Pritzker wants to spend record amount but needs $898M in tax hikes to do it

Gov. J.B. Pritzker’s record-setting $52.7 billion 2025 spending plan needs massive tax increases. Tax changes will hurt individuals, businesses and local governments.

Illinois Gov. J.B. Pritzker will set another state record if his $52.7 billion budget for 2025 is passed. He described it as “tight” as well as “focused and disciplined.”

But it relies on $898 million in new taxes. It is nearly $13 billion more than the state budget when he took office.

So, yes, it’s focused and disciplined – as much as sailors on leave.

Here’s a look at the details, winners, losers and those who will be left wounded.

Revenue

Illinoisans should be most cautious of the call for massive tax hikes, $898 million to be exact, on corporations, retailers, sportsbooks and even individual taxpayers. While the governor specifically singled out his proposals to create a state-level child tax credit and eliminate the state’s grocery tax – revenue that goes entirely to local governments – in his address Feb. 21, he failed to mention that in total his series of proposals would substantially raise taxes for Illinoisans.

Extend cap on net operating losses

The largest tax hike in Pritzker’s budget proposal is the extension of Illinois’ cap on net operating losses, which will hike corporate income taxes for companies recently losing money, by $526 million in the 2025 fiscal year. Because the state operates on a fiscal year that runs from July-June and Illinois corporate income taxes are paid quarterly, this tax hike could effectively be doubled in the 2026 fiscal year, resulting in a tax hike of more than $1 billion if current projections hold.

Illinois enacted the current cap on net operating losses beginning in the 2021 tax year to avoid large declines in corporate income tax revenue, as many companies began losing money during the pandemic. That cap is set to expire at the end of the 2024 tax year. Pritzker is proposing increasing the threshold of the cap from $100,000 to $500,000 and extending the cap through tax year 2027, meaning the businesses in Illinois losing the most money will continue to pay corporate income taxes.

Net operating loss provisions are an important part of the state’s tax code that ensure businesses are treated fairly when it comes to taxation, regardless of changes in their profitability. Capping these provisions can lead to companies paying far higher effective tax rates than the state’s statutory corporate income tax rate. Because of this, every state tax code and the federal tax code contain net operating loss provisions. Only two other states – Pennsylvania and New Hampshire – place caps on the amount of losses a business can claim. This burden would be atop Illinois’ corporate income tax rate being the second-highest in the nation.

Sports wagering tax hike

Another major change proposed in Pritzker’s budget address was a massive hike in Illinois’ sports gambling tax, which he proposed raising from 15% of gross revenues to 35%. More than doubling the tax rate is estimated to cost sportsbooks in Illinois an additional $200 million. The change would make Illinois’ sports betting tax rate the fourth-highest in the nation.

While sports gambling revenues are currently dedicated to funding infrastructure projects, the new tax dollars would go directly to the state’s general revenue fund.

Cap retailer’s discount

Pritzker has also proposed further business tax hikes by limiting how much businesses are allowed to keep for collecting sales and use taxes for the state and local governments. The measure would effectively raise taxes by $186 million on retailers.

Retailers now retain 1.75% of the sales taxes for collecting and sending them to the government, so long as they properly file and pay their applicable sales taxes by their due dates. Under Pritzker’s proposal, the value of this tax credit would be capped at $1,000 per month. Current law does not cap this retailer’s discount.

The tax hike is expected to yield an additional $186 million for state and local governments – $101 million for the state, $85 million for local governments. Illinois levies the highest sales taxes in the Midwest at a combined state and average local sales tax rate of 8.86%, the seventh highest in the nation. Capping the retailer’s discount would make the state’s sales tax system even more detrimental to businesses. The Illinois Chamber of Commerce and the Illinois Retail Merchants Association both oppose the proposal.

Lower standard deduction

Perhaps the most insidious tax hike in Pritzker’s 2025 budget proposal is a hidden $93 million income tax hike on individuals. He will get that money by shortchanging the inflation adjustment to the state’s standard income tax exemption.

