Sales Tax

A coalition of policy and civic leaders including, the Center for Tax and Budget Accountability, Chicago Metropolitan Agency for Planning, The Civic Federation, and the Illinois Economic Policy Institute, released Modernizing Illinois' Sales Tax: A Pathway for a Sustainable Future.

Key Findings

Illinois Sales Tax Structure is outdated. The current tax system primarily taxes goods, even though consumer spending has shifted significantly toward services over the past several decades. Illinoi taxes only 29 out of 176 consumer services, far fewer than most neighboring states.

Modernization would promote more tax fairness. High-income households spend five times more on untaxed services than low-income households, creating an unfair system. Illinois's current system also gives preferential treatment to service-oriented business over retail firms. Expanding the tax base to include services would help correct this imbalance.

New revenue would help support critical services. Expanding the sales tax to include consumer services could generate nearly $2 billion annually for the state, with additional funds flowing to local governments and pubic transit agencies.

In early August, the Illinois Chamber of Commerce issued a press release arguing against ratification of the proposed amendment to the Illinois Constitution that will permit the state to utilize a graduated rate structure for its income tax. According to the Illinois Chamber, such ratification, coupled with implementation of the specific graduated rate structure identified in P.A.101-0008, which is called the “Fair Tax” by proponents, would “somehow” shrink the Illinois economy, and disproportionately harm women and minorities. But the press release based these claims on largely unsubstantiated findings contained in an Executive Summary of the report, “Illinois’ Proposed Graduated Income Tax: Impacting Jobs and the Economy,” which the Illinois Chamber paid the Berkeley Research Group (BRG) to produce.

Unfortunately, the Executive Summary does not provide much in the way of support for the conclusions it reaches, nor does it regularly cite its sources, or even provide insight into the model BRG used to reach its conclusions which is particularly problematic in this instance, given that the main findings contained in the Executive Summary are contrary to prior research on migration, tax burden, and the economy.

CTBA decided to reached out to both the BRG and the Illinois Chamber to request a copy of the full report, however, neither the Illinois Chamber nor BRG was willing to make the full report available to either CTBA or the public. CTBA chose to respond to the BRG Executive Summary released by the Illinois Chamber anyway. To find out more about how, when compared to the body of research conducted by credible sources in the relevant areas, the Key Findings presented in the Executive Summary are revealed to be either inaccurate or misleading, please read CTBA’s new Issue Brief, “Analysis of Berkeley Research Group Graduated Rate Income Tax Impact Report.”

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. As this Report details, the state can completely eliminate its structural deficit by re-amortizing its pension debt and making the following tax policy reforms:

• Reform state income tax policy by:
  • Increasing the personal income tax rate from 3.75 percent to 4.75 percent or 5 percent;  
  • Including some retirement income in the personal income tax base;
  • Increasing the corporate income tax rate from 5.25 percent to 6 percent;
  • Eliminate those corporate tax expenditures which are not generating a public good;
• Reform sales tax policy by expanding the base of sales tax to include most consumer services; and
• Impose a tax on sugary sweetened beverages.

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. 

CTBA's issue brief, The Pending FY2016 Fiscal Cliff details the significant—potentially over $12 billion— fiscal shortfall facing the next General Assembly and Governor-elect Bruce Rauner as they work to craft a General Fund budget for Fiscal Year 2016. The issue brief delineates the amount of recurring income tax revenue the state stands to lose when the temporary income tax increases under the Taxpayer Accountability and Budget Stabilization Act of 2011 phase down on January 1, 2015, as well as the worsening of other fiscal pressures that are projected to occur under current law.

Assuming no tax policy changes, if spending on services in FY2016 is held constant in nominal, non-inflation adjusted dollars at FY2015 levels, the state’s accumulated deficit in its General Fund will almost double, increasing from an estimated $6.8 billion in FY2015, to $12.7 billion by the end of FY2016.

This Issue Brief provides CTBA's analysis of gubernatorial candidate Bruce Rauner's position paper on fiscal policy, "Bring Back Blueprint: Jobs and Growth Agenda” (the “Blueprint”). The Blueprint represents candidate Rauner’s most complete policy statement on how to resolve the very real and serious fiscal problems that have plagued Illinois state government for decades. After taking into account all of the Blueprint’s proposals, the Illinois budget would be $5.9 billion short in FY2016, and that is before factoring in the current projected deficit from FY2015, which would increase the total accumulated deficit to $12.4 billion in FY2016. The Blueprint presents no data, plan, or policy proposal as to how to balance the budget.

CTBA's written 2007 testimony on Senate Bill 572 to the House Mass Transit Committee

CTBA's August 2009, testimony to the Pension Modernization Task Force, Funding Subcommittee.

Fact Sheets and Report on House Bill 174 of the 96th General Assembly. This tax reform bill would have implemented a number of changes to Illinois' tax structure including tax increases of the personal and corporate income taxes. Thus, generating new revenue for the state.

Fact Sheets on HB/SB 750 of the 95th General Assembly.