Fiscally Disciplined

On May 31, 2025, the Illinois General Assembly passed a $55.1 billion General Fund budget for FY 2026 (the “FY 2026 GF Budget”). Of that $55.1 billion in total appropriations, roughly $15.9 billion, or 29 percent, cover “hard costs” the state must pay, because they’re either required by law, such as debt service owed to bondholders, or contractual obligations, like health insurance for state workers.

The remaining $39.1 billion in appropriations fund current services for the year. Fully 94 percent of those current service expenditures are targeted to the four core areas of Education (pre-K, K-12, and Higher Education), Healthcare (primarily Medicaid coverage for low-income families), Social Services, and Public Safety. Illinois has historically devoted a similar percentage of General Fund current service expenditures to those same four core areas under both Republican and Democratic gubernatorial administrations.

That said, the FY 2026 GF Budget did not garner bi-partisan support, as no Republicans voted in favor of passing it. In fact, Republican Senate Minority Leader John Curran derided the FY 2026 GF Budget as “unprecedented taxpayer funded spending growth.”[i] Which makes for a good soundbite but does not comport with the data.

Yes, it is true that overall, General Fund appropriations for services in FY 2026 are $1.4 billion or 3.6 percent more in nominal dollars than they were in FY 2025. But that doesn’t tell the whole story. Just like in the private sector, inflation drives up the annual cost of funding services in the public sector. After adjusting for inflation, aggregate appropriations for services in FY 2026 will actually be only $218 million or 0.54 percent more than in FY 2025, which is a marginal change at best.

It also helps explain why Governor Pritzker described the FY 2026 GF Budget as one that reflects numerous “difficult decisions” forced upon Illinois lawmakers. Those difficult decisions included both spending cuts and various one-time and ongoing revenue enhancements.

For instance, the state cut $330 million from the Health Benefits for Immigrant Adults program by eliminating coverage for non-citizens (aka “people”) between 42 and 64 years old. This will effectively deny healthcare support to some 30,000 individuals.

Then there's education, where fiscal strains were evident in funding everything from early childhood to K-12 and higher education. The Department of Early Childhood will receive an appropriation of $21.7 million, up from $14 million in FY 2025. But there will be no increase to the Early Childhood Block Grant in FY 2026, which will remain at the same $748 million allocation as FY 2025. Of course, after adjusting for inflation, that flat funding in nominal dollars results in a real year-to-year cut of $17.8 million.

Meanwhile, the state’s school funding formula, the “Evidence-Based Formula for Student Success Act” or “EBF,” is scheduled for a $307 million increase in funding over FY 2025 levels—less than the $350 million increase originally proposed in February and identified as the suggested annual increase in the EBF legislation itself. Indeed, the $307 million increase to the EBF scheduled for FY 2026 is the lowest year-to-year increase in EBF funding since FY 2021, when the state flat-funded it.

The principal casualty of this reduction in new annual funding for the EBF is the Property Tax Relief Grant (“PTRG”) established under the legislation. Recognizing the over-reliance on property taxes when it comes to K-12 funding in Illinois, the PTRG was included within the EBF legislation to award up to an aggregate total of $50 million annually in property tax abatements on a first come, first served basis to qualifying school districts that applied for the relief. The reduction of new annual funding for the EBF from the initially proposed $350 million to $307 million effectively eliminated the PTRG in FY 2026, and the state has further charged the Illinois State Board of Education with analyzing the effectiveness of the PTRG as a policy initiative going forward.

And while the scheduled $307 million bump for K-12 is still welcome, the shortfall in what the evidence shows every school needs to provide an adequate education to all students increased already from $2.6 billion in FY 2024 to $2.7 billion in FY 2025, and is projected to increase again for the second year in a row, largely due to fluctuating local revenue sources, highlighting the need for stable year-over-year funding from the state.