Illinois’ standard exemption is supposed to automatically increase each year to keep pace with inflation, preserving the value of the exemption over time. However, lawmakers have frozen the standard exemption at $2,425 per applicable individual since 2022 to generate more revenue from taxpayers as inflation was at the highest levels seen in decades. Now, after skipping two years of inflation adjustments, the state’s current standard exemption for tax year 2024 is set at $2,775 per income taxpayer and dependent. Pritzker wants to reduce this exemption to $2,550 per income taxpayer and dependent – a change that would only account for one years’ worth of inflation adjustments instead of the two taxpayers are due.

The change would effectively make an additional $225 of income taxable per applicable individual. The tax increase would disproportionately fall on lower-income earners who receive a larger tax break from the exemption than higher-income earners. Illinoisans paid an additional $113 million in income taxes in 2023 thanks to lawmakers shortchanging the growth in the standard exemption last year.

Eliminate sales tax on groceries

While Pritzker neglected to mention any of his tax hike proposals in his budget address, he did choose to highlight his call to end the sales tax on grocery items. He failed to mention this proposal takes no money from his upcoming budget, because all of the proceeds from the 1% tax on groceries go directly to local governments.

When the 1% grocery tax was suspended during fiscal year 2023, the state budgeted $400 million to reimburse local governments for the lost revenue. The governor did not include a similar proposal in his 2025 budget. Reducing funding for local governments will likely prove challenging to get approved during upcoming budget negotiations, meaning tax relief for Illinoisans may not happen.

Further complicating matters is state budget documents show the grocery tax replacement fund’s excess balance is currently estimated at $148 million, indicating the state only reimbursed local governments for $252 million when it suspended the grocery tax.

Child tax credit

There were some small potential bright spots in Pritzker’s budget proposal, provided the initiatives can make it into law while avoiding serious pitfalls. Most notably, the governor called for the creation of a state-level child tax credit that would return $12 million to taxpayers with children under the age of 3.

A child tax credit could provide an avenue to put money back into the hands of Illinois’ neediest residents while encouraging work. Generally speaking, Pritzker’s proposal adheres to the tenets of good tax policy by phasing-in benefits with earned income. However, because the benefit appears to be tied to the Illinois Earned Income Tax Credit, the tax credit will likely phase-out once an individual’s income reaches a certain level. Illinois’ earned income tax credit phases out completely for single parents earning as little as $46,560.

Tax credits that phase out can harm labor market decisions and lead to rapid increases in effective income tax rates for individuals who no longer qualify for the tax credit. More details from the Pritzker administration are needed to truly determine whether the proposed structure will help or hurt.

Still, Pritzker’s proposed child tax credit is better structured than current proposals filed in the Illinois General Assembly, which have no phase-in but do contain a phase-out schedule – the opposite of what experts recommend – and could very well wind up fostering greater dependence on the state’s social safety net, the opposite of their intended effect.

Expand corporate franchise tax exemption

In addition to the second-highest corporate income tax rate in the nation, Illinois is one of the few states that levies a corporate franchise tax. It is very complicated and costly for businesses compared to the relatively small amount of taxes it generates. Pritzker originally signed a plan to repeal the franchise tax in 2019, but that plan was scrapped with the onset of the COVID-19 pandemic and concerns over declining state revenues.

Currently, the state’s franchise tax exemption covers the first $5,000 in liability for companies. Pritzker’s proposal would double that exemption to $10,000 and is estimated to save corporations $10 million in liability. Despite acknowledging the tax is overly complicated and carries significant compliance costs despite raising relatively little revenue, there is no plan to resume the phase-out of the tax and the current proposal still carries the same administrative burdens of calculating corporate franchise tax liabilities and filing a tax return.

Increased revenue estimates

In addition to the tax hikes in Pritzker’s budget address, the administration is also increasing its revenue estimates for fiscal year 2025. Estimates for total state sources are now projecting an additional $533 million in 2025 – before considering Pritzker’s new revenue proposals – and upping revenue estimates for 2024 by $199 million. The Governor’s Office of Management and Budget had just upped 2024 revenue estimates by more than $1.4 billion in November.

While the governor’s office continues to make large upward revisions to revenue projections, the latest monthly report – published Feb. 5 – from the Commission on Government Forecasting and Accountability suggested revenues through the first half of the fiscal year came in at similar levels as last year. COGFA in March will provide their updated revenue projections for 2025.

