Tax hike threat looms as Illinois budget deadline nears

They are signaling a willingness to raise taxes as the May 31 deadline quickly approaches.

Even though Illinois lawmakers have only a few days to pass a state budget with a simple majority vote, many have yet to see the full details of the revenue and spending proposals.

As negotiations intensify in Springfield, lawmakers are under pressure to close budget gaps, reconcile competing priorities and produce a constitutionally balanced plan before the session ends May 31. After that, they need a three-fifths majority to pass a budget.

Taxpayers should pay close attention to the emerging warning signs. Revenue estimates are weaker than the governor projected, proposals are advancing without identified funding sources, and lawmakers are increasingly signaling they are willing to raise taxes to close the gap.

While details are sparse, here is what Illinoisans should be on the lookout for over the weekend:

Revenue estimates are $720 million to $900 million short of Pritzker’s projections

One of the clearest red flags in the budget process is the growing divide between Gov. J.B. Pritzker’s revenue assumptions and more cautious projections from the General Assembly’s Commission on Government Forecasting and Accountability (COGFA) and Pritzker’s own Governor’s Office of Management and Budget (GOMB). COGFA and GOMB estimates this month predict revenue will be $720 million to $900 million short of what Pritzker has forecast.

State lawmakers have a long history of balancing budgets on paper while relying on overly optimistic revenue expectations. When projected revenues don’t materialize, taxpayers are left with the consequences: spending cuts, borrowing, payment delays or pressure for tax hikes.

That could happen in the coming fiscal year, as lawmakers have filed spending bills based on Pritzker’s budget but have yet to propose any new revenue that would be needed to satisfy the governor’s plan.

Advancing budget bills makes tax hikes likely

House Bill 131 and Senate Bill 2512 are appropriations bills based on Pritzker’s record-setting $56 billion spending proposal. However, estimates predict state revenues will fall far short of that figure. Taxpayers should watch for tax increases and one-time budget gimmicks as lawmakers look to close the gap with higher revenues rather than spending cuts.

Pritzker has already outlined maneuvers he’d prefer to use to balance the budget. Among them are corporate tax hikes, new social media fees, increased casino taxes and one-time fund sweeps that take money from other sources.

$269 million corporate tax hike from capping deductions for net operating losses

One of the largest potential tax hikes is the extension of Illinois’ cap on deductions for net operating losses. That would raise corporate income taxes by an estimated $269 million in fiscal 2027 for companies recently losing money.

Net-operating-loss deductions are an important part of the state’s tax code that ensure businesses are treated fairly regardless of changes in their profitability. Capping these deductions 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 — cap the losses a business can claim. This burden would be atop Illinois’ corporate income tax rate, which is third-highest in the nation.

$200 million in social media fees

The next-largest revenue increase could come from a new fee for social media companies with large user bases. The governor proposes a charge ranging from $0.10 to $0.50 per month per Illinois user, depending on the number of users each platform has.

Pritzker’s office projects the fee would generate $200 million. While the governor is attempting to ban companies from passing on this cost to consumers, Illinoisans will ultimately bear the burden in the form of higher prices.

$120 million in casino tax hikes

The governor has also proposed increasing taxes on table games at casinos outside Chicago. The proposal would change those rates from 15% to 20% to 15% to 50%. The move would cost casinos a projected additional $120 million in taxes next fiscal year.

$139 million in fund sweeps

Another revenue-raising measure in this year’s budget is a proposed $139 million in fund sweeps. The governor suggests transferring $79 million in sales taxes from candy, soft drinks and grooming products from the Capital Projects Fund to the general funds in fiscal 2027.

This one-time measure is not a reliable source of revenue to solve long-term fiscal issues and takes money from a fund meant to finance infrastructure projects.

Another $60 million would be taken from local governments by reducing the revenue-sharing rate for individual income tax collections from 6.47% to 6.23%. Lawmakers have already lowered the revenue-sharing rate from 10% in fiscal 2012.

While the reduction would give the state more revenue, it would also put pressure on local governments, which are primarily funded via property taxes. Reducing the Local Government Distributive Fund risks raising property taxes on residents, who already pay the highest rates in the nation.

Balancing the state budget on the back of property taxes is nothing new for Pritzker — last year’s budget eliminated the $43 million Property Tax Relief Grant program, increasing the property tax burden to balance the state budget.

Other tax hikes are still on the table

Illinois’ Affordability and Tax Justice Coalition, a group of more than 40 lawmakers, is pursuing at least six additional tax hike proposals that could end up in the budget should more revenue be needed. Those include:

• A 10% tax on digital advertising
• Decoupling from the federal tax code to remove business tax credits and incentives
• Increasing the state’s corporate income tax rate from 7% to 7.92%
• Introducing a tax on unrealized capital gains
• Requiring worldwide combined reporting for businesses to increase state tax liability for multinational corporations
• Reducing income tax credits, deductions and exemptions for high-income earners

A status quo budget won’t solve Illinois’ woes

Rather than relying on hopeful revenue estimates, tax hikes and budgeting gimmicks, Illinois lawmakers should reject Pritzker’s approach in favor of a more sustainable plan.

The Illinois Policy Institute has proposed an alternative budget plan that would bring long-term financial stability to the state and foster an environment in which families and businesses can thrive. Most importantly, it doesn’t require budget gimmicks or tax hikes to balance the state budget and put Illinois on a path towards fiscal stability.

Illinois continues to lose residents to neighboring states with lower taxes and stronger growth. Businesses face uncertainty and higher costs. Property taxes remain crushingly high. The ongoing budget process offers no reprieve from the status quo. Rather than relying on risky revenue assumptions, imposing nearly three-quarters of a billion dollars in new revenue measures and nearly $900 million in new spending, lawmakers should prioritize structural budget reforms that would provide long-term fiscal stability.

Until Springfield addresses the root causes of Illinois’ fiscal instability, taxpayers will remain stuck in a cycle of higher costs and disappointing results.