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Thursday, Sept. 17, 2009 07:35 pm

Business owners wary of proposed service tax

Tax would be passed on to consumers, but policy expert say that’s the point

Lynn Puls styles customer Linda Richardson’s hair at Hair Shanty on Second Street. Puls, who owns Hair Shanty, would be taxed five percent for cutting hair under a proposed service tax in the Illinois legislature.
PHOTO BY PATRICK YEAGLE

It has been called “a headache,” “double taxation,” and “another way for government to get their hands in consumers’ pockets.”

The idea of taxing services — something Illinois has historically been hesitant to do — has gained more attention this year with reports that the state is facing a deficit of anywhere from $8.95 to $12.26 billion, depending on whom you ask.

As Illinois faces the record budget deficit, the General Assembly continues to mull a bill to tax services — 39 of them, in fact, for everything from chartered flights to dating services. A study released in August by the state’s Commission on Government Forecasting and Accountability estimated such a tax could yield between $3.6 and $7.25 billion per year in new revenue.

While the details of House Bill 174 are hammered out between the Illinois House and Senate, local business owners are worried that a service tax will hurt their livelihoods.

“Whenever you tax somebody, it creates more bureaucracy and more headaches for the small business owner,” said Terry Farmer, who owns the Springfield photography business that bears his name.

Springfield barber Gene Pankey, owner of Reflections Hair Design, is concerned that he would have to raise prices to pay the projected five percent service tax.

“We’d have to up our prices to equal out somewhere,” Pankey said. “You try to keep them down wherever you can, but things go up. You’ve got to do it, and that hurts business.”

Local carpenters would also have to raise prices under the new service tax, said Dean Graven, president of the Homebuilders Association of Illinois.

“It’s going to have a consumer going, ‘Do I really need to do this?’, ‘How do I spend my dollars?’ They may cut back on the project; they may cut back on what they really wanted to do because they have to anticipate the builder is going to pass that cost along.”

But one policy analyst says passing the cost along is precisely the point.

“Of course the consumers pay it,” said Ralph Martire, executive director of the Center for Tax and Budget Accountability, a bipartisan Illinois think tank. “It’s not a business tax, it’s a consumer tax.”

Martire explains that a service tax is meant to accomplish what he calls the “four elements of sound tax policy.”

It is responsive, according to Martire, by focusing revenue generation on growing economic sectors.

“The goal of a tax system is to raise revenue,” Martire said. “It won’t do that if it’s focusing on a diminishing aspect of the economy.”

Fairness, another of Martire’s elements of sound tax policy, is accomplished by putting the greatest tax burden on the largest consumers, he says.

A tax system must also be stable, he points out, meaning it must generate revenue even in poor economic times.

Finally, Martire looks for efficiency in a tax system; it must have minimal effects on the economic decisions taxpayers make.

The service tax, Martire says, accomplishes all of those goals, unlike the current sales tax.

“Our sales tax, as currently designed in Illinois, fails to do the two things it is supposed to do,” he said. “What a sales tax is supposed to do is respond to where the economy is growing and be stable during poor economic times. The only way you do that is by broadly taxing those transactions that are actually occurring in the consumer economy.”
Still, some business owners say they don’t believe the service tax will fix the state’s budget problems.

“I don’t have a lot of faith when a tax is thrown into a general fund,” said Graven of the Homebuilders Association. “If that tax was going to be set aside and limited to a specific use…infrastructure, development of different areas in a community…that’s one thing. If it’s going into the general fund, it’s like, ‘Here’s my hundred-dollar bill. Have fun with it!’ ”

Contact Patrick Yeagle at pyeagle@illinoistimes.com.
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