Building a modern tax code
New report calls for sales tax on services
As the May 31st legislative deadline looms, tax experts are making one more push to extend the state’s sales tax to services.
The Center for Tax and Budget Accountability (CTBA) and the Taxpayers Federation released a report last week calling for Illinois to tax services the same way products are taxed.
Illinois sales tax covers fewer services than any of its neighboring states. Outside of utilities, which nearly all states tax, Illinois taxes a total of five services out of about 150.
When Illinois does put a tax on a service, it isn’t the service itself that is taxed. Instead, only physical things incidental to the purchase of a service are taxed – like a replacement part for a car during a repair. The labor doesn’t get taxed at all.
Gov. Bruce Rauner floated the idea of taxing services during his campaign as a way to help balance the state budget. Though the governor has reiterated that position since, he hasn’t made it a legislative priority. He also has consistently said that he wouldn’t discuss new revenue sources with Democrats before they first discuss his pro-business reforms, many of which are non-starters for the Democrat-controlled Illinois General Assembly.
Ralph Martire, executive director of the Center for Tax and Budget Accountability, says a large part of Illinois’ budget woes could be attributed to a tax structure that is out of date.
“If you look at tax policy in Illinois, you can see that the fact that it is so flawed has contributed significantly to the state’s current fiscal woes,” Martire said. “If you broadly tax what consumers are really buying in a consumer economy, what you will see is stable revenue even in a recession.”
Martire said that the sales tax Illinois currently has isn’t built for the modern economy, noting that consumer spending in Illinois has shifted over time. Fifty years ago, spending was split evenly between products and services. For the past decade, however, more than 70 percent of consumer spending is on services.
The study starts by laying out four basic principles of a good tax policy: fairness, responsiveness, stability and efficiency. Martire says no single tax hits all four of those principles, and a tax on services is no different. Sales taxes are more stable and responsive than income taxes, but they are also less fair because people with lower incomes spend a higher percentage of their earnings on products and services. Martire also said that though a tax on services is a regressive tax, it is less regressive than the current sales tax structure and would serve to make the state’s taxes less regressive overall.
Martire said that although a tax on services would have a greater impact on lower and middle incomes, it is a far better deal for those people than the alternative: balancing the budget by cutting the services those people depend on.
“It might cost that family 50 to 100 dollars a year more in taxes,” Martire said. “What does the loss of child care services cost them? Thousands. What does the underfunding of the schools mean not just for them, but for their children’s future? Hundreds of thousands.”
The tax proposal put forward by the CTBA and Tax Federation joint report is seeing some unexpected support. The Illinois State Bar Association, which has been against a sales tax on services since it was brought up late last year, seemed supportive of the new proposal.
Jim Covington, legislative director for the Illinois State Bar Association said that a sales tax that included professional legal services would make it more difficult for low and middle income families to afford a lawyer.
“It would basically be a tax for asserting your rights,” Covington said. “It’s an access to justice issue.”
The CTBA’s proposal excludes professional services like attorneys.
The Illinois Chamber of Commerce remains opposed to any kind of sales tax expansion to services. Todd Maisch, president and CEO of the Illinois Chamber said that the revenue estimate in the CTBA’s report was overblown because it came from a Commission on Government Forecasting and Accountability report from 2011, which included professional services. However, the report he referred to did include an estimate without professional services. It estimated $8.5 billion in revenue from a sales tax with professional services included and $4 billion without. The CTBA’s report only estimated $2.1 billion brought in by the state.
Martire stressed that if services were to be taxed, it should only be consumer services. He says that if business-to-business services became the target of a tax, that extra cost would get filtered through to the consumer, which would stifle the economy.
“You do not want to tax every item of the distribution chain,” Martire said. “That results in double, triple, quadruple taxation; something tax-policy people call ‘pyramiding.’ ”
Senate Revenue Committee chairwoman Toi Hutchinson, D-Olympia Fields, said that Illinois’ fiscal condition – and the resulting willingness of lawmakers to at least consider new revenues - is an opportunity to modernize the state’s tax code which may not come again for a long time.
“Considering the fact that a major overhaul of Illinois’ tax code hasn’t happened since 1970,” Hutchinson said, “this is the perfect time for us to get this right, because this won’t happen again for decades and decades.”
The last time Illinois changed its sales tax rate was 1990.
Contact Alan Kozeluh at email@example.com.