COVID-19 clouds Illinois’ revenue prospects
Illinois Gov. J.B. Pritzker’s administration and the General Assembly’s non-partisan research arm presented closely aligned revenue estimates to lawmakers this week, but whether those numbers hold up is an open question due to the COVID-19 outbreak.
Illinois’ “big three” tax sources are the corporate, individual income and sales taxes, which make up 76% of state revenue in the $40 billion general fund. Federal sources follow at 9%. Personal income taxes account for $19.7 billion, the corporate tax, $2.4 billion, the sales tax, $8.5 billion, and federal sources, $3.7 billion.
Before accounting for an infusion of new income tax revenue should voters approve a graduated tax in November, both the Governor’s Office of Management and Budget and the Commission on Government Forecasting and Accountability project modest growth for the fiscal year beginning July 1. The reports and committee hearings come as lawmakers dig into Pritzker’s proposed $42 billion budget.
Both see no reason for current alarm but warn of the risks COVID-19 poses to the estimates.
“There are risks to the” U.S. economic forecast led by ongoing global trade tensions that persist and on the coronavirus, Illinois Department of Revenue chief economist Marty Johnson said during a House Revenue and Finance Committee hearing Thursday. “Economic forecasters and health experts alike are still assessing the situation. It's premature to quantify the potential impact on the U.S. economy."
While it’s premature to quantify the impact, all are watching indicators on consumer confidence and supply-chain interruptions that could impact state exports and sales, Johnson said.
Asked by Rep. Steve Reick, R-Woodstock, about whether the department had analyzed whether the economic impact was tracking prior viral outbreaks of the SARS and the H5N1 avian influenzas, Johnson said “the economists have started to use that as a baseline in their analysis … nothing is out there suggesting a certain number. It’s just too early to tell."
COGFA also acknowleged the uncertainty of its numbers used to craft the budget as they don’t factor in the potential volatility associated with COVID-19.
While inflation remains tame and national gross domestic product was forecast to grow 1.9% for 2020 and 2.0% for 2021, “impacts of the coronavirus on the global supply chain are expected to put downward pressure on both global and U.S. economic growth,” COFA warns in its teconomic forecast and revenue estimates.
In the next couple of months, “I think we will start seeing some revisions to the forecast,” said COGFA’s revenue manager, Jim Muschinske, adding that he’s not yet seen economists predict negative growth but there are concerns about supply-chain interruptions. “The bottom line is we simply don’t know at this early stage what the impact will be.”
Any cut in growth that accelerates an economic downturn could pressure both Chicago and Illinois finances due to structural budget gaps and their big pension burdens — $30 billion for the city and $137 billion for the state. In addition to a loss of tax revenues, a prolonged market loss that is not recovered, even for funds that smooth results, could further weaken poorly funded ratios.
The city has a more than $550 million reserve from privatizing the Skyway toll bridge, but it helps prop up its weak ratings that range from junk to the single-A category. Two major conventions have cancelled shows at McCormick Place, heightening worries over the impact on Chicago’s books as tourism-related taxes on restaurants, parking, taxis, and hotels are funneled to city coffers.
Illinois lacks any reserves and modest ending balances in the $100 million range are projected this year and next. The state is banking on voters approving a move to a graduated income tax from a flat one to begin building a rainy day fund and structurally balancing its budget. Illinois would raise about $1.4 billion from a higher tax structure on top earners in fiscal 2021 and $3.6 billion annually going forward. Rating agencies have said the state won’t truly have balanced its books unless it pays down its $6 billion to $7 billion bill backlog and makes actuarially — not statutory — pension contributions.
City and state economic budget and economic forecasters should be concerned, said Richard Ciccarone, president of Merritt Research Services.
Weakened fiscal positions make it all the harder to weather a crisis. “We pride ourselves on being a global city and a global state and with that comes the consequences when the world gets sick,” Ciccarone said. “We have more to lose because we are fiscally vulnerable.”
Ciccarone said some offsets are in place to help the city and state weather an economic hit, such as the city and state’s healthcare, research institutions, and drug manufacturers that will give it a role in dealing with the public health solutions and could in turn, bolster the economy.
In a crisis, Ciccarone said, borrowing for cash flow, deficit financing, or expenses like healthcare are “legitimate” actions if allocated solely to deal with a crisis. Congressional approval for a more a more than $8 billion package to deal with the outbreak is a good sign, Ciccarone said.
The fiscal 2020 revenue picture is so far tracking close to prior estimates, both COGFA and DOR said. “We are right on the mark,” said DOR director David Harris.
“Illinois is in decent shape for a state facing a slowdown in manufacturing, poor agricultural conditions, and numerous demographic and fiscal problems. The economy is doing better than it has in some time,” COGFA told lawmakers summing up a Moody’s Analytics report.
The state’s economy is dampened by population losses, poor demographics, and fiscal uncertainty that was worsened by a two-and-a-half-year budget impasse that ended in 2017. The state carries the lowest ratings, just one to two notches above junk of any state, and pays the highest yield penalties.
The 2019 estimate projected a 0.4% loss in population — the same as the previoius two years — with a 0.3% loss in fiscal 2020 and 0.2% loss in 2021, dropping to about 12,600 residents in 2021.
GOMB projects $42.231 billion in revenue next year, including about $1.5 billion if the graduated tax takes effect midway through the fiscal year on Jan. 1, while COGFA projects $42.191 billion.
Pritzker's proposed budget sets aside $1.4 billion in spending should the graduated tax amendment fail with $865 million in spending being held back and another $531 million of one-time measures being taken through interfund borrowing and transfers.
The various measures include delaying $300 million in corporate tax refunds and $400 million in employee group healthcare payments, cutting $150 million in a planned increase to education aid, keeping $74 million in income-tax sharing with local governments and $25 million from transit districts.