The Governor’s Office of Management and Budget projected last week the current fiscal year’s budget will run a $267 million deficit. The budget office recommended taking “immediate” action to plug the hole.
And the problem gets much worse in the future, with a $2.2 billion projected deficit for next fiscal year, which begins July 1.
So what’s going on? Earlier last week, the Legislature’s Commission on Government Forecasting and Accountability reported that state corporate income tax receipts are absolutely tanking this fiscal year.
Corporate income tax receipts for the first quarter of the fiscal year were a whopping $215 million (net) lower than the same period during the previous fiscal year, the commission reported.
The real mystery was that corporate receipts had actually been projected to grow by 10.8% ($438 million) over the year, “largely due to several revenue-enhancing provisions” passed in May, the commission explained.
That growth is obviously not happening. The commission speculated that corporate tax cuts passed by Congress in July “may offset much of the anticipated corporate tax revenue growth from these state-level reforms.” Since much of the state’s tax code is in sync with federal law, the federal changes were suspected of being the cause of the state’s unexpected shortfall.
Well, the governor’s budget office’s latest report confirms the commission’s speculation.
According to Governor’s Office of Management and Budget, the “One Big Beautiful Bill Act” will cost the state $587.2 million this fiscal year in corporate income tax receipts and another $249 million in individual income tax receipts (although the commission reports that individual tax receipts are still rising as expected).
The largest hit, a change that accelerates research and development expensing, represents about $320 million of that, according to the governor’s budget office.
The governor’s budget office said it wants the Illinois General Assembly to “immediately” change state law to decouple from the new “bonus depreciation” law ($121 million in corporate income taxes and $23 million in individual taxes) and unspecified others. It also wants the General Assembly to update state law to “reflect the federal change from global intangible low-taxed income to net controlled foreign corporation tested income” ($90 million corporate).
The annual fall veto session begins Tuesday. So the assumption is something will happen during that session.
Gov. JB Pritzker’s executive order issued in late September to “identify up to 4 percent General Funds budgetary reserves to mitigate a portion of the impact of the downward revision in the revenue forecast” should keep the deficit at about $267 million, the governor’s budget office said.
Transfers out of the general funds will “decrease by approximately $469 million,” but debt service will increase by $37 million above the originally projected amount. The tax code changes are needed to bring the budget into full balance, on top of the reductions.
But the situation will deteriorate further next fiscal year, according to the budget office: “(B)ased on the current assessment of revenues and maintenance budget pressures for fiscal year 2027, estimated expenditures would exceed revenues by $2.2 billion.”
Last year about this time, the governor’s budget office projected a $3.2 billion budget deficit, which didn’t turn out to be the case. So, take this latest projection with a grain of salt, unless the economy sputters. It’s always been difficult to predict revenues and some spending into the distant future. Things can change so fast.
One side point is that last year’s projections (and previous projections) included the state’s rainy day fund contribution into the end balance number. They’d add up the expenditures and the revenues and show the total, then add in the rainy day contribution and display the final, grand total.
Curiously, the current projections for both this fiscal year and future years do not include that contribution in the deficit projections (a $161 million contribution this fiscal year and $173 million next year). So, the actual deficits may very well be higher than advertised.
It’s unclear at the moment how the Democratic super-majorities will react.
A spokesperson for House Speaker Emanuel “Chris” Welch said the new deficit projections “will be part of the discussion within the caucus” during veto session.
A spokesperson for Senate President Don Harmon said he has been contacted about the situation and expects to be briefed. Meanwhile, “It is under review.”
Rich Miller also publishes Capitol Fax, a daily political newsletter, and CapitolFax.com.