When it comes to funding their primary operating budgets, the state of Illinois and city of Chicago seem stuck in a constant rut of déjà vu. Last month, state lawmakers enacted a general fund budget that, after inflation, will spend about $455 million, or 1.1% less, on public services in fiscal year 2027 than this past year.
Mind you, the reason for that parsimonious outcome wasn’t a desire to rein in profligate spending.
Indeed, the evidence shows most public services Illinois provides, like K-12 education, higher education and human services, are collectively underfunded by billions. The problem is, and historically has been, state tax revenue doesn’t increase sufficiently to maintain the same level of public services from year to year. In fiscal terms, that consistent mismatch between revenue and service cost growth is called a “structural deficit.”
Then there’s Chicago, which has a structural deficit of its own. Fresh off closing a $1.1 billion hole in its $6.3 billion corporate fund for the current fiscal year, the city faces a budget shortfall that’s projected to range from $700 to $780 million next year.
And like the state, Chicago’s revenue shortfalls are expected to continue. In fact, over the next 30 years, corporate fund revenue is projected to grow by around 43%, while service costs are projected to grow by 87% and the schedule for repaying Chicago’s underfunded pension systems grows by 85%.
That’s problematic, given the corporate fund is Chicago’s primary operating budget, which covers police and fire protection, streets and sanitation, libraries, and most social and health services the city offers.
No more Band-Aids
To get off this inimical deficit merry-go-round, state and city decision makers must stop relying on short-term Band-Aids and instead implement long-term, structural reforms. To that end, there’s much to like in the final report released by the Chicago Financial Future Task Force late last month.
Empaneled in May 2025 by Mayor Brandon Johnson, the task force was charged with, among other things, identifying solutions to Chicago’s persistent, long-term structural fiscal challenges. Which sounds promising for the city, but what’s it got to do with the state?
As it turns out, plenty. That’s because the fiscal condition of the state and Chicago are inexorably intertwined. So while the vast majority of the 58 recommendations the task force made consist of Chicago-centric initiatives covering everything from management of long-term liabilities to operational efficiencies, cost savings, generating new revenue and more economic development, some key recommendations directly speak to the interplay of state and city finances.
For instance, all the data confirm the state’s structural deficit exists because Illinois’ two primary revenue sources — its income and sales taxes — aren’t designed to work in the modern economy. That not only means state revenue growth won’t keep pace with service cost growth over time, but Chicago’s revenue growth will be similarly constrained. There are two reasons for this.
First, Illinois shares its income tax revenue with municipalities like Chicago through the Local Government Distributive Fund. So underperformance by the state’s income tax means inadequate distributions to local governments.
Illinois overdue for graduated income tax
The main reason Illinois’ income tax underperforms in the modern economy is the state’s 1970 Constitution, which mandates Illinois assess one flat rate against all income, irrespective of earnings level and ability to pay.
That’s indefensible from both a fiscal and a fairness standpoint for one simple reason: Since Illinois’ constitution was ratified, income inequality has exploded. Between 1979 and 2022, real, average annual incomes for the top 1% in Illinois jumped from $501,320 to $2,132,780 — a 325% increase. Meanwhile, real, average annual incomes for the remaining 99% of Illinoisans grew from $62,734 to $81,845 — a 30.5% increase.
The task force recommended Illinois fix this obvious flaw by either pursuing a constitutional amendment to permit a graduated rate, or increasing the flat rate while simultaneously implementing a tax credit targeted to low- and middle-income earners, to offset any additional income taxes the rate increase would otherwise generate for them. Either reform would reduce both entities’ structural deficits, while simultaneously making the tax burden fairer in Illinois.
Second, each local government in Illinois, including Chicago, predicates its sales tax base — that is, what the sales tax applies to — on the state’s base. Unfortunately, unlike the rest of the nation, Illinois’ sales tax predominately applies to goods, not services, even though service transactions account for 73% of Illinois’ gross domestic product.
The task force noted this economic mismatch causes revenue underperformance for the state and city, so it recommended the Illinois sales tax be extended to include consumer services, thereby simultaneously redressing both the state and city structural deficits.
The task force made other recommendations that cover the complex fiscal relationship between the state and Chicago, but the bottom line is neither can solve its fiscal problems without structural tax reforms.
Ralph Martire is executive director of the Center for Tax and Budget Accountability, a nonpartisan fiscal policy think tank, and the Arthur Rubloff Professor of Public Policy at Roosevelt University.