Governor Pritzker’s Budget Proposal: New Money and Old Tradeoffs

April 30, 2024

By Paula R. Worthington, Senior Lecturer and Academic Director, Harris School of Public Policy, University of Chicago

Governor Pritzker’s proposed budget for Illinois’s 2025 fiscal year includes increased revenues and spending, additions to budget reserve funds, and changes to state-sponsored pension plans for its current and future retirees.  As budget deliberations unfold this spring, this is an excellent time to highlight key public finance principles in the context of the Governor’s proposal.

Look at the big picture, not just the general funds.

The proposed budget includes $50.5 billion in general funds expenditures, providing support for key programs in education, health care, and human services. These funds are also used to make the state’s pension fund contributions and support basic governmental services.

But across all funds, appropriations would be over twice as high, at $123.2 billion.  Medicaid expenditures; certain assistance programs for income, housing, and health care; spending on roads and transit—all this spending takes place via special funds, not general funds, making it difficult to fully evaluate the proposed spending priorities.  More generally, a full assessment of the budget proposal requires looking at revenues and spending across all funds:

Focusing on general funds also obscures the true importance of a given program or revenue source.  For example, spending on Medicaid topped $32 billion in FY 2023, but much of that spending flowed through special funds such as the Healthcare Provider Relief Fund, where the state records payments to Medicaid providers as well as federal reimbursements for the joint federal-state program. And the contentious Health Benefits for Immigrant Seniors and Health Benefits for Immigrant Adults programs does not appear in the general funds budget at all, yet has a recommended appropriation of $628.7 million for FY 2025.

The state’s credit ratings reflect the overall fiscal picture, not just what happens inside the general funds.  Analysts assess special funds (e.g., debt service, pensions, and grant-supported), not to mention liquidity, reserves, budgetary practices, and so on.  Credit analysts have mentioned increased “rainy day” funds,  solid growth in tax revenues, and ongoing commitments to funding pensions when announcing recent upgrades for Illinois—avoiding general funds deficits is helpful but far from sufficient to assess credit-worthiness.

There’s more than one way to trade off short-term gain against long-term pain.

Borrowing to pay operating expenses in excess of revenues; “scoop and toss” debt restructuring; shortchanging pension obligations— the list of “bad” ways to deal with budget pressures goes on and on. And the proposed budget adds a new item to the list:  extending the limitation on net operating losses (NOL) that can be claimed on state corporate income tax (CIT) returns.  By capping how much can be claimed at $500,000 per year through 2027, the proposal would artificially raise taxable income in the short run and redistribute it to future tax years—thus supporting CIT revenues now in return for depressing them later.

Here's how that works: Federal and state corporate income tax structures have long allowed firms to “carry over” losses from previous years to smooth out income fluctuations, ensuring that taxes reflect average profitability over time. Until 2020 in Illinois, firms could carry losses forward for 12 years, but for the 2021-2023 tax years, these NOL were capped at $100,000 per year, forcing firms to “wait” before claiming losses in excess of that limit.  Thus, under current law, we would expect to see a big decrease in taxable corporate income and a decline in CIT revenues in 2024.

Under the proposed budget, the annual limits would extend through 2027 but be raised to $500,000/year.  This would raise taxable corporate income and CIT revenues relative to expectations under current law—the estimated revenue impact is $526 million in FY 2025.  “Those that are impacted will only be delayed in using their NOL deductions; they will not lose them.”

Budgets Can Be Expressions of Priorities or Political Documents…or Both.

Budgets have long been understood to reflect a jurisdiction’s values and to translate those values into programs and policies for raising funds and providing services. But they are also political in nature, and recommendations by a jurisdiction’s chief executive often include elements unlikely to make it into enacted budgets but likely to communicate the leader’s priorities to his/her constituents.  More pointedly, proposed budgets offer a starting point for budget negotiations, not necessarily an ending one.  The Governor’s proposed budget is no different, and may include elements already known to be contentious.

For instance, consider the proposed spending of $182.0 million via “Welcoming Centers” and the “Home Illinois” program providing food, shelter, and other humanitarian services to migrants seeking asylum.  Recent budget hearings highlighted concerns from state legislators about past and future commitments, and available data on spending are incomplete. A state data dashboard reports state  spending of $64.6 million between November 1, 2023 and March 31, 2024, but a fuller accounting indicates that the state spent $162.6 million of its own funds in FY 2023 and has spent $145.8 million in FY 2024 so far.

Proposed Budgets Can Cultivate Debate.

Illinois cities, villages, and towns oppose the proposed elimination of the sales tax on food, collected by the state but distributed to municipalities; the change would reduce local revenues by an estimated $325 million.  Local governments are also likely to be disappointed with the unchanged rates used to calculate their shares of state-collected income taxes, now at 6.47% for individual income taxes and 6.845% for corporate income taxes.

Retailers have expressed opposition to the proposed cap on the so-called “retailer’s discount,” which provides credits to retailers to defray sales tax collection costs; this change is estimated to increase general fund revenues by $101 million.

Sports gambling stakeholders also object to the proposed increase in the wagering tax from 15% to 35%, forecast to generate an additional $200 million for the general fund in 2025.  The proposed hike may depress industry growth and encourage diversion into illegal—and unregulated and untaxed—markets.

What happens next?

The Governor’s proposed budget has something for nearly all stakeholders to like—and to oppose.  Additional revenues come from tweaking tax rates, limitations, and exemptions, not imposing new taxes.  Spending priorities on education and health care are clear overall, but the specifics have generated both support and opposition, as more spending on one program may mean less spending on another.  And while the budget proposal avoids some classic public finance mistakes, it does rely on a few somewhat “oblique” elements, such as limiting the CIT’s NOL deduction and the retailer’s discount.  It’s anyone’s bet—and an untaxed one at that—how the final approved budget will resolve these issues later this spring.

The contents of this blog post reflect those of the authors, and not necessarily those of the GFRC.