Establish fiscal stability

Illinois must embrace fiscal responsibility to ensure the long-term fiscal and economic health of the state. The state consistently spends more than it should and more than taxpayers can bear. Without changes, Illinois will remain trapped in a cycle of short-term budget fixes through taxes and gimmicks, rising debt obligations and long-term fiscal instability.

By adopting spending caps, addressing overspending, curbing rising health care costs and reducing the state’s enormous pension liabilities, Illinois can align spending with economic reality. It can eliminate inefficiencies within state government without resorting to the type of draconian cuts that could become necessary without reform.

Establish spending caps

Illinois’ recurring shortfalls are driven by overspending that has consistently outpaced economic growth. A spending cap would limit growth to what taxpayers can afford.

Illinois’ net operating costs – spending on areas such as education, health care and human services that lawmakers directly control each year – have significantly outpaced economic growth. From fiscal year 2019 to 2026, these costs increased by over 46% while Illinois’ nominal GDP grew only 33%. Spending in these areas would be roughly $5.4 billion lower than current levels if they had simply grown in line with the state’s economy since 2019. The spending growth has already pushed the budget out of balance and is a large contributor to the state’s projected deficit.

Unless reforms are enacted, Illinois’ net operating costs are projected to continue growing faster than economic output. When spending outgrows the economy,  the only way to balance the budget is through tax and fee increases. When spending is restrained, the government can lower taxes while balancing the budget, especially when the economy grows.

The simplest way for lawmakers to ensure responsible spending is to adopt a statutory spending cap to tie future budgets to economic growth. Under this framework, Illinois’ spending cap would reflect the state’s 10-year average nominal GDP growth, currently about 4% per year because of elevated post-pandemic inflation. Historically, that average has been closer to 3%.

The cap would apply to net operating expenditures. It would exclude obligations such as pensions, debt service and group health insurance. They are largely driven by past commitments and require separate structural reform.

Tying economic growth to nominal GDP accounts for both inflationary increases and real economic expansion. This ensures the government grows within the state’s capacity to pay without steep increases. It would force lawmakers to face runaway costs projected in areas such as education and health care. It would also ensure lawmakers confront trade-offs within each budgeting cycle rather than pushing costs onto future taxpayers.

Create savings through rightsizing spending

While a spending cap can prevent future overspending, Illinois’ budget baseline is currently too high because of a sharp increase in spending in recent years, mainly driven by pandemic-related spending.

To follow a budget cap with a balanced budget going forward, the government would need to reduce spending by $3 billion before 2027. That means a 2027 budget of $54 billion rather than the $57 billion currently projected.

One of the simplest places to start is by eliminating pork projects, items added late in the budgeting process with limited oversight and little connection to core state services. Many of these are funded through the general revenue fund. For example, Illinois provided a $5 million grant to NASCAR earmarked for “operating expenses.” Other projects include $1 million for operating costs for PGA Tour Enterprises, the $40 million for a sports complex previously mentioned for the House speaker’s alma mater and millions towards funding various activist organizations.

To truly rightsize the budget, lawmakers should also return agency spending back to pre-pandemic norms. Illinois expanded the budget by nearly $11 billion between fiscal years 2020 and 2023, a 27% increase, in response to the pandemic. Much of this growth was supported by temporary federal aid. Even though the emergency has passed, those temporary funds have become permanent spending and are now funded by Illinois taxpayers.

For example:

1. “Environment and culture” spending grew 62% in just three years, rising from $61 million to $99 million. Had spending grown in line with average economic growth, it would have been roughly $32 million less by 2023.

2. “Human service” spending jumped from $6.6 billion in 2020 to $10.8 billion 2023, a 64% increase. The rise in staffing alone has added significant costs. Employee headcounts are up nearly 5,500 since 2020. If costs had tracked with nominal GDP averages, spending would be about $3.5 billion lower.

The state should return these costs to sustainable, baseline-growth levels tied to the broader economy.

To help the state better manage its expenditures, Illinois should expand and fully leverage its Budgeting for Results Commission. This body can evaluate state programs, identify inefficiencies and ensure taxpayer money is tied to measurable outcomes. However, it has been woefully underutilized, in part because it is understaffed and too often overlooked. Strengthening the commission with dedicated staffing, clearer agency performance benchmarks, improved tracking of results and enhanced research capabilities would help lawmakers target waste and prioritize core services.

