Illinois Taxes Goods. But What About Services?

It may feel like Illinois, and Chicago in particular, already take a cut of everything and anything that can be taxed – come January, Illinois will even begin to tax rented parking. But in reality, Illinois skips some significant potential sources of tax revenue: There’s no tax on retirement income, for one, and the state taxes only a handful of services (most are utility-related).

That may change.

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Chicago Mayor Lori Lightfoot is considering broadening the sales tax base to include services.

She’d need permission, however, from the state legislature and governor to do so, and when he was on the campaign trail Gov. J.B. Pritzker rejected the idea of adding the sales tax to services.

Then again, Pritzker as a candidate also said no to a higher gas tax to fund infrastructure upgrades, and he recently signed a law that doubled the state tax on motor fuel as of July 1.

Revenue from a statewide broadened sales tax could bring extra money to both the state and to communities around Illinois that are likewise facing monumental pension pressures, particularly as pro-labor Pritzker is steadfast that he will not look to curb government employees’ and retirees’ benefits (the state constitution hamstrings even those who do favor that approach).

Various groups have long called for Illinois to add a sales tax to services, including the Center for Tax and Budget Accountability and the Civic Federation.

“Illinois is an outlier in terms of its very narrow base on which it applies the sales tax,” the Civic Federation’s Laurence Msall said.

A 2017 report from state government’s nonpartisan Commission on Government Forecasting and Accountability cites Iowa as taxing some 81 services Illinois does not – everything from dance lessons to vehicle repairs and detective work to dating services.

Even former Gov. Bruce Rauner campaigned on adding a sales tax to certain “luxury” services, like yachting and accounting, and the conservative-leaning Illinois Policy Institute’s budget and tax director Adam Schuster said in a statement that “it’s true that a broad-based sales tax expansion would be in the state’s best interests.”

But Schuster adds caveats: “However, in our view, it needs to be revenue-neutral. As is, this is not a comprehensive plan, but rather doubling down on the same failed strategy of taking money out of the private economy and asking taxpayers to pay more. Bailing out the unsustainable pension system with more and more taxes is not in the best interest of those who live or work in the city or receive pensions.”

Lightfoot doesn’t have a plan fully fleshed out just yet, as she made clear at an unrelated press appearance on Tuesday.

But a day earlier, she was open about how a services tax is very much on the table, as long as it’s not “regressive.” Lightfoot said she doesn’t want to hit mom-and-pop shops but is instead focused on higher-end services, like on the legal work she used to do as a partner at one of Chicago’s biggest law firms, Mayer Brown.

Illinois State Bar Association President David Sosin said that while corporations may be able and willing to foot the bill for a larger legal tab, taxing lawyers’ work is regressive.

“People don’t choose to be evicted,” he said. “People don’t choose to have their parents die and go through a probate proceedings to receive their property. People don’t choose to fall behind on their mortgage payments.”

Msall warns that if only a few services are subject to the sales tax, Lightfoot isn’t apt to raise the sort of revenue she’s looking for to prop up the city’s budget. And if Chicago alone begins to tax services, companies that recently have been moving to Chicago proper may well migrate back to the suburbs.

Follow Amanda Vinicky on Twitter: @AmandaVinicky

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