Similarly, funding for higher-ed is not exactly robust in the FY 2026 GF Budget. Let’s begin with the state’s Monetary Award Program (“MAP”), which provides grant funding to low-income college students. MAP funding will be $721.6 million in FY 2026, a nominal dollar increase of $10 million over FY 2025 levels. After adjusting for inflation, however, that becomes a real, year-to-year cut of $6.9 million. Collectively, higher education will receive a nominal dollar year-to-year increase in appropriations of just $7 million, going from $2.615 billion to $2.622 billion. After inflation, however, that becomes a real cut of $55 million or 2 percent. All-in, aggregate General Fund appropriations for higher education in FY 2026 will be around $2 billion less in real, inflation-adjusted dollars than they were 26 years ago, a cut of about 42 percent.

Indeed, when General Fund appropriations are considered as a whole, the data make it quite evident that spending on public services in Illinois is not truly growing over time. In fact, after adjusting for inflation, General Fund appropriations for the four core services in FY 2026 are fully 8.1 percent less in real terms than they were over two decades ago in FY 2000.

But cutting or otherwise under-investing in core public services still wasn’t enough to get FY 2026 expenses in line with projected revenue.  Which is why lawmakers found it necessary to fill the hole in FY 2026 by manufacturing a total of $1.1 billion in both one-time and recurring revenue through:

  1. Generating $228 million in one-time revenue from a new Tax Amnesty Program;
  2. Generating $171 million in one-time revenue by not making a scheduled transfer of motor fuel sales tax revenue from the General Fund to the Road Fund;
  3. Generating $264 million in recurring revenue from closing two corporate tax expenditures – the GILTI (Global Intangible Low-Taxed Income, which allowed for offshore profit sheltering) and the 80/20 Safe Harbor (which offered tax exemptions to companies conducting 80 percent or more of their business outside the United States);
  4. Generating $72 million in recurring revenue from adjusting the state’s “throwback” rule (which will allow Illinois to tax a larger portion of business income derived from sales to states where the sale was not taxed);
  5. Generating $50 million in recurring revenue by increasing the taxes on vapes, nicotine pouches, and other tobacco products;
  6. Generating $36 million in recuring revenue by enhancing the sports wagering tax to include an assessment of $0.25 per bet on the first 20 million bets placed online, and $0.50 per bet on all bets following that;
  7. Generating $10 million in recurring revenue by removing hotel tax exemptions from short-term rental platforms, so that more companies like VRBO will now be required to pay the tax;
  8. Generating $50 million in recurring revenue from increasing the telecommunications tax from 7 percent to 8.65 percent to include a 9-8-8 surcharge;
  9. Generating an undetermined amount from increasing certain EPA penalties; and
  10. Generating $237 million in one-time revenue from fund sweeps.

 

From a hard costs standpoint, the state is realizing a year-to-year increase of $638 million, or 4.2 percent. As indicated previously, the state is obligated to pay these hard costs either by law or by statute. The largest single year-to-year increase for hard costs is the contribution into the state’s five pension systems required under the 1995 pension ramp legislation. That legislation created a payment schedule that was supposed to get the state’s pension systems 90 percent funded by FY 2045. Unfortunately, the payment plan it instituted is so heavily backloaded that annual increases jump at unaffordable levels, which helps explain the bump for FY 2026.

In addition to the payment required under the pension ramp, the FY 2026 GF Budget includes another $75 million to support increasing the Tier II pensionable earnings cap up to the Social Security Wage Base (“SSWB”). This was added to the budget because the current benefits provided under the state’s Tier II pension system are so inadequate that they fail to satisfy the safe harbor threshold created under federal law which makes Illinois exempt from having to enroll the vast majority of its state workers—and literally all teachers—in the Social Security system. That exemption saves Illinois billions in annual costs.

However, legislation needed to authorize the change in the pensionable earnings cap that this $75 million additional appropriation covers did not pass. For more information on the problems created by the existing Tier II benefit structure, see CTBA’s report: Updated: Illinois Teachers’ Retirement System and Tier II Pension Law: An Overview.

