What Policymakers Should Know About the Fiscal Impact of COVID-19 on Illinois

Abstract

We model the fiscal impacts of the COVID-19 pandemic and stay at home orders on Illinois’ fiscal situation. Prominent forecasters’ recently published estimates range from short and modest declines in U.S. GDP to declines of almost 6%. We model the impact of these economic disruptions on the revenues of the individual income, corporate income, and sales taxes considering what we know about the history of the revenue sources. We estimate revenue losses from $6.4 billion in the severe pandemic scenario to $1.9 billion in the low severity scenario. We also expect large increases in public health expenditures but a modest impact on Illinois’ fiscal situation since these expenditures are a small portion of the budget. Over the next several years, annual Medicaid expenditures could increase by $4 to $5 billion (21% to 26%). We expect increases in expenditures on human services as economic pressures require residents impacted by the pandemic to rely on these services. Potential declines in the value of public pension funds’ assets could result in increased unfunded liabilities and required state contributions. However, these increased contributions would be phased in gradually due to “asset smoothing,” and immediate fiscal effects would be modest. Local governments with a sales tax are likely to see immediate revenue shortfalls resulting from the sharp COVID-19 related economic downturn. Economic disruption may result in decreased property tax collections, but these impacts would lag significantly. To date, federal responses have been significant but are unlikely to fully insulate Illinois from the fiscal damage.