Illinois lawmakers’ late-night budget sets a new spending record financed by more tax hikes on the final day of legislative session.
The Illinois General Assembly approved a record-setting $55.9 billion budget for fiscal 2027 at 4:13 a.m. June 1, after a 76-39 House vote sent the more than 3,700-page spending plan to Gov. J.B. Pritzker.
The budget process played out in familiar fashion, with lawmakers waiting until late at night to finally pass a package that includes record spending, hundreds of millions of dollars in tax increases and even pay increases for themselves.
To cover the rising costs of education, state pensions and health benefits for government workers, the budget uses shortsighted fixes and ignores structural problems. Once again, taxpayers will pay the price. The budget package, which included House Bill 111, House Bill 2949 for implementation and Senate Bill 3019 for revenues features more than $800 million in new taxes and $185 million in fund sweeps to finance new state spending.
Despite lawmakers’ claims of budget cuts, the 2027 budget will begin $700 million higher than the fiscal 2026 budget. Pritzker has grown Illinois’ budget by $16 billion and enacted at least 57 tax increases that cumulatively have cost taxpayers more than $77 billion.
So what new taxes are in this year’s budget package?
$815 million to $1.4 billion in new revenue:
$300 million corporate tax hike from capping net-operating-loss deductions
The largest immediate tax hike in the budget is the extension of Illinois’ cap on deductions for net operating losses, which will raise corporate income taxes for companies recently losing money by $300 million in fiscal 2027, according to lawmakers. Illinois enacted the current cap beginning in the 2021 tax year to avoid large declines in corporate income tax revenue, as many companies began losing money during the pandemic.
Rather than phase out the provision as scheduled, starting in tax year 2027 companies’ carryover deduction will be limited to 15% of net income or $500,000, whichever is greater. That figure increases to 30% in 2028, 50% in 2029, 65% in 2030 and 80% in 2031.
Net-operating-loss deduction provisions are an important part of the state’s tax code that ensure businesses are treated fairly when it comes to taxation, regardless of changes in their profitability. Capping these provisions can lead to companies paying far higher effective tax rates than the state’s statutory corporate income tax rate. Because of this, every state tax code and the federal tax code contain provisions for net-operating-loss deductions.
Only two other states — Pennsylvania and New Hampshire —cap the amount of losses a business can claim. This burden would be atop Illinois’ corporate income tax rate, the second-highest in the nation.
$200 million in social media fees
The next-largest revenue increase will come from a new fee for social media companies with large user bases. Lawmakers passed a Pritzker-proposed new fee ranging from $0.10 to $0.50 per Illinois user per month, depending on the number of users each platform has. Lawmakers project the new fee will generate $200 million in additional revenue. While the legislation attempts to ban companies from passing on this cost to consumers, Illinoisans will ultimately bear the burden of the new fees in the form of higher prices.
$60 million in digital asset taxes
Beginning Jan. 1, 2027, Illinois will begin taxing digital assets such as cryptocurrency. The new tax rate will be 0.2% of the value of the asset involved in the exchange, transfer, storing or custodial services for digital assets. The tax includes crypto exchanges, trades, wallet and custody providers holding customer assets, and firms transmitting digital assets between accounts. It would apply to any digital asset broker with a place of business in Illinois, including brokers with a physical presence and brokers with at least $100,000 annual digital asset business receipts.
In other words, major crypto exchanges will be required to collect the tax. Transactions are considered to have occurred in Illinois if the customer is physically located in Illinois or if online transactions, account information, mailing address, IP address or other data indicate Illinois is the customer’s place of primary use. Lawmakers expect the tax to generate $60 million.
$50 million to $60 million from decoupling from the federal Qualified Small Business Stock Exclusion
To promote investment and economic development for new small businesses, the federal tax code exempts capital gains from income taxes for stock acquired from eligible startups and small businesses. Illinois’ tax code automatically conforms to this federal provision. However, lawmakers are now decoupling Illinois’ tax code from the federal tax code in order to tax capital gains on stocks from qualifying small businesses. The change is expected to cost taxpayers more than $60 million, according to lawmakers.
$5 million from taxes on ‘fantasy contests’
Illinois will now impose a new 15% tax on a “fantasy contest” operators’ adjusted gross fantasy contest receipts, defined as total entry fees collected from Illinois participants minus Illinois participants’ pro rata share of cash prizes paid out – similar to taxes on gaming revenue, applied to the “hold,” or profit, instead of the total handle. The tax is expected to generate $5 million in fiscal 2027, according to lawmakers.
$200 million to more than $800 million from a Targeted Advertising Services Tax
Perhaps the most controversial tax lawmakers approved is a digital ad tax on “targeted advertising services” beginning Jan. 1, 2027. With the new tax, companies with more than $1 million in gross receipts from digital advertising services provided in Illinois will be charged 10% on the gross receipts of targeted advertising services provided in Illinois.
