The Illinois General Assembly just enacted a $55.2 billion General Fund budget for the upcoming 2026 fiscal year. A sizable chunk of that budget, $16 billion, covers mandatory spending obligations Illinois is required to pay either by law, such as debt service owed to bond holders, or contract, like health insurance for state workers. That leaves around $39 billion for services, over 94% of which goes to education, health care, social services and public safety, the core services families rely on across Illinois.
Most of the commentary since the budget passed has highlighted one of three things: what the incremental increases were for various items, like the state’s school-funding formula, which got $307 million instead of the $350 million originally proposed; what got cut, like $330 million in health care for noncitizens between the ages of 42 and 64; or what didn’t get addressed at all, like the $771 million fiscal cliff facing the Regional Transportation Authority. Certainly, this short-term stuff matters. That said, it doesn’t paint a complete picture of state finances.
For instance, while the $307 million bump for K-12 is welcome, the shortfall in what the evidence shows every school needs to provide an adequate education to all students will grow from $2.6 billion this year to $2.7 billion next year. Meanwhile, fiscal year 2026 appropriations for higher education will be around $2 billion, or 42% less, in real, inflation-adjusted dollars than they were 26 years ago. In fact, while year-over-year spending will increase slightly, total FY 2026 General Fund appropriations for the four core services are 12% less in real, inflation-adjusted terms than they were back in FY 2000.
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.
So why does Illinois, which has 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 budget, even though real spending on services will be less next year than at the start of this century?
No short-term budgetary analysis will explain that. However, a review of the long-term data does. And that data shows the Illinois General Fund has a structural deficit. A structural deficit exists when over time, tax revenue growth doesn’t support the inflationary cost of maintaining the same level of public services from year to year. The long-term data also shows 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 the Illinois sales tax, which applies primarily to purchase of goods, not services. That’s a losing proposition, given that the sale of goods accounts for just 17% of state gross domestic product, while the sale of services accounts for 74%. 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 the 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.
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% of earners has declined. Folks in the middle realized a modest 8% growth in income, while the wealthiest 10% saw their incomes jump by 30%. 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 rates on lower levels of income.
Except the 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%. 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.
Bottom line: Getting Illinois’ fiscal house in order is the only way to fund core services sustainably over time, and getting there requires aligning Illinois tax policy with today’s economy.
Ralph Martire is executive director of the Center for Tax and Budget Accountability, a nonpartisan fiscal policy think tank, and the Arthur Rubloff professor of Public Policy at Roosevelt University.
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