Taxpayer Accountability and Budget Stabilization Act

This Report provides a detailed analysis of both Governor Bruce Rauner’s and the General Assembly’s two very different proposals for the FY2016 General Fund budget. Both budget proposals would cut services and increase the state’s deficit due to the phase down of the temporary tax increases in the state’s personal and corporate income tax rates that became effective on January 1, 2015. Collectively, those income tax rate cuts will cause Illinois’ General Fund to lose $4.6 billion in recurring revenue over the course of the full fiscal year.

While Governor Rauner’s budget proposal would cut spending by $5 billion, CTBA analysis found that $3.2 billion of his proposed spending cuts will likely not be realized in FY2016 for legal, constitutional, and related reasons, and therefore, would increase the state’s General Fund deficit to $9.2 billion. Meanwhile, the General Assembly’s proposed FY2016 budget would cut spending by $590 million, but, without the sufficient revenue needed to cover the higher level of spending it authorizes, it would increase the projected accumulated General Fund deficit to nearly $10 billion.

CTBA's issue brief, The Pending FY2016 Fiscal Cliff details the significant—potentially over $12 billion— fiscal shortfall facing the next General Assembly and Governor-elect Bruce Rauner as they work to craft a General Fund budget for Fiscal Year 2016. The issue brief delineates the amount of recurring income tax revenue the state stands to lose when the temporary income tax increases under the Taxpayer Accountability and Budget Stabilization Act of 2011 phase down on January 1, 2015, as well as the worsening of other fiscal pressures that are projected to occur under current law.

Assuming no tax policy changes, if spending on services in FY2016 is held constant in nominal, non-inflation adjusted dollars at FY2015 levels, the state’s accumulated deficit in its General Fund will almost double, increasing from an estimated $6.8 billion in FY2015, to $12.7 billion by the end of FY2016.

This Issue Brief provides CTBA's analysis of gubernatorial candidate Bruce Rauner's position paper on fiscal policy, "Bring Back Blueprint: Jobs and Growth Agenda” (the “Blueprint”). The Blueprint represents candidate Rauner’s most complete policy statement on how to resolve the very real and serious fiscal problems that have plagued Illinois state government for decades. After taking into account all of the Blueprint’s proposals, the Illinois budget would be $5.9 billion short in FY2016, and that is before factoring in the current projected deficit from FY2015, which would increase the total accumulated deficit to $12.4 billion in FY2016. The Blueprint presents no data, plan, or policy proposal as to how to balance the budget.

Because the Illinois legislature failed to act during the spring 2014 legislative session, both of the temporary state income tax increases that became law under the Taxpayer Accountability and Budget Stabilization Act of 2011 (TABSA) will begin to phase down halfway through Fiscal Year (FY) 2015, which begins on July 1, 2014. Under TABSA, the personal income tax rate will decline from 5 percent to 3.75 percent, and the corporate income tax rate will drop from 7 percent to 5.25 percent beginning on January 1, 2015. This Fact Sheet provides an overview of the FY2015 General Fund budget passed by the General Assembly, and demonstrates that in this case there is a very high cost of doing nothing. 

Why, on March 26, 2014, did Governor Pat Quinn make the unusual move of introducing two different proposals for the fiscal year (FY) 2015 General Fund budget? The answer is simple. The Governor proposed two very different spending plans because the state faces two very different potential fiscal realities in FY2015. That is because both of the temporary state income tax increases that became law under the Taxpayer Accountability and Budget Stabilization Act of 2011 (TABSA)  are scheduled to begin phasing down this coming fiscal year. Under TABSA, the personal income tax rate will decline from 5 percent to 3.75 percent, and the corporate income tax rate will drop from 7 percent to 5.25 percent on January 1, 2015, halfway through the fiscal year. Collectively, those rate reductions will cause the state to realize a loss of $2 billion in revenue from FY2014 levels.  

Given Illinois’ already shaky fiscal condition, that loss of revenue will be impossible for the state’s General Fund to absorb without significantly reducing FY2015 spending on core services from FY2014 levels. Here is why: before losing the revenue from the phase down of the temporary tax increases, Illinois already has an accumulated deficit of $6.8 billion. That is roughly 27.8 percent of total FY2014 spending on the core services of education, healthcare, human services, and public safety, which collectively account for 90 percent of all FY2014 General Fund appropriations. Illinois has that significant accumulated deficit despite the new revenue generated by the temporary tax increases (personal and corporate) that passed under TABSA, and the $4.7 billion in service cuts made over the last five years.  So if the temporary tax increases are in fact allowed to phase out, the Governor will have no choice but to implement significant spending cuts.

That somber fiscal reality led the Governor to introduce two different spending proposals for FY2015. The first, which is the Governor’s “Recommended Budget,” is built on the assumption that rather than be allowed to phase down, the income tax rate increases passed under TABSA are either extended or made permanent. The second is a “Doomsday Budget” in which the Governor identifies the type of significant cuts—particularly funding for education and human services—that would have to be made if the temporary tax increases are allowed to phase down as currently provided in TABSA. 

Presentation on the FY2015 budget proposals given at the National Associatioin of Social Workers Advocacy Day in Springfield, Illinois.

Governor's FY2015 Proposed General Fund Appropriations ($ Millions)

The fiscal problems that have historically plagued Illinois are on full display in the FY2014 General Fund budget passedby the Illinois General Assembly. The state’s accumulated deficit remains significant, and in all likelihood will be at least $8 billion by the end of FY2014. Despite increases for some aspects of the General Fund budget, net spending on services will be $173 million less in FY2014 than in FY2013. Meanwhile, as spending on service delivery continues to decline, the annual cost of debt service continues to grow—specifically the debt owed to the state’s five public pension systems. 

All of these problems can be traced back to the state’s flawed tax policy, which creates inadequate revenue growth to maintain service levels from one year to the next. This means that, even when spending on services are held constant in real, inflation-adjusted terms over time, deficits nonetheless materialize due to insufficient revenue growth. This makes it incredibly difficult for Illinois to provide public services at the levels needed to meet the demographic needs of the state. But as difficult as things are now, given current law on state tax policy, they are about to get much worse. 

That is because the temporary income tax increases passed as part of the Taxpayer Accountability and Budget Stabilization Act of 2011 (PA 96-1496)1 will begin to phase out in fiscal years 2015 and 2016. Unfortunately for Illinois, the additional revenue being generated from those temporary tax increases are all that stand between state government and insolvency. Consider that the accumulated deficit projected for the FY2014 General Fund will be at least $8 billion, even with the revenue from the temporary tax increase. That means 32.5 percent of the $24.5 billion in scheduled spending on services for FY2014 is in reality deficit spending. If Illinois did not have the revenue from the 2011 temporary tax increases over the last three fiscal years, and spending were held constant, the state’s accumulated deficit in FY2014 would be $33 billion—meaning the deficit would be $8.5 billion more than total service appropriations.

For too long, Illinois has tried to resolve its structural fiscal problems with temporary fixes, service cuts and irresponsible practices—like borrowing against the pensions. All, predictably, to no avail. The FY2014 General Fund budget makes it abundantly clear that the time for half measures has passed. To solve its structural problems Illinois must enact comprehensive tax reform that simultaneously: (i) generates adequate new revenue to sustain investments in core services over time; (ii) taxes citizens more fairly; and (iii) otherwise comports with the principles of sound taxation for a modern economy.