The key take-away from the FY 2026 GF Budget is inescapably clear: despite cutting real spending on services for decades, the state still couldn’t balance its FY 2026  budget without bumping a number of taxes and fees by $482 million, sweeping some $237 million from other state funds, not making a $171 million scheduled transfer to the Road Fund, and creating a tax amnesty program to raise a quick $228 million.

Which begs the question: Why does Illinois, with an economy of over $1 trillion, the fifth largest of any state, have to manufacture a combined $1.1 billion in revenue to balance its General Fund budget, even though real spending on services will be less in FY 2026 than at the start of this century?

When highlighting the “difficult decisions” that had to be made in FY 2026, Governor Pritzker blamed the current fiscal challenges on the uncertainty of federal funding created by the administration of President Trump.  Which is a fair point.  Trump’s fiscal follies have certainly made things worse for Illinois—and virtually every other state.

But the data show there is another culprit to blame for Illinois’ fiscal shortcomings that is both a lot closer to home, and long term in nature. And that culprit is the structural deficit in Illinois’ General Fund. A “structural deficit” exists whenever a tax system fails to generate enough revenue growth over an extended period of time to cover the cost of both: (i) maintaining delivery of the same level of public services from year-to-year, after adjusting solely for changes in inflation and population, and assuming no changes in law; and (ii) repaying existing debt service.  The long-term data also show that flawed tax policy caused this structural deficit, and those policy flaws are clear: neither of Illinois’ two primary revenue sources—the income and sales taxes—are designed to respond to the modern economy. This has created a tax system that’s both unsound and unfair.

Start with Illinois’ sales tax, which applies primarily to purchases of goods, not services.  That’s a losing proposition, given that the sale of goods accounts for just 17 percent of state GDP, while the sale of services accounts for 74 percent. Failing to levy sales taxes on most of the largest and fastest growing segment of the economy means the revenue it generates can’t grow with the economy. Fixing that requires assessing Illinois’ sales tax to the purchase of all consumer services, like neighboring Iowa and Wisconsin do. That reform would generate over $2 billion in new revenue. For more information on why Illinois should expand its sales tax base to include services, please see the report: Modernizing Illinois’ Sales Tax: A Pathway for a Sustainable Future, authored by the Center for Tax and Budget Accountability, the Chicago Metropolitan Agency for Planning, the Civic Federation, and the Illinois Economic Policy Institute.

Then there’s the income tax, which is supposed to create some tax fairness, and respond to how income growth is actually shared among taxpayers over time. Since 1979, the real incomes of the bottom 10 percent of earners have declined. Folks in the middle realized a modest 8 percent growth in income, while the wealthiest 10 percent saw their incomes jump by 30 percent. So to respond to reality and tax people fairly, the income tax should vary with ability to pay, by imposing higher tax rates on higher levels of income and lower tax rates on lower levels of income.

Except Illinois’ income tax can’t, because the state constitution requires utilization of only one, flat rate. To fix this, the state’s flat income tax rate should be increased by 1.5 percentage points to 6.45 percent. That’s enough to generate about $4.4 billion in net new revenue, after covering the cost of implementing a new, refundable tax credit to offset the impact of the aforesaid tax increases on low- and middle- income families. Collectively, these reforms would eliminate the structural deficit, while simultaneously making state tax policy fairer for people.

Check back in with CTBA later this summer to read the full report highlighting the important revenue and spending trends that are contained in the FY 2026 Enacted General Fund Budget made by the Pritzker Administration.

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Endnotes

  

[i] Mitchell Armentrout, “Gov. JB Pritzker blames ‘Trump slump’ for difficult budget year,” Chicago Sun-Times, June 16, 2025.  https://chicago.suntimes.com/illinois-governor/2025/06/16/illinois-budget-signed-pritzker-trump.

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Updates from CTBA