the businesses in Illinois losing the most money will continue to pay corporate income taxes.
Net operating loss provisions are an important part of the state’s tax code that ensure businesses are treated fairly when it comes to taxation, regardless of changes in their profitability. Capping these provisions can lead to companies paying far higher effective tax rates than the state’s statutory corporate income tax rate. Because of this, every state tax code and the federal tax code contain net operating loss provisions. Only two other states – Pennsylvania and New Hampshire – place caps on the amount of losses a business can claim. This burden would be atop Illinois’ corporate income tax rate being the second-highest in the nation.
Sports wagering tax hike
Another major change in the budget was a massive hike in Illinois’ sports gambling tax, which has been switched from a flat 15% of gross revenues to a progressive structure with rates ranging from 20% to 40% depending on operators’ gross revenues.
While this proposal was different than the flat rate of 35% proposed by Pritzker, the change is still estimated to cost sportsbooks in Illinois an additional $200 million, meaning the change would make Illinois’ sports betting tax rate the fourth-highest in the nation.
While sports gambling revenues are currently dedicated to funding infrastructure projects, the new tax dollars would go directly to the state’s general revenue fund. Industry leaders have also warned the tax hike could push customers to illegal bookies.
Cap retailer’s discount
Additional business tax hikes were approved by limiting how much businesses are allowed to keep for collecting sales and use taxes for state and local governments. The measure would effectively raise taxes by $186 million on retailers.
Retailers now retain 1.75% of the sales taxes for collecting and sending them to the government, as long as they properly file and pay their applicable sales taxes by the due dates. Now, the value of this tax credit will be capped at $1,000 per month. There was previously no cap on the retailer’s discount.
The tax hike is expected to yield an additional $186 million for state and local governments – $101 million for the state, $85 million for local governments. Illinois levies the highest sales taxes in the Midwest at a combined state and average local sales tax rate of 8.86%, the seventh highest in the nation. Capping the retailer’s discount will make the state’s sales tax system even more detrimental to businesses. The Illinois Chamber of Commerce and the Illinois Retail Merchants Association originally opposed this proposal when Pritzker suggested it in February.
Video gaming tax hike
In addition to the large increase in the sports wagering tax, Illinois’ video gaming tax will also be increased by 1% from 34% to 35%. The change is expected to bring in an additional $35 million for the state.
“Re-renter” tax
A change to Illinois’ hotel tax will now make third-party companies who resell large blocks of hotel room reservations pay the standard hotel operator’s room occupation tax. These companies were previously not subject to the tax because reservations were being re-sold and they are not hotel operators. The change goes into effect Jan. 1, 2025, and is anticipated to increase state revenues by $25 million and local revenues by $35 million in the upcoming fiscal year that runs through June 2025. The tax increase in fiscal year 2026 would be twice as large, based on current estimates.
Managed Care Organization assessment
Lawmakers are also banking on a large increase in revenues from health insurance companies. Lawmakers say the Department of Health and Family Services’ Managed Care Organization assessment will bring in an additional $200 million in fiscal year 2025, however no additional details have been given.
Child tax credit
Pritzker originally proposed a state child tax credit in his initial budget address that would have returned $12 million to taxpayers with children under the age of 3. Lawmakers have expanded that credit to apply to children under age 12. Qualifying families will be given a tax credit equal to 20% of their Illinois Earned Income Tax Credit in tax year 2024 and 40% of the credit in tax year 2025. The credit is expected to cost $50 million in fiscal year 2025.
A child tax credit could provide an avenue to put money back into the hands of Illinois’ neediest residents while encouraging work. Generally speaking, the proposal adheres to the tenets of good tax policy by phasing-in benefits with earned income. However, because the benefit appears to be tied to the Illinois Earned Income Tax Credit, the tax credit will phase-out once an individual’s income reaches a certain level. Illinois’ earned income tax credit phases out completely for single parents earning as little as $46,560.
Tax credits that phase out can harm labor market decisions and lead to rapid increases in effective income tax rates for individuals who no longer qualify for the tax credit.
Eliminate sales tax on groceries
The approved budget also cemented a plan to repeal the statewide 1% tax on groceries. The change doesn’t have any implications for 2025 revenues, as the tax was remitted to local governments and the repeal doesn’t take effect until 2026.
The repeal was also part of a compromise struck with local taxing authorities. All local governments, including non-home rule units, will be able to implement their own grocery taxes without holding a referendum. No state administrative fee will be charged. Non-home rule units will also be given the ability to increase sales taxes by up to 1 percent without resorting to referendums. In other words, while the statewide grocery tax is on its way out, new local taxes may soon take its place, leaving some Illinoisans without any relief and without a say about the tax.