The state has no standard, agreed-upon revenue estimating procedure. The lack of a standardized method for determining what revenues will be available often lead to inaccurate revenue estimates that leave taxpayers on the hook for any potential shortfall.

Expenditures

Revisions to revenue estimates and the tax increases proposed by Pritzker more than offset the decline in revenues resulting from the winding-down of the federal resources granted to Illinois after the pandemic. Pritzker’s proposed 2025 budget calls for a $2.3 billion increase in spending beyond the 2024 budget, bringing the state’s general funds expenditures to $52.7 billion, the largest budget in state history.

Human services ($10.98 billion), preK-12 education ($10.8 billion), pensions ($10.489 billion) and health care ($9.4 billion) represent the largest categories of spending in the state budget. While the largest dollar increase in proposed 2025 spending is going to human services, group health insurance and government services costs are growing far faster than the other items in the general funds budget – partly because of the record-setting AFSCME contract approved in 2023.

Human services

The largest dollar increase in spending proposed in the 2025 budget is going to human services. The most notable increases are $182 million in “emergency funding” for migrants arriving to the Chicago area, $116 million for services for people with developmental disabilities and $50 million in additional funding for homeless prevention programs, which brings total state funding for homeless prevention programs to $250 million.

PreK-12 education

Under the state’s evidence-based funding formula, the state is increasing education spending by $350 million, bringing the total funding for school districts to $8.6 billion – an increase of $1.8 billion since Pritzker was elected, even as enrollment has declined each year. Last year, lawmakers canceled the Invest in Kids tax credit scholarship program that helped over 9,600 low-income students choose a school that better fit their needs. Lawmakers yielded to teachers union claims the $57 million program – which was funded via tax deductible donations and didn’t take any money out of the education budget – crowded out funding for public schools.

Pritzker’s proposed budget also includes additional funding for special education transportation and career and technical education programs.

Pensions

Pension expenses are the single-largest item in the state budget, taking up nearly $10.5 billion (20%) of the state’s general funds budget, and nearly $11.6 billion across all state funds.

Still, Illinois’ pension contributions are far below what actuaries determine is required to begin paying down the state’s pension debt. Payments across all funds in 2025 are more than $4.5 billion short of actuarially determined contributions, according to COGFA.

Pritzker unveiled additional proposals regarding the state’s pension systems in his budget address, including adding three years to the state’s current funding plan and raising the funding target from 90% to 100%. Pritzker is correct that the state should be targeting 100% funding to truly solidify the state’s pension systems. However, his proposal ignores the basic fact that Illinois’ pension contributions, while statutorily sufficient, remain insufficient on an actuarial basis – meaning they won’t meet real-world needs. The state’s funding schedule will not contribute above current actuarially determined contribution levels until 2039, but that figure will climb each year the state fails to make an actuarially sufficient payment. In fiscal year 2023, actuarially determined contributions were less than $14.9 billion, more than $1.1 billion below today’s actuarially determined contribution.

Additionally, Pritzker’s budget proposal highlights the need for Tier 2 pensions to be reevaluated to determine if they are compliant with federal law. Illinois’ pension systems must provide benefits that meet or exceed Social Security benefits for the state to continue to avoid paying into Social Security on behalf of employees. Because pensionable salaries within Tier 2 are capped at a level below the Social Security wage base, it is increasingly likely Tier 2 pensions will eventually violate these rules, known as safe harbor provisions. Should this be the case, Tier 2 pension benefits would need to be increased to become compliant with federal law, a measure that would add yet-to-be-determined debt to the state’s pension systems and further complicate Illinois’ funding plan.

Budget Stabilization Fund contribution

Despite $2.3 billion in new spending beyond the 2024 budget, Pritzker is only proposing directing an additional $170 million to the state’s rainy-day fund – officially known as the Budget Stabilization Fund. The small contribution will mean Illinois’ rainy-day fund balance will reach $2.3 billion – just under 16 days’ worth of state spending under a $52.7 billion general funds budget – meaning total reservices will likely remain the lowest in the nation.

