November 14, 2014
Nearly all indicators point to positive economic growth in the State of Illinois for the fifth consecutive year in 2015 but due to a change in income tax rates, State government finances remain in crisis.
In a report issued earlier this month on the results for the first quarter of fiscal year 2015, which began on July 1, 2014, the Illinois Department of Revenue (IDOR) reviewed the State’s economic condition and tax revenue trends dating back to 2010 through September 2015.
According to the report, Illinois’ unemployment rate has steadily improved, declining from more than 11.0% in January 2010 to 6.7% at the end of September 2014. The largest area of growth in the most recent 12 months was in the professional and business services sector in the State has added the most jobs, totaling 17,200 in the last 12 months, closely followed by the construction sector with 11,000 jobs in the same time period.
The positive employment trend has also been reflected in the individual income tax revenues received by the State. Gross receipts received by the State from the individual income tax totaled $4.1 billion in the first quarter of FY2015, which is $101.9 million more than the original forecast of $4.0 billion. This total is dramatically higher than the total of roughly $2.0 billion in the first quarter of FY2011. However, the increase is mostly attributable to the higher tax rate of 5.0% compared to 3.0% prior to the temporary increase enacted in January 2011. In third quarter of FY2011, after the income tax rate increase, individual income tax receipts grew to nearly $3.5 billion.
Individual income taxes are the State’s largest revenue source and made up $16.6 billion of the General Funds revenues for FY2014, which totaled $36.8 billion.
The IDOR study points to the Index of Leading Economic Indicators, published by the Federal Reserve Bank of Philadelphia as evidence that Illinois’ underlying economic growth will continue for at least the next six months. The index, which is published monthly, aims to summarize a broad sample of economic indicators and shows a positive expectation of 1.32% growth. The index takes into account trends in the housing market, employment, manufacturing and monetary policy to predict economic growth. Illinois’ index is third lowest among the 11 Midwest states. The highest projected growth index in the Midwest belongs to Michigan, shown at 3.64% and the lowest is Iowa at 0.85%. It should be noted that although Illinois has a lower growth index from the Federal Reserve report, it is the largest economy in the Midwest region.
According to statistics from the United States Department of Commerce, Bureau of Economic Analysis, Illinois’ gross state product in 2013 was $671.4 billion, the fifth largest among all 50 states. The second largest economy in the Midwest is Ohio, which totaled $526.2 billion, followed by Michigan at $408.2 billion.
Sales taxes in Illinois, the second largest revenue source for the State, continue to reflect the improved labor market and housing market through strong consumer spending according to the IDOR report. Sales taxes in the first quarter of FY2015 totaled $2.0 billion. This exceeded the FY2014 total of $1.9 billion for the period by $95.3 million. It is also $52 .0 million more than forecasted for the current fiscal year. In FY2014 General Funds revenues from sales taxes totaled $7.7 billion and are forecasted to grow to $7.8 billion in FY2015.
Unfortunately despite the positive outlook for the State’s economy, Illinois’ State budget will not benefit from the growth which will be offset by the expiration the temporary income tax increase on January 1, 2015. As discussed here, the reduction of the individual income tax rate to 3.75% from 5.0% and the corporate income tax rate reduction to 5.25% from 7.0% will lead to a loss of $1.9 billion in FY2015, net of any underlying economic growth. Despite this looming revenue cliff, the General Assembly passed a budget for FY2015 that does not raise additional revenue or significantly cut spending to make up for the loss. As detailed here previously, the incomplete FY2015 budget signed by the Governor does not fully appropriate for all known government costs, will lead an increase in the State’s backlog of unpaid bills and depends on borrowing and other gimmicks to support an increase in State spending.
The loss of revenue and issues with the FY2015 budget has led to a negative outlook from all three major bond rating agencies.