* The Civic Federation, the Chicago Metropolitan Agency for Planning, the Illinois Economic Policy Institute and the Center for Tax and Budget Accountability have released a report calling for the expansion of the sales tax to some services…

As the State of Illinois’ second largest revenue source, the sales tax is a critical tool that supports government operations and public services throughout the state. First implemented in the 1930s, Illinois’ antiquated sales tax structure still primarily taxes goods rather than services. Due to this narrow tax base — which does not reflect the modern, service-oriented economy — the sales tax is falling short. Illinois needs a more strategic and sustainable fiscal structure that delivers consistent and reliable revenue growth, efficient spending, and economic competitiveness.

The time has come to fundamentally modernize the sales tax in Illinois to better reflect a 21st century economy. Applying the sales tax to consumer services would help secure Illinois’ financial future and its ability to meet residents’ needs by supporting critical public services, reducing tax inequities, and enhancing fiscal stability

* From the press release…

• Illinois’ sales tax structure is outdated.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. Illinois 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’ 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 public transit agencies.

* Exemptions and other items of concern…

▶ A service tax should be imposed on a broad set of consumer services to comply with the Illinois Constitution’s uniformity clause, which requires that taxes be consistently applied, with reasonable exemptions.

▶ Any economically efficient plan to tax consumer services should include two important exemptions to support the state’s households and businesses:

▷ Essential services like housing, healthcare, and childcare that are generally not classified as volitional consumption should be excluded from any tax on consumer services. Taxing these transactions could cause significant disruptions for households of all incomes and would be contrary to the state’s broader policy objectives.
▷ Services purchased by businesses as an input into products later offered for sale should also be excluded. These business-to-business (B2B) transactions, which include services like accounting and legal support, are considered intermediate inputs that help create products that will be taxed when sold to the final consumer. Taxing these transactions would lead to tax pyramiding — an economically inefficient approach that results in uneven and inconsistent effective tax rates. Taxing B2B services would also damage Illinois-based businesses’ ability to compete with peers in other states.

▶ To address existing taxes on services, the General Assembly should work with local governments to transition their existing service taxes (such as Chicago’s tax on streaming services) and avoid double-taxation by multiple units of government. The state can ensure local taxing jurisdictions, including communities with existing service taxes, benefit from sales tax modernization by guaranteeing that any expansion of the state sales tax base is fully reflected at the local level.

▶ As part of an expansion of the sales tax base, taxing jurisdictions should consider potential adjustments to their current rates, with the goal of maximizing revenue while decreasing overall tax burden on consumers.

* Where they’d like to see the new money go…

▷ Addressing the $770 million public transit funding deficit estimated by the RTA and total $1.5 billion needed annually to enable significant improvements to the transit system in northeastern Illinois;
▷ Paying down Illinois’ $144 billion in unfunded pension obligations;
▷ Fully funding the evidence-based K-12 education funding formula;
▷ Making additional contributions to the state’s rainy-day reserve fund; and
▷ Funding tax relief for low-income households by increasing resources allocated to programs like the Earned Income Tax Credit and Circuit Breaker Property Tax Relief program.

Before commenting, please click here and search the full report with any questions you may have.

Anyway, what are your thoughts on this?

…Adding… TFI…

Taxpayers’ Federation of Illinois President Maurice Scholten released today the following statement in response to a new report encouraging Illinois lawmakers expand state sales taxes to include more consumer services:

We appreciate the research teams for their recommendations and share their belief that funding education, mass transit, and public pension systems are vital to economic growth. Expanding Illinois’ historically narrow sales tax base could be one part of a long-term solution, but it is important to remember new sales tax revenues would take a significant amount of time before they are available to address these critical services.

In addition to ensuring their legislation would survive a constitutional challenge, lawmakers must work with local governments already relying on excise and service taxes to ensure these services are not subject to punishingly high tax rates. Moreover, all those affected by these changes must have sufficient time to prepare for such a seismic change to Illinois tax policy.

Illinois taxpayers deserve responsible sales tax policy - a modern system that treats goods and consumer services equally, thereby allowing lawmakers to lower the statewide sales tax rate to be more competitive with neighboring economies. We believe such a policy is within reach, and one that would help Illinois taxpayers realize a more sustainable future.

The report, “Modernizing Illinois’ Sales Tax: A pathway to a sustainable future,” was co-signed by the Civic Federation, the Chicago Metropolitan Agency for Planning, the Center for Tax and Budget Accountability and the Illinois Economic Policy Institute. Although the Taxpayers’ Federation of Illinois did not co-sign the report, Scholten, an attorney who has spent the past 15 years impacting Illinois state and local tax policy, was consulted by its authors and provided feedback incorporated into the final product.