Illinois’ revenue volatility among highest in U.S., threatens budget stability
Illinois just saw a $1.76 billion drop in state income tax collections, proving what a new study just showed: state tax policies give it the nation’s eighth-most volatile revenues. That also makes Illinois very vulnerable when a recession hits.
Illinois’ tax revenue is No. 8 in the nation for volatility, according to research from The Pew Charitable Trusts.
That finding comes as state revenue forecasts were revised after April state income tax collections dropped $1.76 billion. Undependable, volatile revenue makes the current job of creating a state budget tougher, but Illinois would be especially vulnerable if a recession hits.
The report scored states based on the volatility of major revenue streams over 20 years that included sales taxes, personal income taxes, and corporate income taxes while controlling for changes in state tax policy. While Illinois tax revenues were among the most unpredictable in the nation, its neighbors make it look even worse. Kentucky, Iowa, and Wisconsin were ranked as having among the most stable revenues.
Illinois revenues are particularly volatile because of the state’s heavy reliance on corporate income taxes and widely fluctuating personal income tax base.
Corporate income taxes are the most volatile of the major tax types, and Illinois is in the minority as one of only 24 states to rely on corporate income taxes as a major source of tax revenue. The state collets 9% of state tax revenues from the tax, the fourth-highest dependence on corporate tax revenue in the nation.
When it comes to personal income taxes, Illinois is in line with other states are far as dependency upon the tax for revenue, collecting 39% of state tax revenues from personal income taxes. Still, Illinois’ tax base is far more volatile than most other states, ranking sixth highest in personal income tax volatility.
Sales taxes, which are the most stable of the major tax types for states, make up a relatively small share of Illinois’ revenue portfolio compared to other states. Illinois collects only 26% of state tax revenue from sales taxes, compared to 34% on average for states that impose sales taxes.
Illinois’ tax revenue volatility threatens the stability of its budgets and makes forecasting accurate revenue projections even more difficult. The legislature’s Commission on Government Forecasting and Accountability and the Governor’s Office of Management and Budget each forecast revenue projections for the state, but they rarely get it right. From 2008 to 2020, the legislature’s projections were “on target” just five times while the governor’s office projections were right just twice. The National Association of State Budget Officers defines solid projections as being within 0.5% of actual revenues.
Illinois’ history of over-reliance on volatile taxes and inaccurate revenue forecasting should give pause to lawmakers considering the state’s fiscal year 2024 budget and what to do with higher-than-expected revenues. With federal COVID-19 relief funding pushing the federal share of state revenues to record highs and now winding down, lawmakers should be careful to consider the best ways to spend excess revenues and how to manage finances when the federal dollars are gone.
They should avoid spending to create new, permanent programs and services that funding may not be available for in the future, especially with concerns of a potential recession continuing to loom over than national economy and revenues already falling short of projections. Instead, lawmakers should use current surpluses to eliminate the state’s persistent budget issues, pay the state’s unpaid bills, and continue to grow the rainy day fund.
While the rainy day fund has reached record levels at over $1.2 billion, it remains far short of the recommended level. The Government Finance Officers Association recommends maintaining reserves adequate to cover “no less than two months of regular general fund operating revenues or regular general fund operating expenditures.” Illinois Comptroller Susana Mendoza recently told the City Club of Chicago she would like the rainy day fund to be 7.5% of the state’s budget, about $3.25 billion. That would be well below the two-month recommendation.
Given the state’s history of revenue volatility, low reserve funding and history of inaccurate revenue forecasting, Illinois lawmakers should be focused on better management of the state’s current finances in the 2024 budget. Lawmakers should prioritize fixing the state’s budgeting process and eliminating the issues that have driven deficits and mismanagement in the past.