An Unbalanced Approach to Budgeting in Illinois

Much of the focus on the government’s response to the COVID-19 pandemic has been centered on policy-makers inside the Beltway. Illinois governor J.B. Pritzker recently attempted to change that. Speaking in his State of the State budget address, Pritzker spun a yarn about Illinois’ national leadership throughout the pandemic and cast himself as the hero in a budget story about balance and sacrifice.

It has a nice plot, but reality tells a different story. Indeed, the governor’s third annual budget proposal protects his political allies at the expense of taxpayers and people who depend on vital government services, all to close a self-inflicted deficit of $5.5 billion.

Pritzker’s budget includes nine tax hikes worth nearly $1 billion, most of which target businesses still trying to survive after a year’s worth of shutdowns and uncertainty during the global crisis. The governor’s administration is branding these tax increases as “closing corporate tax loopholes,” but none of the credits or exemptions that the budget proposes to reduce or eliminate can be fairly or accurately characterized as “loopholes” at all. Some are hardly even about corporations.

For example, the governor wants to reduce the value of a tax credit for a scholarship program that helps low-income families send their children to private schools. Currently, donors who fund the scholarships receive a 75 percent credit toward their state taxes. Pritzker would reduce that credit to 40 percent in order to gain $14 million in new tax dollars, inevitably reducing the amount of scholarships available to those in need in the process.

Other examples of closed “loopholes” include a decoupling from federal tax provisions intended to promote business investments or bring foreign capital back from overseas. Illinois and many other states automatically adopt certain federal tax changes, and decoupling simply means reversing that process. Pritzker also wants to eliminate various state-specific incentives for business investment in new jobs or equipment and to cap the compensation that retailers receive to cover the cost of collecting sales taxes on behalf of the state.

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By punishing small businesses and other job creators, these policies risk doing major harm to Illinois’ post-pandemic economic recovery. Tax increases in the wake of the Great Recession helped give Illinois among the worst growth in home values and personal income of any state in the following decade, along with the largest exodus of residents.

Pritzker is quick to look for ways to tap businesses, but his budget doesn’t include real cuts to state spending. (It does, however, freeze spending on education and most programs at the prior year’s levels.)

The remainder of the deficit is closed, on paper at least, mostly by repeating accounting shell games that have become all too common in Illinois. Through gimmicks such as delaying debt-service payments, sweeping dedicated funds from other state accounts, and relying on overly optimistic revenue projections, Illinois politicians claim to meet their constitutional requirement to pass a balanced budget each year. However, the last time Illinois’ budget actually ended a year in the black was two decades ago.

Each of those gimmicks is included in Pritzker’s budget this year, which should instantly raise red flags about the proposal’s true “balance.”

“We aren’t going to treat people who have been decimated by this pandemic as roadkill,” Pritzker said during his February 17 budget address. “Those most in need in our most desperate times deserve our help, and we cannot fail them.”

Unfortunately, Pritzker’s budget proposal doesn’t match his rhetoric. If he really wanted to prioritize the people, he’d stand up to his political backers and tackle the single-largest cost-driver in the state: Illinois’ public-pension crisis.

Pritzker mentioned the word “pension” just once in his 5,188-word speech, calling for the state to make its full legally required payment. That’s been an issue in the past, and failing to meet that low bar could have triggered credit-ratings agencies to formally make Illinois the first “junk-rated” state. Total pension costs will equal $11.6 billion this year, including not only the $9.4 billion labeled as pension spending in the budget but also the debt service on pension-obligation bonds and other pension-related spending that is obscured in official reporting. That amounts to nearly 30 percent of the state’s expected general revenues.

Illinois spends more of its tax dollars on pensions than any other state in the nation does, both locally and at the state level. But it also has the largest gap between what it pays under current law and what would be needed to keep the debt from growing year after year without reform.

Making the full pension payment required under law isn’t an accomplishment any more than it’s an accomplishment for an individual to pay his or her rent. It should be expected. But it’s even less of an accomplishment when that payment is so large that it eats tax dollars that should be going to vital programs and services, while still failing to prevent the pension crisis from deepening.

From 2000 to 2021, the state’s inflation-adjusted spending on pensions has skyrocketed 533 percent. Spending on education is up a modest 21 percent.
Meanwhile, spending on all other government services, including programs for the poor and vulnerable, has actually fallen by 14 percent. That’s despite two major income tax increases during the past decade.

State lawmakers are expected to receive $7.5 billion in unrestricted aid from President Biden’s proposed $350 billion in state and local aid, which wasn’t accounted for in the governor’s proposed budget. That lifeline should be viewed as breathing room for Illinois to make the long-term reforms it desperately needs to fix state finances, starting with pensions. It should also be used to prevent all nine of the pandemic tax increases in the governor’s proposal.

A “hold harmless” pension-reform plan developed by the Illinois Policy Institute would save the state $2.4 billion in the first year alone and more than $50 billion through 2045, while fully eliminating the debt over that time. A constitutional amendment to the state pension clause — a necessary first step to unlock any reforms — has majority support, according to recent polling. Voters deserve the opportunity to choose this path forward, and legislators in the state General Assembly can pass the amendment to get it onto the ballot without the governor’s approval.

They ought to do so without hesitation.

Governor Pritzker is willing to freeze spending for education and core government services. He’s fine with increasing taxes on businesses in the midst of an economic and public-health crisis, with little regard for how it will impact working people’s ability to find good paying jobs in the aftermath. But pension benefits that allow many state workers to retire in their 50s and receive multimillion-dollar lifetime payouts on paltry contributions? Those are off limits.

The governor has made his priorities clear. Illinois voters won’t forget.

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