Inside Illinois’ 2026 budget: spend now, squeeze more, solve later

State lawmakers built Illinois’ record $55.2 billion budget for 2026 on gimmicks, one-time fixes and piecemeal tax hikes. They left pension debt, transit cliffs and real reform for another day.

Illinois state lawmakers eked out a budget for 2026 at the last minute, upholding Springfield’s fiscal maxim: when restraint is too tough, sweep funds and squeeze taxpayers a little harder.

With less than a day to review an over 3,000-page spending plan, the Illinois General Assembly greenlit a record-setting $55.2 billion budget. It’s up $2 billion from last year, loaded with sleight-of-hand budget tricks and stealth taxes.

While the budget avoids the broad tax hikes on income, sales and services that were pitched as fixes for the state’s public transit fiscal crisis, it leans on over $1 billion in revenue changes. This includes:

• $482 million in under-the-radar tax hikes
• $100 million in fund sweeps
• $444 million in temporary measures

These measures showcase Illinois lawmakers’ propensity for choosing optics over outcomes, risking potential tax increases later and weakening voters’ confidence in Springfield.

Despite using quick fixes to create the illusion of balance on paper, this year’s budget still shorts pension payments and keeps the state’s emergency fund dangerously low. The state also still has to address the looming $770 million deficit facing the Chicago area’s Regional Transit Authority, potentially leading to other tax hikes.

Here’s a look at key revenue and spending changes that start July 1 with Illinois’ 2026 budget.

Revenue changes

The budget includes several quiet tax increases, designed to stretch the state’s revenue base without attracting significant public scrutiny. It also features various budget gimmicks, including fund sweeps and temporary measures to raise revenue.

Tax hikes

One notable addition is a new tax on Illinois companies operating licensed online or mobile sports betting platforms. Each individual wager placed online or through a mobile app will be taxed: 25 cents per wager for the first 20 million bets and 50 cents for each wager beyond that.

The budget also raises the tax rate on tobacco products from 36% to 45% and extends the tax to nicotine analog products, such as vapes, nicotine pouches and e-cigarettes.  It also doubles the license fee for retailers from $75 to $150. These “sin taxes” on sports betting and tobacco products have become a perennial budget strategy for Illinois lawmakers, despite their reported volatility and long-term unreliability. There will also be an additional surcharge on phone lines to help pay for a mental health helpline.

Perhaps the most controversial and least transparent tax changes in the 2026 budget are the implementation of a state throwback rule and two changes to businesses operating overseas. The tax throwback is a complex tax rule that enables Illinois to tax corporate income from out-of-state sales if those sales aren’t taxed elsewhere, effectively penalizing companies that conduct out-of-state business. Expected to yield $72 million, the move has drawn heavy scrutiny from state Republicans and industry organizations, such as the Illinois Chamber of Commerce.

The Global Intangible Low-Taxed Income, or GILTI, provision expands Illinois’ corporate taxes. GILTI is a portion of offshore corporate income defined under the 2017 U.S. Tax Cuts and Jobs Act as low-taxed, easily mobile profits. Currently 50% of this income is subject to federal taxes. With the law change, Illinois would be subjecting the previously untaxed 50% to state corporate income taxes.

The budget also repeals the 80/20 Safe Harbor provision that provided tax exemptions to corporations or subsidiaries that earn at least 80% of their income from active foreign business operations.

Illinois’ high corporate taxes – already ranked third in the nation – have been one of the primary reasons for the state’s high unemployment and slow gross domestic product growth. These taxes discourage investment, distort economic decision-making and decrease a state’s competitiveness.

Lastly, the budget removes exemptions on hotel taxes for short-term rentals, such as Airbnb and Vrbo. It applies the state’s Hotel Operators’ Occupation Tax uniformly to any rentals under 30 days. The change is expected to generate an additional $10 million.

Budget gimmicks, fund sweeps and temporary measures

The state government expects to generate $228 million in revenues from reviving another tax amnesty program, similar to one used in 2019. The program will expedite tax collections by offering residents and businesses a break on penalties or extra interest. Although this offers a quick revenue boost, it does little to help the state’s long-term fiscal stability. It may also inadvertently reward tax noncompliance, sending the message: delay payment now, get a deal later.

The budget contains $100 million in fund sweeps, which transfer money from special-purpose state funds into the general fund. Fund sweeps are another short-term trick to free up space in the budget and enable lawmakers to postpone making difficult spending decisions.

Another budget gimmick involves delaying the transfer of motor fuel sales tax revenue to the state road fund, the final phase of the five-year shift outlined in the Rebuild Illinois infrastructure plan. While this one-time revenue gimmick is projected generate $171 million, it undermines long-term funding to support infrastructure improvements and contradicts Pritzker’s stated commitment to such investment.

Transportation fund diversion, part 2: the state will be using $137 million from the road fund to cover state employee health benefits that would have otherwise been covered by the general revenue fund. Misusing transportation funds has remained a convenient tool to mask financial mismanagement.   

Finally, the budget shorts payments to the state’s rainy-day fund – the emergency reserve to cover expenses during potential economic downturns – by $45 million. Illinois’ current rainy-day fund stands at $2.3 billion, enough to cover only 15 days, the second lowest in the nation.  The Government Finance Officers Association recommends having enough in reserve to run the state for 60 days, meaning Illinois would have to quadruple its rainy-day fund to have adequate savings on hand.

Expenditure changes

While lawmakers touted cuts, the budget hikes spending by nearly 3.9%. Increases in spending include more funding for safety-net hospitals, higher education and over $6,000 pay raises for lawmakers.

Medicaid

After years of overspending, the budget cuts the Health Care Benefits for Immigrant Adults program, which provided health care payments to undocumented migrants between ages 42 and 64 – saving the state approximately $330 million. Illinois will continue to fund health care for immigrants older than 65, allocating $110 million in state funds.

PreK-12 education

The budget fully funds the K-12 portion of the evidence-based funding formula, allocating $307 million. Despite spending more per student than most states, student outcomes remain poor. Throwing more money at a failing system won’t deliver academic gains. In addition, lawmakers cut the property tax relief portion of the school funding formula, effectively imposing a $43 million property tax hike. Illinois property taxes are the second highest in the nation and a primary driver of people moving out of Illinois and sluggish economic growth.

Public transit

Lawmakers also failed to pass legislation to resolve the $770 million Chicago area mass transit fiscal cliff, deferring action to the fall veto session. Rather than addressing overspending and inefficiencies, lawmakers have opted to sidestep the issue, leaving riders, taxpayers and workers in limbo. This increases the risk of tax hikes in the future, and with no solution in place, transit agencies face service disruptions, layoffs and continued operational dysfunction.

Pensions

Illinois has one of the worst-funded pension systems in the nation, with $240 billion in debt. Pensions consume nearly 20% of Illinois’ general fund budget – one of the highest shares in the nation – yet 2026 contributions will fall $5.1 billion short of what actuaries say is needed. With a 52% funded ratio, the state’s pension systems remain in deeply troubled territory, potentially at the point of no return.

Conclusion

Illinois’ 2026 budget may plug some short-term holes, but it ignores the state’s chronic fiscal dysfunction. One-time fixes, ballooning pension debt and a dangerously low reserve fund mean Illinois’ fiscal challenges remain far from over. As the Regional Transit Authority shortfall lingers, so does the possibility of major tax hikes.

Illinois needs structural changes to achieve long-term stability. This includes implementing spending caps linked to the state’s economic growth, right-sizing government worker health care costs, cutting administrative bloat and overhauling the state’s broken pension system through constitutional reform.