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Civic Federation Says Illinois Should Extend Sales Tax to Services to Help Bridge $3B Budget Deficit
The Illinois State Capitol is pictured in Springfield. (Capitol News Illinois file photo)
Illinois should extend its sales tax to services like haircuts, dry cleaning and plumbing, the nonpartisan Civic Federation recommended in a report out Wednesday — a week before Gov. J.B. Pritzker is set to share his much-anticipated budget proposal. The report said despite marked improvements in recent years, the state has a long road to get on sound fiscal footing.
“Fiscal year 2026 brings the State to a critical crossroads,” the Civic Federation analysis said. “After a few years of strong revenue performance, the State faces a General Funds budget deficit of over $3 billion in FY2026 and more significant projected budget deficits over the next five years.”
Expanding the sales tax base beyond goods to services, therefore updating it to match the modern economy given that roughly half of consumer spending is on services, is one way to course-correct, according to the report dubbed the “State of Illinois FY2026 Budget Roadmap.”
“By applying the sales tax only to goods and a small number of services, Illinois is missing the ability to tax much of the spending within its borders,” the report reads. “Broadening the sales tax base would yield several notable benefits for the State and its residents and customers.”
The primary benefit of levying a sales tax on services would be an estimated $2 billion in annual revenue. It’s not an insignificant figure given the fiscal challenges Illinois is immediately facing: a projected deficit nearing $3.3 billion next year — not including big-ticket additional spending pressures like helping Chicago-area transit agencies come up with $750 million to prevent massive service cuts and layoffs, increasing pension benefits for state employees and teachers hired after 2011, and a $1 billion ask from Chicago Public Schools.
Illinois lawmakers will also have to weigh smaller funding requests for legal services for immigrants, wage increases for staff who care for people with disabilities, and Meals on Wheels for seniors.
The $2 billion estimate is if Illinois leaves the state 5% sales tax in place; the Civic Federation said it could be made more politically palatable if the state lowers the rate at the same time it expands to selected services. The report recommends Illinois avoid making business-to-business services subject to a sales tax to avoid the complications of “pyramiding” when a tax is levied at each step in the process of reaching a consumer.
Taxing services has been bandied about for years as a way to raise money for education, while recent plans advocate for the new revenue to be directed to public transportation — but Pritzker has disavowed it in the past.
Illinois could be shoved into a deeper hole should President Donald Trump’s administration go forward with cuts affecting a bevy of programs, from the U.S. Department of Justice withholding support for law enforcement because of Illinois’ laws protecting immigrants to large reductions in Medicaid to deprioritizing Illinois for infrastructure and road funding because of the state’s lower birth and marriage rates.
Among the more immediate pressures is the call from government workers hired in the past 14 years with Tier 2 pensions. As a means of reducing the state’s crippling long-term pension debt that currently eats nearly a fifth of Illinois’ spending — or more than $11 billion last year — Illinois in 2011 reduced the retirement benefits from what public workers previously were guaranteed.
But the Tier 2 benefits over time are worth less and could breach a federal law that requires they match at minimum what pensioners would receive if they were to draw Social Security, leading unions to call for fixing the “safe harbor” problem by enhancing the workers’ retirement offerings.
The latest package (House Bill 5909) proposed by labor is pegged to cost an additional $1.1 billion the first year it takes effect, and $30 billion through 2045, by changes like increasing retirees’ annual cost of living increase and reducing the age of retirement.
Illinois should not advance that measure, the Civic Federation cautions, and instead “fix” the Tier 2 issue by taking the much smaller, less expensive step of increasing the amount of salary on which an employee can receive a pension.
“The state of Illinois should refrain from unnecessary increases to pension liabilities and enact only those benefit enhancements to Tier 2 pensions necessary to comply with the Social Security Safe Harbor guidelines,” the report said.
The Civic Federation suggests Illinois also undergo a wider review of tax credits and exemptions, and consider eliminating some of the dozens of special funds that dedicate money to a specific purpose, therefore hindering flexibility to dedicate revenue where it’s needed most.
A holistic approach to budgeting is needed, the Civic Federation said, to allow Illinois to more precisely battle a structural deficit built over decades.
“While there is much to be said for the progress achieved under this (Pritzker) administration in addressing long-term fiscal issues, the State needs a more systematic long-term strategic planning process,” the report found.
Illinois’ overall high tax burden, when coupled with local taxes like the property taxes that largely fund schools, hurts the state and contributes to residents moving out of state and driving out economic development, the report said.
“Illinois’ fiscal policies operate as a drag on economic growth and employment in the state,” the report said. “Although Illinois has a variety of economic assets and strengths … economic growth has stagnated relative to the region and the rest of the nation in recent years. This economic weakness is linked to Illinois’ tax and fiscal policy measures, many of which are under the state’s control.”
Pritzker’s office did not immediately respond to a request for comment on the federation’s advice.
The Civic Federation’s prescription is to more closely monitor whether funded programs accomplish their goals, to establish metrics for future funding, and to get Illinois’ rainy day Budget Stabilizing Fund up to 10% or $5 billion (up from 4% of general funds as of fiscal year 2024).
Steps should be taken to make the budgeting — and overall lawmaking — process less opaque to increase public understanding and buy-in. Report suggestions include publicly posting reports, presentations and testimony given to lawmakers; providing on-demand and archive web access to legislative hearings; allowing legislation approved prior to 1971 to be searchable online; and for the state to offer an “accessible and user-friendly explanation of the foundation aspects of the budgeting process.”
“There are deficiencies in the transparency and availability of information regarding the State budget and budgeting process, which hinders public understanding and trust,” the report said. “Currently, many Illinois residents lack access to clear, comprehensive details about how their governments’ budgets are developed, funded and allocated.”
Contact Amanda Vinicky: @AmandaVinicky | [email protected]
