Tax reforms can end budget crises for Illinois, Chicago

Key Takeaways:

• Illinois and Chicago both grapple with structural deficits fueled by underperforming tax revenues.
• After inflation, Illinois will spend 1.1% less on public services in fiscal year 2027 compared to last year.
• Chicago’s deficit for its primary operating budget could reach up to $780 million next year.
• The Chicago Financial Future Task Force recommends modernizing the income and sales tax systems.
• Analysts argue that fixing these revenue flaws is vital to meeting public service obligations.

Overview of the Recurring Crisis

Illinois and the city of Chicago have spent years stuck in a repetitive cycle of revenue shortfalls. According to newly released figures, state lawmakers recently approved a general fund budget that will spend 1.1% less on public services, when adjusted for inflation, in fiscal year 2027 than it did in the previous year. Despite the minimal spending increase, many of Illinois’ core public services—from K-12 education to higher education and human services—remain underfunded by billions of dollars.

Chicago’s Revenue Dilemma

Like the state, Chicago also faces a shortfall that only seems to worsen. Having just closed a $1.1 billion gap in its $6.3 billion corporate fund, the city is projecting a $700 to $780 million hole next year. Over a longer horizon, the situation looks even more concerning: over the next 30 years, revenue in the corporate fund is expected to rise by just 43% while service costs jump 87%, and underfunded pension obligations soar by 85%.

The Structural Deficit Problem

This persistent mismatch between service cost growth and revenue growth is known as a “structural deficit.” Illinois’ main income and sales taxes fail to keep pace with service costs, constraining growth for both the state and local governments. Data show that the city’s pension obligations, police and fire protection, and social services cannot be maintained long term with the state’s existing revenue model.

Task Force Recommendations

To address these financial challenges, Chicago Mayor Brandon Johnson convened the Chicago Financial Future Task Force in May 2025 to propose sustainable solutions. Its recently published report calls for new revenue sources, broad cost-saving measures, and structural changes to the tax system. The task force highlights that many of its recommendations would fix not only Chicago’s budget woes, but also help stabilize Illinois’ finances, given that local revenue streams depend heavily on state tax policies.

Addressing Income Inequality

A major factor in Illinois’ underperforming income tax is the statutory requirement for a flat tax rate. Since 1979, the top 1% of earners in Illinois saw their real incomes grow by 325%, compared to a 30.5% increase for the remaining 99% of residents. The task force suggests either amending the constitution to allow a graduated income tax or raising the flat rate while introducing tax credits for low- and middle-income earners. Both approaches aim to address inequalities that have widened under a single-rate system.

Looking Ahead

Underlying all the task force’s suggestions is the recognition that Illinois and Chicago must agree upon long-term, forward-thinking reforms. Many recommendations focus on modernizing the sales tax to include more consumer services, which currently make up 73% of Illinois’ economy. Without making these necessary adjustments, both Chicago and the state risk deepening structural deficits and compromising essential public services. By embracing a combination of new revenue mechanisms and fairer tax approaches, experts believe Illinois and its greatest city stand a chance of escaping the perpetual budget shortfall cycle.