Illinois and Chicago continue to grapple with persistent budget deficits driven by structural fiscal imbalances, prompting calls for comprehensive tax reforms aimed at stabilizing long-term public finances.

In June, Illinois lawmakers approved a general fund budget for fiscal year 2027 that, when adjusted for inflation, represents a 1.1% reduction in spending on public services compared to the previous year. Despite constrained appropriations, key sectors such as K-12 education, higher education, and human services remain significantly underfunded by billions of dollars. The underlying issue is a structural deficit, where state tax revenues fail to keep pace with the rising costs of maintaining consistent public service levels.

Chicago faces a similarly entrenched fiscal challenge. After closing a $1.1 billion gap in its $6.3 billion corporate fund for the current fiscal year, the city anticipates a budget shortfall of between $700 million and $780 million in 2027. Projections reveal that over the next three decades, corporate fund revenues are expected to increase by about 43%, while service costs could grow by 87%, and obligations related to underfunded pension liabilities are set to rise by 85%. The corporate fund, which finances essential city functions including police, fire protection, sanitation, libraries, and social services, remains under significant pressure.

A task force formed by Chicago Mayor Brandon Johnson in May 2025 released a final report last month outlining 58 recommendations to address Chicago’s fiscal challenges. While many proposals focus on city-specific measures such as operational efficiencies, cost containment, revenue enhancement, and economic development, several address the structural interdependence between Illinois’ and Chicago’s finances.

The report highlights that Illinois’ two main revenue sources—income and sales taxes—are ill-suited to the state’s evolving economic landscape, limiting revenue growth and thereby constraining Chicago’s fiscal capacity. Illinois’ income tax, constitutionally required to be a flat rate on all income regardless of level, is cited as a central factor. Since the state constitution was enacted in 1970, income inequality in Illinois has widened considerably: between 1979 and 2022, the average annual income of the top 1% rose by 325%, while incomes for the remaining 99% increased by just over 30%.

To address this imbalance, the task force recommends pursuing a constitutional amendment to allow a graduated income tax or increasing the flat rate combined with targeted tax credits for low- and middle-income residents. These changes aim to generate additional revenue while maintaining fairness and reducing the structural deficits faced by both state and local governments.

Additionally, the task force points out that Illinois’ sales tax base remains largely concentrated on goods rather than services, even as services now represent approximately 73% of the state’s gross domestic product. Extending the sales tax to include consumer services would align the state’s tax policy with its economy and bolster revenue streams for Illinois and Chicago alike.

Experts emphasize that neither Illinois nor Chicago can resolve their budget crises without significant structural reforms to the tax system. Ralph Martire, executive director of the Center for Tax and Budget Accountability and professor at Roosevelt University, underscored the urgency of these proposals, noting that short-term fixes are insufficient to break the cycle of fiscal shortfalls.

As Illinois and Chicago look ahead, comprehensive tax reform emerges as a pivotal strategy to ensure sustainable funding of public services and address decades of underinvestment.