Tax Policy

Brief History of Illinois’ Budget Crisis

In a 72-45 vote, the Illinois’ Democrat-controlled House of Representatives passed a bill for the state’s fiscal 2018 budget which includes a $5 billion tax package. The two year standoff between the state’s Republican Governor, Bruce Rauner, and the Democratic-controlled legislator has plummeted the state’s credit rating to near junk status. But with unemployment down, housing prices stabilizing and economic growth up since the great recession, how did Illinois find itself on the brink of a fiscal collapse? In order to answer this question we need to take a brief look back in history. 

2007-2009: The Great Recession

According to the Bureau of Labor Statistics, or BLS, Illinois lost 412,000 private sector jobs during the two year period after the start of the great recession. This drop in private sector jobs sent unemployment skyrocketing along with unemployment insurance and other safety net programs.

From 2007 to 2010 annual revenue dropped by $2.5 billion dollars. Without the impact of the great recession revenue would have been $4.5 billion dollars greater in 2010, given a 2% annual growth in GDP. Couple this decrease in revenue with increasing budgets and you’ll find yourself with a fiscal nightmare.

2011: 66% Tax Increase

To fix the $15 billion budget deficit, the Illinois legislature approved a 66% increase in income tax rates. The bill increased personal income tax rates from 3 percent to 5 percent and corporate tax rates from 7.3 percent to 9.5 percent, respectively. The measure was intended to be temporary and would phaseout starting in 2015.

Illinois is one of 9 states to have a flat tax rate so the impacts of the tax rate increase was significant. Personal income tax collected increased from $9.5 billion in 2010 to $18.3 billion in 2014.

2011 – 2013: Unresolved Pension Issues

From 2011 – 2014 Illinois’ credit rating took major hits by being downgraded each year by the major credit agencies. Unbalanced budgets, rising pension cost and political turmoil sent Illinois credit rating sliding further and further. Although the Great Recession added to Illinois’ fiscal problems, their structural budget issues were years in the making.

According to the Commission on Government Forecasting and Accountability, during the fiscal years 1996 to 2016 unfunded pension liabilities grew 675 percent. The commission attributed the largest share of that growth to a shortfall in employer pension contributions.

As a general rule, healthy pension funds should have roughly 80 percent of future obligations on hand – many big pension funds in Illinois are in the sub 40 percent range. This lack of funding over the last two decades is causing retirement payouts to consume a larger part of the state’s overall budget. From 2011 to 2017 pension cost have risen from 9% to 21%, respectively, of the state’s total budget.

2014: Illinois Gubernatorial Election

The 2014 Illinois’ gubernatorial election was a huge shakeup in Illinois’ political landscape. Businessman and venture capitalist Bruce Rauner defeated Incumbent Democratic Governor Patt Quinn on a platform of lower taxes and spending reform.

Quinn’s defeat meant that the expiring tax increase from 2011 would not be renewed and budget debates going forward would be contentious. Quinn argued that the state could not afford the tax cut while Rauner argued that the tax cuts would make the state more competitive

2015: Automatic Tax Cuts

On January 1st of 2015 Illinois tax rates for individuals dropped from 5% to 3.75% while corporate tax rates dropped from 7% to 5.25%, respectively. In 2015 alone, revenue from corporate and individual taxes dropped by more than $1 billion.

To offset this decline in revenue Rauner  puts forth proposed budget cuts that reduced funding for Medicaid and would reform state pensions.

2016 – 2017:  Budget Battle

For the fiscal years 2016 and 2017 the budget battle escalated even further. Illinois became the first state to fail to pass a budget for two consecutive fiscal years. In order to keep the sate running, legislators relied on court orders and stop gap measures.

On top of this, Illinois has seen an exodus of sorts with it’s state population actually declining in 2016. Although corporate and individual tax rates remained the same, revenues from these sources dropped by more than $3 billion in a single year.

The decline in population has been several years in the making with more and more people moving to warmer areas with lower cost of living and better job opportunities. According to a recent study, Illinois has the highest median property tax rate in the nation at 2.67 percent.

Present: Tax Hike

After failing to pass a budget for two fiscals years the Illinois House of Representatives passed a budget for the fiscal year 2018. In the budget is a $5 billion tax hike which includes raising individual tax rates from 3.75 percent to 4.95 percent and corporate tax rates from 5.25 percent to 7 percent. The bill is essentially a reversal of the automatic tax cuts in 2015.

Future Outlook

The future fiscal outlook for Illinois looks grim. With increasing tax rates, decreasing population and increasing cost to sustain debt and pension benefits legislators will find it difficult to undo the mistakes of the past. The legislation still needs to make it past the Illinois Senate with a promised veto from the Governor.

Even if the legislation passes with a veto proof majority, the underlying structural and economic conditions remain the same. Only with a combination of economic growth, pension reform and a reversal of the declining population will legislators be able to  mend Illinois fiscal burdens.

 

 

 

 

 

Jeremias Ramos is a CPA working at a nationally recognized full-service accounting, tax, and consulting firm with offices conveniently located throughout the Northeast. Jeremias specializes in tax and business consulting with focus areas in real estate, professional service providers, medical practitioners, and eCommerce businesses.

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