Rework health care costs

Rising state employee health insurance costs are another major cost driver that must be addressed to achieve fiscal responsibility. They need to be fixed separately from general spending caps and programmatic rightsizing because benefit costs are largely determined through union contracts rather than annual legislative budgeting decisions.

Under Gov. J.B. Pritzker, Illinois has expanded benefit obligations through successive union contracts that are far more generous that what private-sector workers receive. The most notable example is a contract the state signed with the American Federation of State, County and Municipal Employees Council 31 in 2023. It increased base pay by 19.3% and added $1,200 stipends – free cash given each worker just for accepting the contract. All told, the raises and stipends are costing taxpayers an extra $625 million.

At the same time, state employees pay just 16% of their combined premium and out-of-pocket health care costs, leaving taxpayers to cover the other 84%. Private-sector workers in 2024 paid 42% of their own health care costs. This imbalance forces working Illinoisans to subsidize state employee benefits more generous than what they can typically get.

The current AFSCME contract runs through mid-2027. The upcoming negotiations give lawmakers a chance to align state employee health insurance with private-sector norms. Senate Bill 2680 would have done that by removing health care coverage from union contract negotiations if average state workers’ costs stayed below 40% annually. Although the bill died in the Illinois Senate, lawmakers should revive it in the current session to control health care costs.

If state employees contributed at the same rate as private-sector workers in the next contract, the state would save $820 million in 2028 alone and more than $2.5 billion by 2031.

This reform, combined with budget caps and rightsizing spending, would lead to a net surplus of $2.7 billion during the next five years.

Reduce pension liabilities

Years of overpromised government employee pensions have created an unsustainable cycle of raising taxes and diverting resources from other essential services. While Illinois pays the minimum required by law, it falls short of the actuarially determined contributions needed to meaningfully reduce Illinois’ $143.5 billion in unfunded pension liabilities. The projected pension contribution for fiscal year 2027 is nearly $5.1 billion less than the actuarially recommended amount. The state’s pension funding ratio is the lowest in the nation at 48%. Liabilities remain near an all-time high. Worse still, the state has been simply shifting costs onto future generations through growing pension obligations that will increasingly strain future budgets.

On top of existing obligations, new legislative proposals, such as House Bill 4673, threaten to spike Tier 2 pensions.  While an actuarial analysis of HB 4673 has yet to be released, a similar proposal last year was projected to add $60 billion in liabilities across the state’s three largest pension systems. This most recent bill could add similar costs or even more to the state’s pension debt.

Capping pensionable salaries, replacing fixed cost-of-living adjustments with true cost-of-living increases and aligning benefits with inflation would provide even more savings for the state and improve retirement security for pensioners.  Analysis found similar reforms in 2013 would have saved the state $2.4 billion in the first year alone, and more than $50 billion by 2045.

The state could also continue offering pension buyouts to state employees and expand this option to retirees in local pension system as a way of reducing the long-term pension liability. In the seven years it has been in place, the state has reduced its long-term pension liabilities by about $1 billion through these buyouts.

Absent reform, Illinois’ pension debt will continue growing, driving down the state’s credit rating, straining the state’s pension systems, putting public servants’ retirements at risk and impacting all areas of the budget. This will force taxpayers to pay more in exchange for fewer services.

The state should use these funds to strengthen its long-term fiscal position by paying down underfunded pension debt, providing relief for taxpayers and rebuilding reserves.

Lawmakers should prioritize strengthening the Budget Stabilization Fund. Reserves sufficient to cover 60 days of operation are recommended by the Government Finance Officers Association. This would require increasing the state’s rainy-day fund from $2.3 billion to $8.73 billion, nearly four times higher. Budget surpluses should be directed toward closing this gap and restoring fiscal resilience.

Prioritize pro-growth policies

Illinois’ long-term health requires the state to achieve stronger economic growth. Fiscal policies that reduce growth also raise less revenue.

State revenues are projected to rise only $5 billion during the next five years, driven mostly by inflationary growth in income tax collections rather than economic expansion. A persistent flow of residents to other states and continued loss of businesses are reducing the state’s tax base and revenue potential.

