Because You’re Not Paying Enough In Taxes Already

by Kristina Rasmussen As Illinois’s service sector grows (accounting for 32 percent of Illinois’s economy in 1977 and 48 percent in 2009), so has the desire to tax it. In 2009, the Illinois Senate tried to expand the state sales tax to a number of services (chimney sweeps, animal shelters, interior design services, and so on),...

by Kristina Rasmussen

As Illinois’s service sector grows (accounting for 32 percent of Illinois’s economy in 1977 and 48 percent in 2009), so has the desire to tax it. In 2009, the Illinois Senate tried to expand the state sales tax to a number of services (chimney sweeps, animal shelters, interior design services, and so on), but that plan failed.

Opinion makers are once again tossing around the idea of expanding the Illinois sales tax to services (right now, it is mainly levied on goods). The boosters are primarily people who want to squeeze billions more in tax dollars out of our wallets — they’re not interested in revenue-neutral swaps to make the tax code more efficient.

Illinois should avoid the imposition of a state sales tax on services, especially as an attempt to raise new net revenues.

The taxation of services is uneven across the United States, and Illinois’s light tax treatment of services has encouraged the growth of a strong in-state service sector. In fact, services make up a greater percentage of our Gross State Product than nearby Great Lakes States. Notes an updated April 2011report from the Illinois Commission on Government Forecasting & Accountability:

In 2009, Illinois’ service related industries comprised 49.4% of the states GSP. This is the highest of the Great Lake States. Secondary in the region is Ohio at 45.0%, followed by Michigan (43.8%), Wisconsin (41.9%), and Indiana (37.7%). The other Great Lake States service sectors averaged 42.1% of their GDP.

Could it be a coincidence that while Illinois has the largest service share of its economy, we’ve also kept taxes off more of our services? Again, from the COGFA report:

In comparing Illinois with the other Great Lakes states, Illinois is very similar to Indiana and Michigan but very different from Ohio and Wisconsin. Illinois’ 17 service taxes are similar to Indiana’s 24 and Michigan’s 26. In all three of these states, a large amount of the service taxes are related to utilities. Ohio and Wisconsin on the other hand tax 68 and 76 services respectively. Both of these states tax services much more broadly throughout the service categories.

Illinois enjoys strong finance and insurance, professional and technical, and information industries thanks in part to the current inapplicability of sales taxes. Compared to nearby Great Lakes states, Illinois has a competitive advantage in keeping the sales tax off of services. On this count, Illinois is a more attractive place to set up shop and do business, especially compared to Ohio and Wisconsin. Imposing a services sales tax would eliminate a key business-friendly policy.

A balanced tax system imposes low levies across a broad base of activities. Theoretically, the sales tax rate could be expanded to cover services in exchange for proportionately lowering the sales tax rate on goods and services in a budget neutral manner (i.e., state government would bring in no more or no less revenue than it did before). However, past experience in Illinois clearly demonstrates a budget neutral tax swap is never the true intention. Expanding the sales tax to services is a revenue-raising tactic to bring in billions of new tax dollars and is not a “good tax policy” measure by any means.

Thankfully, legislators don’t see the one moving any time soon. From Illinois Statehouse News:

State Rep. Mike Tryon, R-Crystal Lake, said that’s not going to happen. Tryon said he doesn’t know many Democrats in Springfield, and even fewer Republicans, who would vote for another tax increase.  He said passing the 67-percent personal income tax hike earlier this year has left a bad taste with many lawmakers.

“Are we the highest in sales tax, are we the highest in property tax, now we’re midway in income tax, and then be the highest in services taxes?” Tryon asked. “We’re building a government we can’t afford.”

But it’s not just the GOP that is reluctant to talk taxes again. State Rep Elaine Nekritz said few Democrats want to fight that fight again.

“I think that another tax discussion has almost a zero likelihood of happening,” she said. “That being said, the only scenario which I could see (a service tax hike) is if we were to roll back part of the income tax increase and move to a broader sales tax base.”

But keep your eye on it. We just had a midnight income tax hike. Another one isn’t out of the realm of possibility.