In the annual governor’s budget address on Feb. 17, Gov. J.B. Pritzker presented a $41.6 billion budget for fiscal year 2022 that holds spending flat for education as well as most state operating spending.

Pritzker was tasked with closing a $4.8 billion deficit reported in November 2020, which would have grown to $5.5 billion including a $690 million payment towards recent borrowing from the Federal Reserve.

Pritzker’s budget relies heavily on nine different tax increases, mostly targeted at businesses, to raise $932 million in revenue. In his speech and in documents from the governor’s budget office the tax increases are branded as “closing corporate tax loopholes.” However, none of the exemptions or credits Pritzker is proposing to limit or eliminate can be fairly described as “loopholes.” Several do not apply exclusively to corporations.

For example, one Pritzker proposal would reduce the value of a tax credit scholarship program that helps disadvantaged students afford private school education through donations from both corporations and individuals. Another of the proposals does not pertain to any type of credit or deduction, but rather reimposes the states’ arcane “corporate franchise tax,” which is scheduled to phase out through 2024 under current law. And another is a new tax on gasolines that is expected to hurt Illinois farmers and add 20 cents per gallon of diesel.

The state budget law requires the governor to propose a budget that is balanced using only revenues in law at the time the budget is proposed. That requirement was ignored in Pritzker’s first and second budget proposals, and these nine new taxes mean it is in his third budget as well.

Even with these tax increases, Pritzker’s budget proposal is not truly balanced. It includes no reforms to pensions or other structural overspending that would address the state’s long-term deficit. Instead, the budget makes liberal use of budget gimmicks such as changing the timing of payments – moving some debt service back to fiscal year 2021 while pushing other payments farther into the future – and sweeping $565 million from other state accounts. Instead of going to the road fund and capital projects, Pritzker would redirect sales tax revenue from gasoline sales and cigarette tax receipts to the general fund.

Changing the timing of payments allows Pritzker to avoid counting nearly $1 billion in costs toward this year’s budget – $276 million in interfund debt service that was delayed and the $690 million federal reserve borrowing that was moved forward. However, changing the timing of payments does not improve the state’s overall financial condition. It’s an accounting shell game to make the budget appear balanced on paper.

The rest of the deficit is covered by spending freezes worth $1.27 billion and significantly more optimistic revenue assumptions compared to those the governor’s office released in November 2020. Those spending changes are not actual cuts compared to prior-year spending, but rather canceling automatic spending growth that is assumed as part of the state’s baseline budgeting method.

More optimistic revenue projections account for the largest reduction in the deficit, on paper, at $1.88 billion. The governor’s office also raised revenue projections by $2.3 billion for the current fiscal year 2021, which “closes” this year’s $3.9 billion deficit if December’s $2 billion in borrowing from the federal reserve is counted as revenue. Illinois has a history of counting debt as revenue and relying on optimistic revenue projections to cover deficits on paper, but this optimism is often wrong. That helps explain why politicians claim to pass a balanced budget each year, but the budget has not actually ended a year in the black since fiscal year 2001.

While state and local revenue collections in Illinois and across the country have been beating estimates made early in the pandemic, the November revenue projections from the Governor’s Office of Management and Budget were already $2.2 billion higher than projected in April 2020. It’s unclear that economic conditions since November have changed enough to justify another large upwards revision.

All together, Pritzker’s budget proposal fails to offer the significant financial reforms needed to protect Illinois taxpayers, preserve services for the vulnerable in the long term and ensure the state has a strong recovery from COVID-19. Illinois’ personal income growth was the second worst in the nation following the Great Recession, in part because of tax hikes that hurt the recovery. Pritzker’s various proposed tax increases on businesses threaten to hold back Illinois’ ability to create good-paying jobs and grow wages for its residents as the state recovers from a pandemic-induced recession.

Lawmakers are largely expected to receive $7.5 billion in unrestricted aid for the state budget from the federal government under the $350 billion state and local bailout proposed by President Biden’s administration. This lifeline provides Illinois with breathing room to make the long-term changes necessary to stabilize state finances, starting with pension reform. The General Assembly should also use that aid to cancel all nine of the pandemic tax increases from the governor’s budget proposal.

Here are Pritzker’s nine tax increase proposals.

Cap, delay credits for business operating losses by three years: $314 million

When a company loses money in a given year, known as a net operating loss, federal and state tax laws generally allow at least some portion of that loss to be carried forward to future years as a proportional offset to future tax liability. In other words, if a business loses money in 2020 and 2021 because of the pandemic, but earns a profit in 2022, it can deduct the two years of losses from its earnings in 2022 and pay taxes only on the difference.

For purposes of state taxes, Pritzker wants to limit losses carried forward to $100,000 for the next three years. Businesses would still be able to carry forward losses above that amount but couldn’t claim the deduction until three years from now.

This change would reduce businesses’ cash on hand to make investments in equipment, new jobs or raises for employees. It would therefore hurt Illinois’ ability to recover economically from COVID-19. Because the full value of the credits is only delayed, it has the potential to create a significant revenue drop in the future when businesses try to collect on the full value of the credits.

Delay expensing of business investments: $214 million

Illinois automatically adopts certain changes in federal tax law as part of Illinois tax law through what’s called “rolling conformity,” meaning state law points back to the Internal Revenue Code and automatically updates certain provisions to match. Pritzker wants to decouple from federal provisions intended to promote pro-growth investments.

Federal tax reform in the Tax Cuts and Jobs Act included several changes intended to bolster business investments and promote economic growth. One of these changes was to allow full and immediate expensing, meaning companies can deduct the entire cost of an investment in the year it was made, rather than dragging out the expensing over the lifecycle of an asset.

The Tax Cuts and Jobs Act applied this concept, also called 100% bonus depreciation, to investments with a useable lifetime of 20 years or less, such as machinery and equipment. Long-term investments in buildings must still be expensed over time. The changes for short-term investments are scheduled to phase out beginning in 2022 and expire in 2026. The nonpartisan Tax Foundation has argued for making these changes permanent, because delaying deductions for investments increases the cost to businesses and discourages investments that help grow the economy.

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