Noticeably absent from the approved budget was the expansion of the corporate franchise tax exemption originally proposed during Pritzker’s budget address in February.
In addition to the second-highest corporate income tax rate in the nation, Illinois is one of the few states that levies a corporate franchise tax. It is very complicated and costly for businesses compared to the relatively small amount of taxes it generates. Pritzker originally signed a plan to repeal the franchise tax in 2019, but that plan was scrapped with the onset of the COVID-19 pandemic and concerns over declining state revenues.
Expenditures
Revisions to revenue estimates and the tax increases approved by the General Assembly more than offset the decline in federal pandemic relief. The 2025 budget calls for a $2.7 billion increase in spending beyond the originally enacted 2024 budget, bringing the state’s general funds expenditures to $53.1 billion, the largest budget in state history.
The spending plan is $400 million larger than what was originally proposed by Pritzker in his February budget address. Increases in spending were included for summer and afterschool programs, pay raises for certain personnel, increased funding for safety net hospitals, and additional spending on domestic violence and rental assistance programs.
An estimated $73 million of Pritzker’s spending proposals were deleted, including cash assistance for migrants, the community college PATH program and small reductions in some state grants and Department of Human Services spending.
Outside of these changes, spending will largely adhere to the suggestions made in Pritzker’s initial budget proposal.
Human services ($10.98 billion), preK-12 education ($10.8 billion), pensions ($10.489 billion) and health care ($9.4 billion) represented the largest categories of spending in the state budget. While the largest dollar increase in proposed 2025 spending is going to human services, group health insurance and government services costs are growing far faster than the other items in the general funds budget, partly because of the record-setting AFSCME contract approved in 2023.
Human services
The largest dollar increase in spending proposed in the 2025 budget is going to human services. The most notable increases are $182 million in “emergency funding” for migrants arriving to the Chicago area, $116 million for services for people with developmental disabilities and $50 million in additional funding for homeless prevention programs. That brings total state funding for homeless prevention programs to $250 million.
PreK-12 education
Under the state’s evidence-based funding formula, the state is increasing education spending by $350 million, bringing the total funding for school districts to $8.6 billion – an increase of $1.8 billion since Pritzker was elected, even as enrollment has declined each year. Last year, lawmakers canceled the Invest in Kids tax credit scholarship program that helped over 9,600 low-income students choose a school that better fit their needs. Lawmakers yielded to teachers union claims the $57 million program – which was funded via tax deductible donations and didn’t take any money out of the education budget – crowded out funding for public schools.
The budget also includes additional funding for special education transportation and career and technical education programs.
Pensions
Pension expenses are the single-largest item in the state budget, taking up nearly $10.5 billion (20%) of the state’s general funds budget, and nearly $11.6 billion across all state funds.
Still, Illinois’ pension contributions are far below what actuaries determine is required to begin paying down the state’s pension debt. Payments across all funds in 2025 are more than $4.5 billion short of actuarially determined contributions, according to the legislature’s Commission on Government Forecasting and Accountability.
The General Assembly did not take up additional pension changes suggested by Pritzker, including adding three years to the state’s current funding plan and raising the funding target from 90% to 100%. Pritzker is correct that the state should be targeting 100% funding to truly solidify the state’s pension systems. However, his proposal ignores the basic fact Illinois’ pension contributions, while statutorily sufficient, remain insufficient on an actuarial basis – meaning they won’t meet real-world needs.
The state’s funding schedule will not contribute above current actuarially determined contribution levels until 2039, but that figure will climb each year the state fails to make an actuarially sufficient payment. In fiscal year 2023, actuarially determined contributions were less than $14.9 billion, more than $1.1 billion below today’s actuarially determined contribution.
Additionally, Pritzker’s budget proposal highlighted the need for Tier 2 pensions to be reevaluated to determine if they are compliant with federal law. Illinois’ pension systems must provide benefits that meet requirements established by the Social Security Administration and IRS for the state to continue to avoid paying into Social Security on behalf of employees. Because pensionable salaries within Tier 2 are capped at a level below the Social Security wage base, it is increasingly likely Tier 2 pensions will violate these rules, known as safe harbor provisions. Should this be the case, Tier 2 pension benefits would need to be increased to become compliant with federal law, a measure that would add yet-to-be-determined debt to the state’s pension systems and further complicate Illinois’ funding plan.
Several bills looking to enhance Tier 2 pensions were considered during the legislative session, even though lawmakers had no idea how much their proposed changes would cost. These changes failed to pass. While Tier 2 pensions and proposed changes should be evaluated for federal compliance, taxpayers deserve to know the cost of any changes before benefits are irrevocably increased.
Health care
The most notable expenditures related to health care was $440 million from the General Revenue Fund to provide for the health care costs of undocumented migrants. The state anticipates spending $629 million on the measure across all funds.
