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Dwindling tax revenues could endanger Illinois’ fiscal health

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(The Center Square) – As Illinois lawmakers prepare to approve a state budget, there are some dark clouds forming on the horizon in regards to the state’s fiscal health.

According to an analysis from The Pew Charitable Trusts, dwindling tax revenues, population loss and an inadequate rainy day fund could spell trouble.

Pew experts analyzed a broad set of updated fiscal, economic and demographic indicators to provide an overview of current state budget conditions.

At the beginning of the pandemic, the federal government acted quickly to deliver robust financial support to states facing a slump in tax collections and a spike in spending demands. But despite the additional federal funds, 19 states closed fiscal 2020 with a deficit. That is the most states since the Great Recession.

“This extraordinary chapter in state financing has come to an end as budget conditions are tightening,” said Justin Theal, a fiscal research officer with The Pew Charitable Trusts. “Policymakers now face the tough combination of both weakening revenues and mounting spending pressures.”

Illinois was one of only five states that had a deficit in fiscal 2021, where revenue covered just 96.2% of expenses, while many states accumulated notable surpluses.

Illinois was one of only eight states that lost residents in 2023, a sharp decline from the 19 states that had shrinking populations a year earlier. Growth accelerated in 35 states, including nine of the 10 slowest-growing states.

The report noted that many states were able to beef up their rainy day funds to prepare for rough economic times. Illinois’ rainy day fund has grown in the past couple years, but still is the third worst in the country. The government could run for only two weeks on the fund.

Theal said states should be conducting budget stress tests to analyze the fiscal risk posed by recessions and other short-term events, something Illinois does not do.

“It is striking to me just how few states actually use these forward looking analytical tools,” said Theal. “It really means that policymakers are often operating in the dark about whether their state finances are on a sustainable path and prepared for the next downturn.”

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