On February 21, as required by state statute, Illinois Governor J.B. Pritzker released his state budget proposal for fiscal year 2025 (FY25), which runs from July 1, 2024, through June 30, 2025. This kicks off the annual state budget process which concludes with the adoption of budget legislation by the General Assembly before the end of the spring legislative session. The budget proposal also provides the Governor’s Office with a platform to highlight their near-term priorities for the state.

For this reason, the Chicago Metropolitan Agency for Planning (CMAP) analyzed how the proposed budget impacts transportation funding and other policy priorities in northeastern Illinois and across the state. Highlights from the budget review include:

• The state is projecting a General Fund surplus of $128 million and a transfer of $170 million to the rainy-day fund due, in part, to a series of proposed tax law changes that raise an estimated additional $910 million in state general funds.

• The budget proposal recommends the elimination of the state grocery tax, a 1 percent sales tax on groceries imposed by the state but wholly dedicated to local governments, which is estimated will result in a $325 million combined loss in funding for local governments across the state.

• The governor is proposing to transfer an additional $175 million from the Road Fund to the Public Transportation Fund, which results in an overall decrease in total funding for transportation operations.

This budget proposal builds upon recent fiscal progress that places the state in a better position to respond to uncertain macroeconomic conditions, such as the continued impacts of high inflation on the purchasing power of government revenues. As the sixth consecutive balanced budget proposal from Governor Pritzker, it continues the state’s efforts to fund its pension obligations and bolster the Budget Stabilization Fund. This fiscal discipline has been recognized by rating agencies, resulting in nine credit rating upgrades for the state since 2019 and Moody’s recent revision of the state outlook from stable to positive.

The budget responds to economic uncertainty and constrained revenues by proposing ways to fortify existing revenue streams, shifting monies to meet growing obligations in areas like education and human services, and prioritizing key capital investments. Even though inflation is slowing, persistent economic pressures could limit future consumer spending and public revenue growth. Pandemic-related federal aid — which has buoyed the state’s funding and programmatic capacity in recent years — is also set to expire by 2026. At the same time, persistent financial pressures such as annual pension contributions and debt service payments continue to weigh down the budget’s bottom line. This year’s budget proposal therefore includes several policy changes that seek to buttress the state’s General Fund without limiting expenditures. These changes have implications for both local governments and the transportation system.

The budget proposal recommends a total $123.2 billion appropriation for the operating budget, including $52.7 billion of expenditures from the state’s General Fund. Accounting for all revenues, the General Fund revenue forecast is $53 billion for FY25, which is an increase of $777 million (or 1.5 percent) compared to estimated fiscal year 2024 (FY24) levels. Taken together, the proposed budget projects a General Fund surplus of $298 million after expenses, or $128 million after an additional mandatory transfer of $170 million to the Budget Stabilization Fund (also referred to as the rainy day fund). The budget surpluses estimated and projected for FY24 and FY25 are only fractions of the budget surpluses enjoyed in both fiscal years 2022 and 2023 (Table 1).

Table 1: General Fund revenues are projected to grow by 1.5 percent in FY25 compared to FY24. (Dollars shown are in millions.)

Proposed revenue changes impacting state funds

At the state level, the budget proposal recommends tax law changes that are estimated to direct an additional $910 million to the General Fund (which is equivalent to 1.7 percent of all revenue in the fund). These changes include:

• Extending a previously established limit on corporate net operating loss deductions for the next three years, which is estimated to deliver an additional $526 million in corporate income tax funds for FY25.

• Capping the standard deduction for individual income taxpayers at $2,550 instead of allowing it to rise to $2,775 as previously scheduled, which is estimated to result in an additional $93 million in individual income tax receipts for FY25.

• Implementing a $1,000 per month cap on the 1.75 percent discount that Illinois retailers can retain in exchange for collecting sales taxes for the state, which is projected to increase sales tax deposits into the General Fund by $101 million (and provide $85 million in additional sales tax revenue flowing through existing formulas for local governments). The Governor’s Office of Management and Budget estimates this change will only impact 1 percent of retailers in the state, which includes those retailers who collect more than $57,143 in sales monthly.

• Raising the sports wagering tax imposed on license holders by 20 percentage points, from 15 percent to 35 percent, and transferring an estimated $200 million from the incremental revenue collected into the General Fund.

Proposed revenue changes impacting local governments

The budget proposes eliminating the state grocery tax, a 1 percent sales tax on groceries imposed by the state but wholly dedicated to local governments. Although the governor has cited the regressive nature of the grocery tax as a key reason for retiring it, the Illinois Municipal League estimates that eliminating it could result in a $325 million combined loss in funding for local governments. Other analysis further shows that programs like the Supplemental Nutrition Assistance Program already significantly offset the regressivity of the grocery tax without impacting revenues for local governments.

The state previously reimbursed local governments for lost revenue when the grocery tax was temporarily paused in fiscal year 2023, but the current budget proposal offers no dedicated revenue replacement for municipalities.