Budget Stabilization Fund contribution
Despite $2.7 billion in new spending beyond the 2024 budget, lawmakers only set aside an additional $198 million for the state’s rainy-day fund – officially known as the Budget Stabilization Fund. The small contribution will mean Illinois’ rainy-day fund balance will reach $2.3 billion – just under 16 days’ worth of state spending under a $53.1 billion general funds budget. That means total reserves will likely remain the lowest in the nation.
While billions in federal money and stronger-than-expected recovery in revenues after the pandemic allowed Illinois to build its rainy-day fund up from practically nothing in 2019, the fund’s balance remains far too low. Comptroller Susana Mendoza’s own target of 7.5%, or $3.98 billion, would cover just over 27 days of state spending. But Illinois should have enough in reserve to run the state for 60 days, experts with the Government Finance Officers Association recommend. That is $8.9 billion for the 2025 fiscal year budget. In other words, Illinois needs to quadruple its rainy-day fund to have adequate savings on hand.
Conclusion
Lawmakers again passed a red-lined state budget during an “overtime” session with only hours for most lawmakers and their constituents to be able to review the more than 5,000 pages of associated bills.
Rather than exercise restraint as federal COVID funds wind down and revenues begin to return to expected levels, lawmakers levied massive tax hikes to finance record spending largely in line with Pritzker’s original proposals, while leaving very little margin for error in the form of revenue estimates or reserves.
Instead of maxing out the budget and adding billions in new spending, Illinois’ budget should have focused on increasing reserves to build the foundation for future tax relief. To make substantial tax relief a reality, state lawmakers must approve constitutional pension reform to both provide retirement security for those reliant on the pension system – remember the state is currently underfunding pensions by $4.5 billion annually – and provide stability to the state budget and tax relief for citizens.
A “hold harmless” pension reform plan such as one originally developed by the Illinois Policy Institute – based loosely on bipartisan 2013 reforms – would help to eliminate state and local unfunded pension liabilities and achieve retirement security for pensioners.
Previous analysis showed changes such as capping pensionable salary, replacing 3% compounding raises with true cost-of-living increases and adjustments to realign benefits with historical inflation rates would have saved the state $2.4 billion in the first year alone, and more than $50 billion by 2045. It would also fully fund the plans, as opposed to the state’s previous goal of 90% funding, to truly safeguard retirees’ benefits.
There are additional savings measures the state could also pursue to begin to reel-in spending to a tenable level without compromising service. Realigning health care costs for public employees – who currently pay health insurance costs at half the rate of the private sector – would save the state nearly $500 million annually. Consolidating Illinois’ school district administration, without closing schools, could also save the state more than $500 million in administrative costs without affecting classroom funding.
A responsible spending cap that limits growth in state expenditures to the growth rate of the economy would alleviate the most fundamental problem with Illinois’ budget: expenditure growth exceeds taxpayers’ ability to pay. This misalignment means Illinois is bound to face either frequent budget shortfalls, perpetually rising taxes or both. Illinois needs a spending cap to protect taxpayers from continuous tax hikes and to rein-in runaway state spending. Illinois overspending has driven
• The two largest income tax hikes in state history, in 2011 and 2017
• Pritzker enacting 20 new tax and fee hikes totaling $4.6 billion in 2019
• Voters forced to stop a $3.4 billion income tax hike in 2020
• Pritzker and some lawmakers pushing a $500 million to $1 billion tax hike on small businesses
• Pritzker threatening to raise the flat income tax by 20%
• Pritzker proposing $932 million in tax hikes in his 2022 budget.
• $1.1 billion in new taxes in the 2025 budget.
A spending cap would eliminate the constant call for these tax hikes. By linking growth in the state budget to the average growth in the Illinois economy, lawmakers would be able to reasonably predict how much additional state spending their constituents could afford in the coming year without the need to raise taxes. This procedure would create stability within the state budgeting process and allow for modest growth in government funding while also protecting taxpayers from future tax hikes.
Illinois’ state finances have undoubtedly improved in recent years after more than $8 billion in federal aid and stronger-than-projected revenue growth. As a result of these fortunate circumstances, Illinois has been able to pay off state debts and begin to build a more adequate rainy-day fund. However, because of historical fiscal mismanagement, Illinois was not able to provide any substantial, permanent relief to taxpayers or create stability in the state budget.
Rather than follow Pritzker’s recommendations, state lawmakers should have considered constitutional pension reform, aligning government health care costs with the private sector, reducing the administrative costs of Illinois’ 850-plus school districts and enacting a responsible spending cap. These measures would put Illinois on a sustainable fiscal path and provide much-needed relief for Illinoisans who are struggling under the weight of Illinois’ highest-in-the-Midwest tax burden.
Maybe next year.