RESEARCH Business Economy

ECONOMY
Illinois financial picture to stay bleak, economist predicts

Mark Reutter, Business Editor
(217) 333-0568; mreutter@uiuc.edu

2/1/03

Photo by Bill Wiegand Economist J. Fred Giertz predicts that even if the economy recovers from its current malaise, Illinois’ finances will remain shaky for the foreseeable future as several revenue sources, such as the state’s share of the national tobacco settlement, are used up.

CHAMPAIGN, Ill. — Faced with a budget deficit of $2.5 billion and climbing in the coming fiscal year, Illinois Gov. Rod Blagojevich has three options, according to a University of Illinois expert: He can break his campaign promise and raise income taxes, make steep cuts in government spending or "muddle through" with stop-gap measures.

Barring an unforeseen calamity, the governor and General Assembly are likely to muddle through with a series of small tax increases, some budget cuts, borrowing, one-time revenue sources and deferrals to balance the 2004 budget that begins July 1, Illinois economist J. Fred Giertz predicted in his review of state finances.

But one thing is for certain – even if the economy recovers from its current malaise, Illinois’ finances will remain shaky for the foreseeable future as several revenue sources, such as the state’s share of the national tobacco settlement, are used up.

Coming off a historic revenue high in 2000, the state saw its receipts start declining in the spring of 2001. "Fiscal 2002 was truly a terrible year," Giertz wrote, with corporate profits tumbling in the flat economy and the stock market plunge wiping out capital-gains taxes from wealthier households.

At the end of calendar year 2002, revenues were about $600 million below the depressed level projected last July. At the same time, state costs are rising from Medicaid and other mandated programs.

It was hoped that a 40-cent-a-pack increase in the cigarette tax last year would generate $235 million of state revenue. However, the total is falling short by as much as $80 million, partly because of a decline in consumption and partly because of an increase in cigarette smuggling.

With the state’s "rainy day fund" and general funds balance exhausted, Gov. Blagojevich and the General Assembly are expected to dip into temporary revenue sources to avoid drastic cutbacks in state spending. One plan is to "securitize" the state’s share of the tobacco settlement in order to receive funds immediately; another is to defer pension fund contributions for state employees. It is also expected that casino gambling will be expanded in Cook County to generate more tax revenues.

Giertz last year proposed a temporary two-year income-tax hike, from 3 percent to 3.25 percent, to ease the current crunch. This change would amount to about $100 in higher taxes each year for a family of four and would generate roughly $800 million in state revenues.

Last fall, Blagojevich ran on a platform promising no major tax increases. But muddling through this year – together with fulfilling his campaign pledge to increase state spending in some areas, such as helping the elderly pay for drugs – might make a tax increase more palatable in the future, according to Giertz.