Moreover, the proposed elimination of the grocery tax occurs against the backdrop of historical reductions in the share of financial support provided by the state for local governments, which have occurred in conjunction with increases to the tax rates that account for the state’s primary funding sources. For example, the state’s contribution to the Local Government Distributive Fund (LGDF) was reduced from 10 percent to 6 percent of state income tax revenues in 2010, which coincided with increases to both individual and corporate income tax rates.

Figure 1: Although Local Government Distributive Fund distributions have grown at a rate that exceeded inflation since 2010, local governments have not fully benefited from the state’s growing income tax collections.

Despite the reduced percent share flowing to the LGDF, the increased state income tax rates have resulted in greater collections overall and therefore have yielded higher distributions to the fund. In fact, LGDF distributions have generally grown at or above the growth rate of inflation since 2010. However, due to the decreased contribution rate, state distributions to the LGDF have not grown at the same rate as income tax receipts collected by the state (Figure 1). Given growing costs and responsibilities, local governments across the region must increasingly rely on local funding sources like property taxes rather than state support to alleviate budgetary pressures. The proposed elimination of the grocery tax will continue to reduce the level of state support for local governments at a time when new resources are needed.

Expand the sales tax base to strengthen local and state resources

CMAP has long supported expanding the state sales tax base to include services as additional revenues for the state, local governments, and the regional transit system. Today, the sales tax in Illinois primarily taxes goods, not services. However, as the national economy becomes increasingly service-based, consumers are spending a large and growing share of their income on services rather than goods. In the absence of reforms that modernize the base, the Illinois sales tax will grow increasingly dependent on a shrinking sector of consumer spending, and its revenue yield will continue to underperform compared to actual economic activity.

Regional leaders previously supported the concept of expanding the sales tax base to include services when they adopted the region’s comprehensive plan, ON TO 2050, in 2018 and the ON TO 2050 Plan Update in 2022. More recently, expanding the sales tax base was identified as a cornerstone revenue solution in the Plan of Action for Regional Transit (PART). In addition to providing much needed revenue for the transit system in the face of a significant COVID-19-related budget shortfall, the PART analysis found that taxing services could produce up to $1.9 billion and $744 million in additional funding for state and local governments in 2026, respectively. This shift in tax policy would provide local governments with the revenues they have long sought and would provide the state with additional flexibility to meet current and future funding pressures.

Transportation funding in Illinois is generated from a variety of sources, including federal, state, local, and system-generated revenues. The state, transportation agencies, and local governments use these funds to construct, operate, administer, and maintain the current roadway and transit system, as well as improve and enhance the system to meet present-day and future transportation needs. Within the state’s larger budgeting process, transportation funding is composed of both operating and capital funding.

State operating support for transit continues to fall short of total costs

The proposed FY25 state operating budget allocates almost $4.5 billion to the Illinois Department of Transportation (IDOT), an increase of $337 million (or 8.2 percent) compared to FY24 enacted appropriations. The proposed budget includes a 10 percent funding increase for both paratransit services and reduced transit fare programs in northeastern Illinois. Specifically, the appropriations were increased from $9.1 million to $10 million between FY24 and FY25 and from $19.1 million to $21 million for paratransit and reduced fare costs, respectively.

However, this level of state support remains a small share of the total costs incurred by the Regional Transportation Authority (RTA) and its service boards. For comparison, paratransit expenses in northeastern Illinois are estimated to be almost $265 million in 2025, and the regional reduced fare program has an annual cost of approximately $83 million. The level of funding proposed in the budget only covers about 4 percent and 25 percent of the cost for these paratransit and reduced fare programs, respectively. Given the looming fiscal cliff facing the transit operating budget in 2026, CMAP called for the state to fully fund both paratransit and reduced fare programs in the RTA region in PART. Without greater state support, these mandates will continue to constrain funding for transit.

Transit funding changes do not advance greater transportation funding goals

The budget also proposes to use an additional $175 million from the Road Fund to supplement the state’s annual contribution to the Public Transportation Fund (PTF) and the Downstate Public Transportation Fund (DPTF), which support transit operations in northeastern and downstate Illinois, respectively. In northeastern Illinois, the state funds the PTF by matching a portion of local RTA sales tax receipts with state dollars, including an initial contribution of $150 million from the Road Fund, additional Road Fund monies for RTA debt service reimbursements, and state general funds. By increasing the Road Fund’s share of the state’s total contribution to transit operations — estimated to be $1.1 billion across the PTF and the DPTF — the FY25 budget proposal effectively allows an additional $175 million to flow into the General Fund for other uses. As a result, the Road Fund contribution towards transit operations will account for 54 percent of the total PTF and DPTF appropriations, compared to 20 to 25 percent in past years.

