Illinois Governor’s Budget Cuts Costs, Corporate Tax Breaks
(Bloomberg) -- Illinois Governor J.B. Pritzker is seeking to cut spending and end some corporate tax breaks to help close the worst-rated state’s nearly $3 billion deficit in the coming fiscal year.
The Democrat is proposing a $41.6 billion budget for the year that starts July 1. That’s down 4.2% from this year and cuts spending on economic development and healthcare costs, freezes hiring and keeps education funding roughly flat. The plan counts on $932 million of revenue by scaling back what Pritzker calls “unaffordable corporate loopholes.” The budget doesn’t rely on new federal aid even as President Joe Biden pushes to give states more stimulus relief.
“As all our families have had to make hard choices over the last year, so too does state government,” Pritzker said. “‘And right now, we need to pass a balanced budget that finds the right equilibrium between tightening our belts and preventing more hardships for Illinoisans already carrying a heavy load.”
Pritzker delivered his third budget address virtually on Wednesday, outlining a plan that his administration described as full of painful choices after the economic crisis spurred by the pandemic. It’s in stark contrast to last year, when Pritzker presented a spending plan pitching more dollars for education, public safety and pensions. Instead, the 2022 budget reduces spending by $1.8 billion following $700 million in cuts in fiscal 2021 after Covid-19 business closures reduced revenue.
“I admit, I wish the last year had been about all the normal problems of government –- lowering taxes and fixing roads and making college more affordable –- instead of once in-a-lifetime problems like hunting for N95 masks, and building covid testing from scratch, and constructing a fair and science-based strategy for mitigating a new and deadly disease,” Pritzker said. “This budget proposal reflects that struggle.”
While recent economic gains helped shrink the fiscal 2022 gap from an earlier estimate of $5.5 billion, the state’s finances are still stressed. Unpaid bills of $5.2 billion and an unfunded pension liability of about $141 billion weigh on Illinois’ credit rating, keeping its ranking only one notch above junk and the lowest of all U.S. states. Illinois has been faced with higher borrowing costs than its peers and is the only state that tapped the Federal Reserve’s Municipal Liquidity Facility last year.
The federal government has already provided about $9.9 billion to Illinois through stimulus measures since March, which have bolstered the state’s budget. More aid may be on its way as Congress debates another package and the Biden administration pushes for $350 billion of state and local aid. Under that plan, Illinois and its local governments would receive a projected $13.2 billion “to help combat the coronavirus and address the budget shortfalls it created, helping these governments avoid tax increases or cuts,” according to an estimate from Illinois Representative Raja Krishnamoorthi.
“Any money we receive from the federal government needs to be spent wisely by paying down borrowing and our bill backlog,” Pritzker said Wednesday. “Anything remaining must be used to invest in expanding jobs and economic growth.”
Additional revenue would also help after Illinois voters in November rejected Pritzker’s proposal to shift the state’s flat income tax to a progressive rate that would raise levies on the rich and boost revenue. After that failed and to help fill its deficit, Illinois took two loans from the Fed’s emergency lending program last year. The state took a $1.2 billion loan in June and borrowed $2 billion more in December. Illinois plans to sell $2.56 billion of general obligation capital bonds next year, down from $2.92 billion this year, budget documents show.
The governor must now negotiate with the Illinois General Assembly for passage of the budget.
“The budgetary situation comes as no surprise as the graduated income-tax proposal was shot down by voters in November,” Dennis Derby, a portfolio manager for Wells Fargo Asset Management, said in an email on Tuesday. “The governor has proposed cutting expenses and reducing the ability for certain corporations to reduce their tax liabilities. While this is challenging, we expect the state to make its best efforts to continue to reduce the budget deficit.”
Republicans criticized the budget plan for its lack of pension reform and rejected the changes to corporate tax breaks. Pritzker’s tax proposals include:
- Cap deduction on corporate net operating losses for the next three years at $100,000 annually to generate $314 million
- Carve Illinois out of the 100% accelerated depreciation rule added under the 2017 Tax Cuts and Jobs Act for $214 million
- Align Illinois’ tax treatment of foreign-source dividends with its treatment of domestic dividends, generating $107 million
- Accelerate the expiration of exemptions for biodiesel for $107 million
“I’m disappointed,” state Representative Avery Bourne, a Republican, said during a press conference after the budget address. “Illinois deserves better.”
Some business groups also voiced concerns about the corporate tax proposals.
“We call on the governor and legislators to work on a better state budget framework this spring that recognizes the pain caused by the pandemic,” Josh Sharp, chief executive officer of the Illinois Fuel and Retail Association, said in a statement. “At a time when so many small businesses and families they support are teetering and on the brink of disaster, this new Illinois budget proposal would push many over the edge.”
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