Without stronger growth, even disciplined budgets will face long-term pressure as the tax base stagnates. Illinois must pursue reforms that strengthen economic competitiveness and reverse current trends.

Promote job creation

Illinois needs to make it easier for individuals and businesses to create jobs. Job growth fuels the economy and increases revenue by boosting taxes.

One significant barrier to job creation is the state’s excessive occupational licensing burden. Nearly 25% of Illinois’ workforce – or about 1.6 million people – need a government permission slip to work, often requiring hundreds of hours and thousands of dollars to gain approval. These barriers contribute to the loss of 135,000 jobs and $15 billion in economic value.

The state also needs to improve workforce development by prioritizing skilled labor over college degrees in its educational institutions. One proven way to do this is to expand apprenticeships, which prepare trainees to enter a profession. This requires the state to shift funding from universities to workforce development.

Illinois continues to prioritize higher education despite falling enrollments, investing $2.6 billion in universities and only $148 million on apprenticeship and workforce training programs. Numerous studies have shown the impact of apprenticeships, including higher earnings and expanded career opportunities.

Opting into the Federal Scholarship Tax Credit program is one way to secure more private funding for apprenticeship programs.

Join the Federal Scholarship Tax Credit program

Illinois can improve educational outcomes and workforce readiness while increasing overall funding for education by opting in to the Federal Scholarship Tax Credit program. Under this program, the federal government will grant dollar-for-dollar federal tax credits to private donors up to $1,700 each year for giving to a scholarship granting organization.

This money can go to public, private, charter, homeschool and vocational education institutions. It can cover a variety of educational resources including tutoring, additional academic courses, fees for advanced placement or college entrance exams, books or online educational materials and therapies for students with disabilities.

Because this is a federal program, Illinois residents can donate money to educational institutions and get the tax credit starting in 2027 regardless of what Pritzker decides. But if he does not let Illinois join the program, Illinois students would not receive any of the money. It would go to other states’ students. There are 28 states that have already joined the program, a decision Colorado’s Democratic Gov. Jared Polis called a no-brainer.

With fewer than one-third of Illinois students proficient in reading and less than one-quarter in math, this program offers a way to increase funding and expand opportunity, particularly for low-income families, without increasing state spending.

Reduce Illinois’ high tax burden

To achieve long-term fiscal health, Illinois should prioritize lowering corporate taxes to make it easier for businesses to stay in the state and help it grow. Corporate tax burdens have been a primary contributor to Illinois’ slow economic growth. Illinois has the third highest corporate taxes in the nation at 9.5%.

Recent changes tied to federal tax policy have also added complexity and done harm to the state’s corporate tax code, including Illinois’ decision to decouple from federal foreign income credits and deductions designed to encourage domestic investment. These changes placed Illinois at a competitive disadvantage to states that did not decouple. These decisions have driven firms out of Illinois and stagnated tax revenues.

Research consistently finds corporate taxes are among the most harmful for economic performance. Research from the Organization for Economic Co-operation and Development has stated “corporate income taxes appear to be the least attractive choice from the perspective of raising GDP.”

Because businesses are highly mobile, high corporate taxes can accelerate firm departures from Illinois. In 2021, low-tax states such as Florida, North Carolina, Nevada and Texas saw the highest inflow of firms. High-tax states including Illinois experienced some of the largest losses.

Even Illinois policymakers have acknowledged the competitive pressure. In 2019, Pritzker supported phasing out the corporate franchise tax, arguing it would provide relief to 300,000 small businesses. Two years later the phaseout was paused to sustain record spending levels.

Make housing affordable by increasing supply

Illinois has the highest rate of house-burdened residents in the Midwest, with nearly one-third of households paying more than 30% of gross earnings towards shelter. Illinois has the second-most restrictive land use policy in the region, long wait times for permit approval and limits on housing types such as duplexes and granny flats. Those factors have conspired to give Illinois 113,000 fewer homes. High housing costs are cited by 51% of Illinoisans as a reason for wanting to leave the state.

To expand supply and reduce housing costs, lawmakers should:

• Broadly legalize multi-family housing.
• Legalize accessory dwelling units, such as granny flats and basement apartments.
• Zone more areas for residential use.
• Streamline permit approval.
• Reduce lot size requirements.
• Reduce aesthetic restrictions.