At the same time, the state has been shifting the revenues collected via state sales taxes on motor fuels from the General Fund to the Road Fund in recent years. This aligns with the Transportation Taxes and Fees Lockbox Amendment to the Illinois Constitution (the lockbox amendment) that ensures transportation revenues cannot be spent for non-transportation purposes. Beginning in fiscal year 2022, the state implemented a five-year phased approach to divert all motor fuel sales tax receipts to the Road Fund by fiscal year 2026. The FY25 budget proposes that the Road Fund receive 80 percent of these gasoline sales tax receipts, estimated to be $758 million total — a $162 million increase over last year. The increase is, however, offset by the proposed $175 million transfer from the Road Fund to the PTF.

On its surface, the proposal to use additional Road Fund dollars to fund the PTF aligns with principles shared by the lockbox amendment and PART. The PART report recommends using transportation revenues to fund transportation costs wherever possible. However, in practice, tapping the Road Fund to fund the PTF reduces the total state funding available for transportation purposes. Rather than growing over time, the combined General Fund deposits into the PTF and the Road Fund are projected to be $4 million less in FY25 than FY24. This practice could exacerbate the chronic underfunding of our transportation system and set a challenging precedent for addressing broader transportation needs in northeastern Illinois and across the state. Greater reforms are urgently needed to meet the transportation system’s operating and capital needs.

Figure 2: Shifting the funding burden of the Public Transportation Fund from the General Fund to the Road Fund effectively decreases the total funding available for transportation operations.

Additionally, the long-term fiscal sustainability of the Road Fund is still in question. Although the Road Fund has benefited from new additional revenue from the sales tax on motor fuels, motor fuel tax and motor vehicle and license fee revenues continue to decline. As a result, direct Road Fund receipts in FY25 are projected to be $64 million less than FY24.

Transportation capital funding is losing purchasing power

Finally, the governor’s capital budget proposal is 4.8 percent larger than FY24, growing from $48.7 billion to a proposed $51.0 billion. IDOT continues to receive the most funding in the capital budget, but its percent share of total appropriated capital funding decreased slightly between FY24 and FY25 (from 56.2 percent, or $27.4 billion, in FY24 to 54.5 percent, or $27.8 billion, in FY25). As a result, the increase in IDOT capital appropriations is $428 million, or only 1.6 percent.

Importantly, growth in highway construction costs, which increased almost 12 percent from 2022 to 2023, far exceeds the increase provided for IDOT capital spending. Due to recent supply chain challenges, raw material cost growth, and labor cost growth, these increases are eroding the purchasing power of funds committed to capital infrastructure. Figure 3 shows how both the FY24 and proposed FY25 budgets fail to keep pace with these trends.

Figure 3: Recent trends in highway construction costs and inflation impact the purchasing power of funds budgeted for transportation capital costs.

Given that Rebuild Illinois — the state’s 2019 comprehensive capital plan which committed $44.8 billion to infrastructure investments over six years — is scheduled to expire in 2025, and a transit budget shortfall is expected in 2026, new, more robust, and more reliable revenue sources are needed to support the operation, maintenance, and investment in our transportation system’s assets. Since its passage, Rebuild Illinois has been critical to preventing the state of good repair backlog from growing, and instrumental as a local match to leverage federal funds through the Infrastructure Investment and Jobs Act (IIJA). Moving forward, federal representatives, state, and local officials must pursue additional transportation funding that continues to advance the state of good repair and responds to operating needs.

Notable transportation projects are moving forward

IDOT’s proposed capital budget does include $300 million in reappropriated funds for the I-290/Blue Line Modernization Project. State support for this corridor is a priority for the region, and CMAP, IDOT, and the Chicago Transit Authority have signed a Joint Statement of Understanding to advance planning and improvement efforts. Other notable projects that received funding in the capital budget include:

• Amtrak’s Chicago Hub Improvement Program, which received a $94 million federal grant through the Federal-State Partnership, funded by the IIJA. In addition to upgrades to Chicago’s Union Station, improvements will include new connections and trackage to better separate passenger and freight trains, as well as the repair or replacement of century-old bridges to deliver faster and more reliable Amtrak and Metra service.

• The 75th Street Corridor Improvement Project, which received a reappropriation of $66.5 million. This is the largest project in the Chicago Region Environmental and Transportation Efficiency (CREATE) Program, and will ultimately eliminate the most congested rail chokepoint in the Chicago terminal — the Belt Junction — where 30 Metra and 90 freight trains cross paths each day.

• A new $44.7 million appropriation that acts as a local match and unlocks an additional $149 million of federal funding to install networks of electric vehicle charging stations through the National Electric Vehicle Infrastructure program under the IIJA.

Following the passage of Public Act 103-0317, which directs IDOT to initiate a prequalification process for the design and development of a South Suburban Airport in Peotone, the proposed capital budget also appropriates funding for the airport and reappropriates $162 million for an interchange at Eagle Creek Road.

The Illinois General Assembly is now considering the governor’s budget proposal. CMAP intends this analysis to be a resource for stakeholders and lawmakers as they review the proposed budget and consider forthcoming budget legislation.

Documents used to analyze the budget proposal were obtained from the Governor’s Office of Management and Budget.