Tax Increase(s) Coming to Illinois in 2025

June 2, 2023

By Jim Nowlan

Gov. Pritzker and state lawmakers have recently been patting themselves on the back for the fine financial shape of Illinois. Balderdash. And they know it. There will almost certainly be state tax increase(s) by 2025. As a longtime student of Illinois budgets, I explain why; what should be done, and what likely will be done. Not pretty.

The onset of the pandemic in 2020 scared the federal government into gushing money at state and local governments, and into people’s pockets, enough to solve our state budget problems—in the short run.

The consequences of the federal largesse were obvious: increases in base spending for education, social services and the like, plus increases in tax revenues generated by the gusher. But base revenues stayed the same.

Now, we’re on the downside of the pandemic spending. Revenues will decline, but spending won’t.

The Legislature’s own budget forecasting agency predicted in March of this year that by one reasonable scenario, the state’s operating funds in calendar 2025 will be $9 billion in annual deficit, with a whopping $18 billion in unpaid bills (from a total budget of around $100 billion).

And this doesn’t include the political pressures to spend, spend. Spendthrift Democrats have 2-1 majorities in both houses of the legislature, plus a governor who spent $60 million of his own money in 2017 to push for tax hikes, which were soundly rejected by voters.

Further spending pressures will come from Chicago’s new mayor, who is up to his eyeballs in alligators, facing costly crime prevention, migrant influx and other big city problems. The City already has high taxes, so the mayor will come to his friends in the legislature to bail him out.

The question is when, not if, new taxes. Not in 2024, an election year. The obvious window for action is Spring 2025, which would provide time for taxpayer anger to abate a bit, in advance of the big 2026 gubernatorial elections.

Let’s say Dems decide they need to raise $9 billion a year to fill that projected deficit. Where to find the money?!

Governments tend to tax what we own (property), earn, and buy, and for the privilege of doing business, smoking, drinking, gambling, fishing, hunting and myriad other activities.

Illinois state and local taxes overall are higher than in most states, yet our tax burden is not really an outlier among the states. Except for our property taxes, which are breathtaking—the average residential property tax bill in Illinois annually is $5,000.

The Illinois flat-rate 4.95 percent personal income tax compares favorably with top tax rates in California and New York, and even with some neighboring states. Yet, as most readers know, Florida, Texas and Tennessee have no income taxes whatsoever.

The Illinois tax on sales imposes a relatively light burden on us overall. Our state has nearly 100 exemptions from the sales tax, from building materials to bull semen, and basically doesn’t tax services, as many other states do.

Illinois could raise billions a year by eliminating some sales tax exemptions on goods, and by taxing services and pensions. Taxes on services tend to be “progressive,” that is, “fairer,” because the use of services increases with income.

Pensions cost our state budget billions more than could otherwise be the case. First, our state exempts all pension income, which most states tax; this costs Illinois about $3 billion a year in forgiven revenue. State spending for pensions is an additional couple billion higher than it might otherwise be. This, because we both pay for annual pension outlays to retirees, and also to build up our infamously underfunded asset nest egg, which theoretically should be large enough to pay all benefits, but isn’t.

But, we won’t likely tax services and pensions, nor will we abandon the effort, unnecessary to my mind, to build up the pension nest egg—all are too hot to handle politically.

So, I fear Illinois policymakers will revert to the tried, true and simple, that is, raise the income tax rate. This would, unfortunately, encourage further flight of job creators and their wealth from Illinois.

I recommend business and labor (the latter immensely powerful in Illinois) start talking now about how to shape the coming tax increase(s) in ways that might conceivably attract, rather than scare away, job creators and productive citizens. Because a tax increase(s) is coming.

Nowlan is a former president of the Taxpayers’ Federation of Illinois, a business group. A former professor at the University of Illinois, Nowlan has been an Illinois legislator and state agency director; he held senior posts with three unindicted Illinois governors.