Illinois sales taxes highest in Midwest

Illinois sales taxes highest in Midwest

Combined state and average local sales tax rate tallies 8.85% in Illinois for 2024. That’s the highest in the Midwest and seventh highest in the nation.

Illinois’ combined state and average local sales tax rate is the highest in the Midwest, according to new rankings released Feb. 6 by the nonpartisan Tax Foundation.

Illinois’ state sales tax of 6.25% combined with an average local sales tax rate of 2.61% leave Illinoisans paying an average combined sales tax rate of 8.86%, the seventh highest tax rate in the nation.

Illinois’ poor ranking stems from the fact the state not only levies high state-level sales tax rates but local governments also impose some of the highest local sales tax rates in the nation. Neighboring Indiana levies the second-highest state sales tax in the nation at 7% but does not permit local sales taxes, leaving Indiana’s combined average sales tax rate squarely in the middle when compared to other states.

Similarly, neither Kentucky nor Michigan imposes local sales taxes, while local sales tax rates in Wisconsin and Iowa each average less than 1%. Of Illinois’ neighbor states, only Missouri levies a higher average local sales tax rate at 4.16%, but a lower state sales tax rate at 4.23% still keeps Missouri’s combined state and average local sales tax rate below Illinois.

One of the reasons Illinois’ sales tax rates are so high is because of the state’s relatively narrow sales tax base. According to the most recent estimates from the Tax Foundation, only 26% of the state’s economy is included in the sales tax base. The median state includes nearly 36% of the economy in the sales tax base. Every Midwestern state has a broader sales tax base and lower sales tax rates than Illinois.

Sales tax bases have narrowed in recent years as the economy has shifted towards personal service expenditures, which are generally tax exempt, including in Illinois.

Illinois’ high state sales tax rate and broad taxing authority for local governments has left Chicagoans paying the second-highest sales tax rate of any major city, according to the most recent analysis from the Tax Foundation. Only Tacoma, Washington, (10.3%) levies a higher combined state and local sales tax rate than Chicago’s 10.25% combined sales tax rate. Even other high-tax cities such as New York (8.875%), San Francisco (8.625%) and Los Angeles (9.5%)  have substantially lower sales tax rates than Chicago.

To make matters worse, Chicago voters are being asked to approve a $100-million tax hike that will disproportionately fall on businesses in the upcoming March election. The measure, dubiously branded a “mansion tax,” would increase Chicago’s Real Estate Transfer Tax rate on properties valued over $1 million to fund a homelessness relief project without any plan or details.

The tax is much more than a “mansion tax” because relatively few residences sell at that rate but many business properties and apartment complexes fall in that range. Crain’s Chicago Business’ analysis showed $1 million-plus real estate transactions disproportionately were commercial property sales rather than residential property sales by a rate of 9 to 1, or $7.5 billion to $841.8 million, from April 2021 to April 2022.

Businesses in Chicago already pay the second-highest state corporate income tax rates in the nation. They also pay the second-highest commercial property taxes in the nation. They are expected to lure customers when sales taxes are No. 2 in the nation. Now Mayor Brandon Johnson is trying to increase their tax burdens even more.

Chicago voters can decide March 19 whether the city becomes more or less hostile to businesses by imposing a “mansion tax” that really isn’t.

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