Illinois’ budget on track for deficit as new federal policies create challenges

Storm clouds overlook the Illinois Capitol in Springfield in 2024. (Capitol News Illinois photo by Andrew Adams)

SPRINGFIELD — Illinois is on track to run a more than $200 million deficit just three months into the current fiscal year, according to the Governor’s Office of Management and Budget.

If nothing changes, the deficit is on pace to grow to $2.2 billion when fiscal year 2027 begins next July.

GOMB released its annual report on Thursday, which includes a five-year projection for state spending and revenue rates. The report provides an annual early look at the direction of state finances, though longer-term windows are notoriously hard to accurately project. In past years, deficits have been considerably lower than the opening-round projections of the annual GOMB report.

This year’s report shows lower-than-expected corporate tax revenue, federal tax law changes and economic volatility are driving a $267 million deficit in the fiscal year 2026 budget.

Overall revenue is projected to decrease $449 million from the amount anticipated last May, to a total of $54.8 billion. Lawmakers originally expected $55.3 billion in revenue while they appropriated $55.1 billion in spending.

Read more: Pritzker signs $55.1B state budget reliant on $700M of new taxes

GOMB noted some revenue sources are on pace to grow this year, but uncertainty over tariffs and dwindling consumer spending is keeping corporate tax returns down. The One Big Beautiful Bill Act — the domestic policy plan President Donald Trump signed in July — also included several corporate tax breaks that are set to reduce tax revenue to the state.

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An Illinois Department of Revenue analysis found the federal tax policy changes could reduce FY26 revenue by $830 million. Many states like Illinois tie portions of their corporate tax collections to the federal tax code to make it easier for the state to administer the tax and easier for businesses to file them.

GOMB is recommending the state decouple from certain parts of the federal tax code. If that happens, the $267 million shortfall should largely be avoided, according to GOMB.

House Speaker Chris Welch, D-Hillside, told Capitol News Illinois lawmakers are already exploring that option for action in the fall veto session.

Gov. JB Pritzker also signed an executive order last month directing certain state agencies to reserve 4% of FY26 general fund appropriations and identify other ways to reduce spending or create efficiencies. The state also has a $100 million fund it can tap into to cover gaps this year.

Read more: Pritzker directs agencies to limit spending in response to Trump’s economic policies

Pritzker’s order triggered some criticism from Republicans, who said they were sounding the alarm on budget pressures even before Trump was elected. Last year’s GOMB report, released before Trump’s election, showed lawmakers faced a $3 billion deficit in FY26 that was eventually closed, including with the help of $700 million in new taxes.

Senate President Don Harmon, D-Oak Park, defended Democrats’ budgeting strategy in an interview with Capitol News Illinois.

“You can’t predict the unpredictable,” Harmon said. “If we were sitting around navel gazing trying to figure out what the folks in Washington might do, we still wouldn’t have a budget. We did the best we could with the information we had.”

Future years become more challenging

Budgeting will become even more challenging for lawmakers in next year’s spring session as the projected deficit climbs to $2.2 billion.

GOMB’s projections are based on current law, meaning they reflect the reality if lawmakers make no spending cuts or raise no new revenue.

Even so, GOMB warns “the ability to fund new programs will be severely limited,” sending an early message to advocates and lawmakers seeking new or increased state spending that their requests might not be answered.

The report projects FY31 will see a $5.3 billion deficit, in part because of federal policy changes that require states to cover a greater portion of social programs.

Beginning next October, states will have to cover half of administrative costs for the Supplemental Nutrition Assistance Program, rather than 25%, and start covering a portion of benefits in October 2027. States like Illinois with a higher error rate on SNAP payments will have to cover a greater portion of benefits. Illinois’ current error rate would put it on track to pay $705 million for benefits when the new policy takes effect.

Medicaid cuts at the federal level also significantly increase pressure on Illinois’ budget, especially beginning in FY28. GOMB projects health care provider taxes the state uses to support Medicaid will substantially decline between FY28 and FY32. GOMB estimates the state will see federal Medicaid funding decline by $2.8 billion by FY31 unless Congress restores it or the state provides its own funding.

The Medicaid changes will cost the state between $1.7 billion and $4.5 billion in FY31, according to GOMB. The exact total depends on how much the state increases spending to fill gaps Congress left in the program.

The Trump administration is also broadly cutting federal grants for other programs outside the state’s general fund budget, though GOMB did not have an estimate for how much.

“GOMB expects the state to have a very limited ability to replace lost federal funding for these specialized state grants and no funding to replace lost grants made directly to local governments and community organizations,” the report said.

Capitol News Illinois is a nonprofit, nonpartisan news service that distributes state government coverage to hundreds of news outlets statewide. It is funded primarily by the Illinois Press Foundation and the Robert R. McCormick Foundation.

Illinois’ budget on track for deficit as new federal policies create challenges by Ben Szalinski