Higher revenue leads to tax cuts in 11 states, but not Illinois

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State revenue losses across the country range from far less than expected to none at all. Fiscal healthy countries give something back to taxpayers. That doesn’t include Illinois.

In April 2020, shortly after the COVID-19 pandemic began, state and local governments were projected to have a net budget deficit of $ 300 billion through fiscal 2022, worst-case scenario.

More than a year later, after nearly $ 6.8 trillion in federal government stimulus spending, states and local governments have made a comeback. After a cumulative sales decline of 4% at the beginning of the pandemic, state and local revenues rebounded and ended the year with an overall profit of over 1%.

Virtually every state has fared better than expected, but some states have translated this good news into taxpayer benefits. Eleven states – including the neighbors of Illinois, Missouri, Iowa, and Wisconsin – have cut income taxes, corporation taxes, or both, according to a July report by the Tax Foundation, a non-partisan research organization.

Illinois went in the opposite direction, passing $ 655 million in tax increases in June that specifically hit job workers. The latest unemployment figures show Illinois has remained stable at 7.1% unemployment since March while the rest of the nation bounces back.

Government tax levies exceeded expectations

As the country continues its economic recovery from the COVID-19 pandemic, the tax foundation found in its July report that government revenues significantly exceeded expectations. This was largely due to the nationwide mobilization of $ 6.8 trillion in federal legislative and administrative aid. The Federal Reserve has allocated an additional $ 6.5 trillion for monetary stimulus.

The federal stimulus helped state economies in two ways. First, federal spending helped the private sector help individuals and businesses keep their incomes and spending high – which in turn helped keep state income and sales tax collections up and running. Second, various forms of direct aid, such as grants to health care providers and transport companies, kept vital facilities like hospitals and buses running during the pandemic.

In response to the additional revenue that was accumulated, the eleven states passed reforms to return money to taxpayers through tax cuts. Several of these states – Arizona, Idaho, Iowa, Louisiana, Montana, and Ohio – have also consolidated income class numbers to make their tax structures more neutral.

The tax foundation’s report found that all eleven states that have implemented the tax reform saw tax revenues grow between fiscal years 2019 and 2021, with gains of between 5% and 35%.

The report encouraged other states with strong fiscal positions to consider tax reforms to increase business investment competitiveness and population growth, while cautioning against the policies of states like California and New York. California is facing several bills that would increase the state’s already highest tax rates in the country. New York has already hit individuals and businesses with $ 4.3 billion in tax hikes, even though there has never been a drop in sales.

Illinois in comparatively poor budgetary position, adopts anti-competitive measures

Not only is Illinois lagging behind other states, it is actually moving in the opposite direction in its ongoing attempts to address its budget and fiscal stability problems through tax increases.

From 2019 to 2020, Illinois performed slightly below the national average on revenue, but far better than projections at the start of the pandemic. An analysis by the University of Illinois found that the Prairie State lost approximately $ 1.45 billion in income, sales, and corporate tax receipts. That loss is relative to what Illinois expected before the pandemic, not relative to last year’s collections. The government magazine reported that Illinois was one of 29 states that generated more revenue in the 12 months after the pandemic began than in the previous 12 months. It’s still far less than both the initial loss projections and the federal dollars received by Illinois.

In total, the state government receives over US $ 13.7 billion in federal aid, consisting of over US $ 3.5 billion in funds from the Coronavirus Aid, Relief and Economic Security Act, and over US $ 8.1 billion in funds from the American Rescue Plan and nearly $ 2.1 billion in additional Medicaid matching funds.

Despite the inflow of money from the federal government, Illinois’ budget for fiscal year 2022 included $ 655 million in tax increases aimed at job creators struggling to recover. Financial projections have shown that the federal aid received from Springfield represents a temporary improvement in the expected long-term debt of the state.

Although Illinois recently received a credit upgrade two notches above the scrap metal from Moody’s Investors Service, it still retains the lowest rating in the country. The state has closed every budget year with a budget deficit since 2001. Despite the tax hikes, this year will be the 21st with a government budget deficit.

Illinois spending grew 30% faster than its residents’ personal incomes between 2010 and 2021. This means that the legislature’s expenditure exceeds the taxpayers’ solvency.

But the increased spending was not used for programs that add value to Illinois residents. It has been siphoned off in pensions and other public sector service costs, displacing the services that residents want and need. Pension spending increased by 533% between 2000 and 2021, and spending on health insurance for public employees increased by 126%. Meanwhile, spending on education rose by only 21% and spending on all other services fell by almost 15%.

If Illinois is to be able to lower the tax burden on its residents and increase its competitiveness, as eleven states have recently done, it must adopt significant tax reforms to end its chronic budget deficits and keep spending at levels that taxpayers can afford.

A constitutional amendment that allows for real pension reform offers the only way to permanently repair Illinois’ ailing finances and create a way forward for its residents.