Commonsense policy reforms

Finally, Illinois can enact commonsense reforms to ensure future budgets are well structured and growth-oriented. Some strategies the state can use include revisiting unnecessary and costly policies, economic impact studies for costly regulations and reworking the appropriation committee.

Regulatory impact reviews

Many policy and tax changes in Illinois are adopted with little scrutiny of their economic impact, often in the final hours of the legislative session. This approach makes transparency difficult or impossible. Illinois should require stronger economic impact reviews on major rule or tax changes before they are enacted.

State law already recognizes the importance of fiscal oversight in the rulemaking process. The bipartisan Illinois Joint Committee on Administrative Rules is required to consider the financial impact of proposed rules on small businesses and local governments.

The same standard should apply to major tax and policy changes through truth-in-taxation hearings that would require lawmakers to consider the fiscal and economic impact of tax changes. Too often, tools such as fiscal notes and economic impact estimates are set aside through procedural rulings, allowing costly policies to advance without full disclosure of their long-term consequences. The Illinois General Assembly should be explicitly charged with considering – before enactment – the fiscal impact of proposed tax or policy changes on Illinois employers, working families and economic growth.

A strengthened framework should assess factors such as direct compliance costs, employment and wage impacts, housing affordability and whether there are less burdensome alternatives. This approach can increase transparency, improve government accountability and help Illinois avoid costly policies.

Economic impact reviews

Beyond tax and budget decisions, Illinois should establish stronger safeguards on economically significant regulations before they go into effect. Illinois is the fourth-most regulated state in the U.S. with over 282,000 restrictions, many of which are unnecessary and costly.

The federal Regulations from the Executive in Need of Scrutiny Act requires explicit legislative approval of laws with higher than $100 million in economic impact. If Illinois enacts similar reforms for laws with at least $10 million in economic impact, it can ensure major regulatory decisions receive both thorough analysis and democratic accountability.

A threshold of $10 million in annual economic impacts would ensure:

• Economic impacts are evaluated early in the rulemaking process.
• Lawmakers are given ample time to review new rules.
• Costly or ideologically driven rules are prevented from taking effect by default.
• There is legislative responsibility for economically significant policy decisions.

This is imperative to moving Illinois away from short-term policymaking and ensure future policies focus on growth, job creation, retention of businesses and stability.

Restructuring the budget review process

Illinois’ budgeting process also lacks effective fiscal gatekeeping. Appropriation committees primarily focus on advancing proposed budgets rather than rigorously evaluating long-term costs and tradeoffs. This contributes to pork projects and unfunded mandates. Other states offer better models.

In California, all bills with significant fiscal impacts go through appropriations subcommittees that assess fiscal sustainability and often halt costly proposals before enactment. Texas requires fiscal notes for bills or joint resolutions with budgetary impacts, ensuring lawmakers understand costs, savings, revenue gain or revenue losses before voting.

Illinois should adopt similar practices to strengthen legislative oversight and prevent future unsustainable spending commitments.

In addition, Illinois needs to adopt a more standardized and transparent budgeting framework. It can do this by:

• Increasing transparency in the budgeting process by giving lawmakers sufficient time to review and debate the final budget.
• Implementing multi-year budgeting, with independent institutions producing balanced projections based on realistic revenue and spending assumptions.
• Including long-term revenue and tax projections along with preliminary policy options to cover potential future shortfalls.

Conclusion

Illinois is at a crossroads. Recent revenue windfalls, such as billions in temporary federal aid, have dried up and further tax hikes have become politically and economically toxic. This has only magnified the state’s historic problem: rapid spending increases driven by short-term policy and ideological priorities outpace what the state’s taxpayers and economy can sustain, even during periods of record revenues.

The good news is Illinois leaders have a choice: By adopting predictable budgeting practices, rightsizing government costs and prioritizing pro-growth policies, the state can undo past mistakes and set the foundation for long-term stability and growth.

Illinois Forward 2027 offers a practical path to limit tax burdens, close structural deficits, reduce debt and spur economic growth for all Illinoisans. It can again let Illinois be the economic powerhouse at the heart of the nation.