Illinois Budget

In FY2016, the failure to pass a comprehensive General Fund budget resulted in larger deficits as well as deep cuts to core services like Public Safety—even without anyone having to cast a vote.

This Report offers a solution to Illinois' longstanding fiscal shortcomings. There are a number of common sense, data-driven initiatives that will modernize the tax code—and still keep Illinois relatively low tax. The Report details how changes to Illinois' tax policy, primarily to its income and sales taxes, and re-amortizing its pension debt can completely eliminate its structural deficit.

This report identifies why expanding the base of the state sales tax to include consumer services—like pet grooming, haircuts, country club membership, health clubs, and lawn care—would simultaneously help to stabilize revenue generation for the state’s fiscal system, while reforming tax policy to comport with the modern economy. 

As detailed in the report, Illinois is one of 45 states that impose a general sales tax. And while the state-only sales tax rate of 5 percent is below the national average state-only sales tax rate of 5.5 percent, Illinois’ sales tax rate is applied, in large part to the sale of goods (like clothing and furniture) and not services (like pet grooming, health clubs, lawn care, and haircuts). Illinois’ sales tax applies to few services. In fact, of the 45 states with a general sales tax, the average number of service industries taxed is 51; Illinois is an outlier, taxing only five consumer service industries. And that is why the state’s sales tax policy fails to jibe with the modern economy. Indeed, over 72 percent of the Illinois’ economy is derived from the sale of services, while just 17 percent stems from the sales of goods.

Expanding the Base of Illinois’ Sales Tax to Consumer Services Will Both Modernize State Tax Policy and Help Stabilize Revenue, estimates that $2.105 billion in additional revenue could be generated if Illinois’ sales tax base was expanded to include primarily consumer service industries, while excluding business-to-business transactions and professional services. This could go a long way toward addressing the state’s fiscal difficulties. The report also notes that by broadening the state’s sales tax base, Illinois may also be able to reduce the state’s sales tax rate if policy makers so choose. 

Many know that on January 1, 2015, the temporary increases made to the state’s income tax rates that became law under the Taxpayer Accountability and Budget Stabilization Act of 2011 (TABSA) began to phase-down. On that date, the personal income tax rate declined from 5 percent to 3.75 percent, while the corporate rate went from 7 percent to 5.25 percent. What is not well known is: (i) who benefited most from the cut to the personal income tax rate under TABSA, and (ii) whether or not that tax cut can reasonably be expected to stimulate the Illinois economy. This Issue Brief reveals that the state's highest income earners will benefit disproportionately from the income tax rate phase-down, worsening income inequality and failing to stimulate the state's economy.