Holiday shopping and the sales tax scrooge
The average American will spend around $800 on gifts this Christmas. But making those holiday buys in Illinois will leave many families wishing they could get more bang for their buck.
Illinois passed its first state sales tax – 2 percent on all retail goods – all the way back in 1933. It not only replaced revenue that came from the old statewide property tax, but brought in a lot of new money as well.
Fast forward to today: Illinois’ average combined state and local sales tax rate is the highest in the Midwest and the seventh highest in the country, according to the Tax Foundation.
The state rate stands at 6.25 percent. But lots of local layers add up too, pushing Chicago, for example, to a 10.25 percent combined sales tax. That’s the highest combined sales tax among any large U.S. city.
Some blame the high sales tax on Illinois’ middling state income tax. That’s lazy.
Seven states in the country have no state income tax at all. All of them but Washington have lower sales taxes than Illinois. And all of them have lower property taxes than Illinois.
Other states have figured out how to do far more with fewer public dollars.
But another feature of Illinois’ sales tax that explains part of why it’s so high is that it’s narrow. Almost the entire service sector – from haircuts to lawn service – is exempt from sales taxes. A far more efficient, effective and fair way to collect a sales tax is with a lower rate on a broad base of both goods and services. It’s especially good for keeping revenue more stable during downturns, unlike the income tax.
The current patchwork of sales tax exemptions, oftentimes carved out by special interests, makes for poor policy.
Here’s one example: If you give someone a smartphone as a gift this Christmas, you’re also handing them a punishing tax bill. Another Tax Foundation study released this week revealed Illinoisans now pay higher wireless taxes than anyone else.
Even though cellphone service is not subject to Illinois’ sales tax, the average combined burden between federal, state and local excise taxes is more than 27 percent. That’s around $300 in taxes every year on a typical cellphone bill.
When the rules aren’t simple, lawmakers look for easy fixes to reap more revenue from a small range of items.
Cook County this week voted to restore a 6 percent sales tax on parking apps like SpotHero. And Chicago Mayor Rahm Emanuel called for doubling the state gas tax, likely making it the highest in the nation. Illinois is one of a handful of states to apply its sales tax to gas.
Changing how the state levies its sales tax will take a lot of political will. And there are legitimate concerns about doing so. Levying a sales tax not just on services, but things like food and medicine as well, which are currently taxed at a much lower rate, would be painful for low-income residents.
The key problem would be a cash grab. Illinoisans cannot let lawmakers use an opportunity to expand the base as a free pass for billions in new spending.
Residents can instead wish for a revenue-neutral sales tax expansion. It would modernize the tax code, protect low-income residents and prevent politicians from jacking up taxes on all sorts of Christmas gifts year after year.