While billions in federal money and stronger-than-expected recovery in revenues after the pandemic allowed Illinois to build its rainy-day fund up from practically nothing in 2019, the fund’s balance remains far too low. Comptroller Susana Mendoza’s own target of 7.5%, or $3.95 billion, would cover just over 27 days of state spending. But Illinois should have enough in reserve to run the state for 60 days, experts with the Government Finance Officers Association recommend. That is $8.8 billion for Pritzker’s proposed 2025 fiscal year budget. In other words, Illinois needs to quadruple its rainy-day fund to have adequate savings on hand.

Conclusion

Rather than exercise restraint as federal COVID funds wind down and revenues begin to return to expected levels, Pritzker’s proposed 2025 “tight” budget calls for substantial increases in spending on the back of massive tax hikes while leaving very little margin for error in the form of revenue estimates or reserves.

Lawmakers have the opportunity to craft a more responsible budget than the one Pritzker has proposed. Rather than redlining the budget and adding new spending, Illinois’ budget should focus on increasing reserves to build the foundation for future tax relief. To make substantial tax relief a reality, state lawmakers must approve constitutional pension reform to both provide retirement security for those reliant on the pension system – remember the state is currently underfunding pensions by $4.5 billion annually – and provide stability to the state budget and tax relief for citizens.

A “hold harmless” pension reform plan such as one originally developed by the Illinois Policy Institute – based loosely on bipartisan 2013 reforms – could help to eliminate state and local unfunded pension liabilities and achieve retirement security for pensioners.

Previous analysis showed changes such as capping pensionable salary, replacing 3% compounding raises with true cost-of-living increases and adjustments to realign benefits with historical inflation rates would have saved the state $2.4 billion in the first year alone, and more than $50 billion by 2045. It would also fully fund the plans, as opposed to the state’s goal of 90% funding, to truly safeguard retirees’ benefits.

There are additional savings measures the state could also enact to begin to reel in spending to a tenable level without compromising service. Realigning health care costs for public employees – who currently pay health insurance costs at half the rate of the private sector – would save the state nearly $500 million annually. Consolidating Illinois’ school district administration, without closing schools, could also save the state more than $500 million in administrative costs without affecting classroom funding.

A responsible spending cap that limits growth in state expenditures to the growth rate of the economy would alleviate the most fundamental problem with Illinois’ budget: expenditure growth exceeds taxpayers’ ability to pay. This misalignment means Illinois is bound to face either frequent budget shortfalls, perpetually rising taxes or both. Illinois needs a spending cap to protect taxpayers from continuous tax hikes and to rein in runaway state spending. Illinois overspending has driven:

• The two largest income tax hikes in state history, in 2011 and 2017
• Pritzker enacting 20 new tax and fee hikes totaling $4.6 billion in 2019
• Voters forced to stop a $3.4 billion income tax hike in 2020
• Pritzker and some lawmakers pushing a $500 million to $1 billion tax hike on small businesses
• Pritzker threatening to raise the flat income tax by 20%
• Pritzker proposing $932 million in tax hikes in his 2022 budget.
• Pritzker proposing nearly $900 million in new taxes in his 2025 budget.

A spending cap would eliminate the constant call for these tax hikes. By linking growth in the state budget to the average growth in the Illinois economy, lawmakers would be able to reasonably predict how much additional state spending their constituents could afford in the coming year without the need to raise taxes. This procedure would create stability within the state budgeting process and allow for modest growth in government funding while also protecting taxpayers from future tax hikes.

Illinois’ state finances have undoubtedly improved in recent years after more than $8 billion in federal aid and stronger-than-projected revenue growth. As a result of these fortunate circumstances, Illinois has been able to pay off state debts and begin to build a more adequate rainy-day fund. However, because of historical fiscal mismanagement, Illinois was not able to provide any substantial, permanent relief to taxpayers or create stability in the state budget.

Rather than follow Pritzker’s recommendations, state lawmakers should consider constitutional pension reform, aligning government health care costs with the private sector, reducing the administrative costs of Illinois’ 850-plus school districts and enacting a responsible spending cap. These measures would put Illinois on a sustainable fiscal path and provide much-needed relief for Illinoisans who are struggling under the weight of Illinois’ highest-in-the-Midwest tax burden.