Illinois governor won't seek tax hike as deficit shrinks

Illinois Gov. J.B. Pritzker won’t ask lawmakers to approve a major tax hike to help close the now $3 billion projected gap in the fiscal 2022 budget he unveils next week.

The budget proposal to be unveiled on Feb. 17 during his annual budget address will hold the line on spending, close corporate tax loopholes to keep $900 million in revenue, and redirect revenue from the cigarette tax to the general fund, according to a one-page statement Tuesday from the governor’s office.

Illinois Gov. J.B. Pritzker will lay out his proposed fiscal 2022 budget next week.U.S. Air Force/Senior Airman Jay Grabiec

The statement provides only broad strokes about how the state will close the current year and next year budget gaps and doesn’t include much detail about potential federal funding should a relief package proposed by President Biden win approval. The state last year passed a $43 billion fiscal 2021 general fund budget.

“The governor will be proposing a budget that protects hardworking families from additional hardship — with no tax increase,” the governor’s statement said. It did not specifically say that was a reference to the income tax but that’s what’s been on the minds of lawmakers, municipal bond market participants, and the public.

It said “vital services” in some areas like public health and employment security will be “strengthened” while the budget holds state spending flat based on current levels. Spending cuts announced late last year totaling $700 million will continue into the new the new fiscal year that begins July 1.

Education funding will increase, but that’s due to federal funding, according to the statement. The state will maintain “its existing investment and the governor is committed to ensuring that education is fully funded in future years.” That suggests that the scheduled $350 million annual increase under the 2017 revised funding formulas might not be made in fiscal 2022 but would be in future years.

The budget office previously estimated the fiscal 2022 gap at $5.5 billion but that’s been reduced to $3 billion as the state expects stronger tax revenue performance than previously forecast and it paid down $700 million of borrowing from the Federal Reserve’s Municipal Liquidity Facility early.

The state last year borrowed $1.2 billion of certificates due June 30 and another $2 billion due in three years. Illinois paid 3.42% on the second deal and 3.82% on the first one. The state’s paper seven years and out are currently trading at a 125 basis point spread to the Municipal Market Data’s AAA benchmark, a low level compared to early in the pandemic.

“There is no question that this budget will include painful choices, but as the effect of the pandemic diminishes over the coming months, the governor will continue to focus on economic recovery for the hardest hit,” the statement said.

Pritzker also will “advance long-term structural budget improvements” but the document stopped short of providing any additional details.

Many market participants and members of the GOP believed the Democratic governor would seek a tax hike after voters rejected a constitutional amendment on the November ballot allowing the state to shift to a progressive income tax structure from the current one. Democrats had proposed a rate structure that would raise about $3 billion annually on top earners.

Pritzker attributes about half of the previously estimated current year gap of $3.9 billion to the pandemic and half to structural strains. Pritzker over the last two months called on the GOP, which is in the legislative minority, to lay out potential budget cuts. He would provide little hint as to his plans on taxes aside from comments that cuts will only go so far before critical services are negatively impacted.

The $711 million in cuts announced late last year included a hiring freeze, grant reductions, and operational savings in corrections, healthcare and human services, economic development, culture, the environment, and government services.

Pritzker had also previously asked state agencies to identify 5% in cuts in the current budget and potential 10% cuts in fiscal 2022.

Illinois’ long term forecast last fall warned of deficits between $4 billion and $5 billion annually over the next five years absent structural fixes. That red ink would be piled on to the existing bill backlog that has hovered between $4 billion and $5 billion.

Like other states, including Midwest neighbors Wisconsin and Michigan, Illinois avoided grim early pandemic warnings of tax revenue losses as the recovery began quicker than expected thanks to federal stimulus and changes in consumer spending, a University of Illinois pandemic task force concluded in a recent report.

The net effect of revenue losses from the pandemic through November totaled $801 million for the state’s “big three” sources: personal and corporate income taxes and sales taxes, according to the report from the University of Illinois System's Institute of Government and Public Affairs’ special task force on the pandemic’s impact. The group and state had warned of billions in losses.

The budget document distributed Tuesday did not address any measures relating to the state’s $141 billion unfunded pension tab. The state carries bond ratings at the lowest investment grade level with negative outlooks.

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