Opponents say the move violates the federal Internet Tax Freedom Act and the Uniformity Clause in Illinois, while being difficult or impossible to administer if upheld, and that the threshold for the tax is far too low and could affect many small businesses.
The state tax would pre-empt local digital ad taxes like the one Chicago Mayor Brandon Johnson has been pushing for the city to collect. Lawmakers say estimates of revenues from the tax range from $200 million to more than $800 million but that the budget isn’t reliant on these revenues, as they expect legal challenges.
$185 million in fund sweeps
In addition to hundreds of millions in guaranteed tax increases, the state budget also pulls several one-time gimmicks in order to “balance” the budget. Most notable is $150 million being swept from the Road Fund to the state’s General Revenue Fund. The revenue comes from higher-than-expected tax collections from Illinois’ state sales tax on gasoline. Because Illinois is one of only five states to apply the general sales tax rate to gasoline sales, as prices of gas have skyrocketed, so have tax collections.
While these revenues are supposed to be dedicated to the state’s Road Fund for transportation-related spending, this year’s budget will send $150 million in additional revenue from the Road Fund to the General Revenue Fund to finance higher general operations spending.
The state also will sweep $35 million from the State Coronavirus Urgent Remediation Emergency Fund to the General Revenue Fund. The coronavirus fund uses federal dollars related to pandemic aid and has to be expended by the end of 2026.
Other notable changes:
While top-line spending was a predictable continuation of previous state budgets, there are some notable changes. While massively increasing taxes for Illinoisans, lawmakers gave themselves a raise of more than $3,100 —increasing their salaries to more than $100,000 — for a part-time job.
Base pay for lawmakers jumped from $98,304 to $101,405, a 3.2% increase. That’s on top of per diem pay for days when lawmakers are asked to attend work in Springfield and mileage associated with their travel.
Additionally, the pool of money used to pay stipends for leadership positions and committee chairmen was also boosted by $3.2%. Constitutional officers got a pay bump, too.
Lawmakers have also spent considerable time congratulating themselves for approving a six-month pause on the automatic increase in the state Motor Fuels Tax, which was scheduled to increase by 1.3 cents a gallon July 1. Lawmakers said the pause would save taxpayers $37.5 million. However, they failed to advertise that the state budget would get an extra $150 million by sweeping the Road Fund after higher-than-expected revenue from the state sales tax on gasoline because of high gas prices. That maneuver wipes out any true savings for taxpayers and skirts the Illinois Constitution’s “lockbox” amendment, which arguably requires that sales tax money go to transportation-related spending. Lawmakers ignored the plain text of the amendment in recent years in favor of an interpretation that lets them direct those funds wherever they like — and they did that again this year.
The budget also created the new Families Receiving Emergency Support for Hunger (FRESH) Program, which provides a $400 one-time payment to individuals who recently lost SNAP benefits for failing to meet work requirements. This provision was previously introduced in standalone legislation, where lawmakers could have fully debated the merits and cost of the program without lumping it into the state budget in the final days of session. Lawmakers alleged the new program will cost $60 million.
Some bad proposals were weeded out of the budget package. The Local Government Distributive Fund, which Pritzker proposed cutting by $60 million, was left alone. Individual income tax revenues shared with localities will remain at the current 6.47% rather than being trimmed down to 6.23% and putting upward pressure on property taxes.
This years’ budget also saw the reestablishment of Property Tax Pool Relief grants for schools, which were eliminated in last year’s budget. These grants are expected to save $47 million for property taxpayers and will now be available for three years once approved, rather than the two years originally allowed.
Lawmakers also avoided sweeping $79 million in sales taxes from candy, soft drinks and grooming products from the Capital Projects Fund to the general funds in fiscal 2027 as Pritzker originally proposed.
Still, despite all the tax increases, Illinois budget will remain fundamentally unbalanced because of the state’s biggest financial problem: pensions. Total appropriations to the state pension systems will reach nearly $12 billion in fiscal 2027. While those contributions are legally sufficient, actuaries say the state needs to contribute at least $17 billion to truly fund the systems and begin paying down Illinois $143.5 billion pension debt. The shortfall of more than $5 billion means Illinois’ finances are almost certain to continue to deteriorate and put even more pressure on state spending in future years.
The 2027 budget continues Illinois’ practice of irresponsible and speculative budgeting. Rather than focusing on policy solutions such as a spending cap, right-sizing employee health care costs and constitutional pension reform, lawmakers opted for a status quo budget. Constantly relying on additional taxes and fund sweeps encourages irresponsible budgeting, which erodes voters’ trust in Springfield. These tactics reduce the state’s competitiveness, risk potential credit downgrades and can worsen Illinois’ challenges with high unemployment and sluggish growth.
Illinois’ 2027 budget continues the state’s habit of patching budget problems using shortsighted fixes with long-term consequences.
