I. State Budget Crises in the Wake of COVID-19

While the full economic impact of the COVID-19 pandemic remains unclear, the outlook for states is grim. States have had to increase spending on public health and Medicaid while making the difficult decisions to shut down large parts of their economies. The mandatory business closures and stay-at-home orders paralyzed the American economy in a way for which no state could have been prepared.

The aftermath of these public health measures has affected both state income and sales tax revenues, which are most states’ largest revenue sources.1 Income taxes started falling off in March and have continued their downward progression.2 Shutdowns have spurred mass layoffs, with the national unemployment rate approaching 15 percent.3 This steep decline in business activity will lead to less consumer spending, and therefore less sales tax revenue.4

The combination of reduced economic activity, increased unemployment, and increased enrollment in state safety-net programs is severely affecting state budgets. Illinois was in desperate financial straits even before the economy came to a halt in March. Already facing a $1.7 billion budget shortfall, the deficit progression for this year alone has increased by $1 billion.5 The Illinois Department of Revenue estimates a further budget shortfall of $4.6 billion, for a total anticipated shortfall of $7.4 billion for fiscal year 2021.6 Further, Illinois already had the lowest credit rating in the nation and was well below the average funding level, with less than 40 percent of the funds needed to meet its current expenses and obligations.7 The impact of COVID-19 will only exacerbate these problems.

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