Increased Unemployment Corrodes State Revenues

October 20, 2009

The State of Illinois’ personal income tax revenue for FY2010 is now expected to be $850 million lower than projected when the budget was approved in July 2009, according to David Vaught, the newly appointed Director of the Government’s Office of Management and Budget.

The latest estimate of approximately $9.4 billion is down roughly 8% from the $10.2 billion projection used to develop the budget for FY2010. Personal income tax collections—the State’s largest single revenue source—totaled approximately $10.2 billion in FY2009. The following graph shows the State’s quarterly personal income tax receipts over the past two fiscal years and the first quarter of FY2010, as well as the total annual revenue from personal income tax for FY2008, FY2009 and the projected total for FY2010.


Illinois’ fiscal year runs from July 1 to June 30. Personal income tax receipts fell 11.7% in this year’s fiscal first quarter, which ended September 30, to $2.1 billion from $2.4 billion in FY2009. For the month of September, personal income tax revenues were down 18.1%, to $816 million from $996 million.

Income tax collections have been depressed because of higher than expected unemployment rates, Vaught said. As indicated below, the average quarterly unemployment rate in Illinois rose to 9.9% for the period ending June 30, 2009 from 6.4% in the year-earlier quarter. The rate increased to 10.4% in July before falling slightly to 10% in August.



Most states are having similar problems. Across the country, states collected 27.5% less in personal income taxes between April and June of 2009 than in the same period in 2008, according to a recent report by the Rockefeller Institute. This represented the worst decline in half a century. Preliminary data from 36 states show that personal income tax revenues in July and August 2009 declined 8.6% from the year-earlier period. Illinois was one of 41 states that had declining economies in August, based on labor market conditions such as average hours worked in manufacturing and the unemployment rate.

As in other states, declining personal income tax revenues are adding to the pressure on Illinois’ already strained budget. The FY2010 budget passed by the General Assembly and signed by Governor Pat Quinn included $26.1 billion in General Funds appropriations, down 14% from $30.2 billion in FY2009. The FY2010 budget relies on $3.5 billion in borrowing to cover pension fund payments and is expected to leave the State with $3.7 billion in unpaid bills.

Governor Quinn has said that he plans to renew his push for an income tax increase after the primary elections in February. In the meantime, he intends to fund approximately $1 billion of shortfalls in the State’s General Funds by borrowing money from some of the more than 300 Special State Funds. General Funds act as the State’s checkbook for all-purpose operations and are funded by income taxes and other taxes and fees. Illinois also has hundreds of Special Funds, which are accounts for activities funded by earmarked revenue sources that may only be used for special purposes. The General Assembly had previously approved transfers of $352 million of excess balances from Special Funds for FY2010.

On Sunday, the Governor said he will ask for authority from the General Assembly to begin borrowing from the Special Funds, which would include roughly $200 million from Special Funds to provide grants for low-income college students under the Monetary Award Program (MAP). During last week’s veto session, lawmakers passed and the Governor signed legislation restoring the MAP funding for the second semester.

At a press conference on July 31, the Governor said full funding for MAP was part of $1.4 billion in “unmet needs” that he had been unable to provide for under the FY2010 budget. Other shortfalls cited by Governor Quinn included $600 million in Medicaid funding and $600 million for state employee and retiree health insurance.