The Problem

As families make their Fourth of July travel plans, motorists in Illinois are feeling the pinch especially hard. National surveys continually find that Chicago tops the list of highest average gas prices in the country. Latest numbers show that as of June 27, the average gasoline price in Chicago is $3.98, compared to a state average of $3.78 per gallon and a national average of $3.58 per gallon.

?Most consumers understand that the forces of supply and demand are largely responsible for setting gas prices. But carpooling moms and pizza delivery guys often are shocked to find that Illinois has the fifth-highest gas taxes in the nation.

Even worse, the state reaps “windfall profits” when gas prices rise. Specifically, the state applies a 6.25 percent sales tax on gasoline, in addition to a flat-rate excise tax. When gas prices go up, so does the state’s “take” from sales taxes. Over time, this can significantly increase the tax burden on motorists. In 2002, the Illinois sales tax accounted for 12 percent of all taxes applied to a gallon of gasoline in Chicago or 7.2 cents. Currently, it is 26.9 percent of taxes on a gallon of gasoline, now equal to 23 cents (graphic 3). Illinois is one of only seven states that fully or partially apply general sales taxes to gasoline, and this tax hits the poor and disadvantaged particularly hard.

Our Solution

Illinois should eliminate the five percent state share of the sales tax on gasoline (the rest goes to localities), thereby taking the tax from 6.25 percent to 1.25 percent. Under this scenario, the average motorist would save $2.83 each time he filled up his tank at the current prices. Over the course of a year, the savings could top $180.

A permanent reduction of motor fuel sales taxes would be welcome relief to struggling families, as would a temporary moratorium. Using Illinois taxable gasoline gallonage from 2010, Graphic 4 provides estimates of the potential savings to Illinois motorists from a reduction of the gasoline sales tax to 1.25 percent over the course of three, six and 12 months.

??Multiple bills introduced in the spring 2011 session by Illinois legislators would have offered alternative avenues for addressing Illinois’s double taxation on gasoline. Two sought to reduce or eliminate the state sales tax and partially replace it with a higher flat excise tax, all while offering a net tax reduction with gas prices above $4 a gallon. Another proposed a six month gasoline sales tax holiday, and one bill eliminated the state portion of the gasoline sales tax completely.

• HB 2057 (Rep. Mike Fortner) would abolish the state share of the sales tax (5 percent) on motor fuel. Part of the funds would be recouped by increasing the state motor fuel by 15 cents per gallon, and resulting revenues would be restricted to capital spending. Because the excise tax amount is fixed, as opposed to the variable sales tax, tax cost would not go up as prices rise.
• HB 3485 (Rep. David Harris) would abolish the state and local share (5 percent and 1.25 percent, respectively) of the sales tax on motor fuel. Part of the revenues would be recouped by increasing the state motor fuel tax by 19 cents per gallon, with 4 cents set aside for localities.
• HB 3769 (Rep. Wayne Rosenthal) would create a six month gasoline sales tax holiday in which the state share of the sales tax (5 percent) on motor fuel would be eliminated from July 1, 2011 through December 31, 2011.
• SB 2078 (Sen. Kirk Dillard) would abolish the state share of the sales tax (5 percent) on motor fuel indefinitely starting July 1, 2011.

Why This Works?

Fluctuations in motor fuel prices can cause significant strain on the pocketbooks of businesses and families in Illinois. The sales tax portion of the motor fuel tax adds an unnecessary burden on the Illinois economy during a time of increasing commodity prices and a falling dollar. It’s time for this burden to go, especially as the related revenues don’t always go to maintain our state’s transportation system.

While $180 in tax savings may not seem like a large sum to everyone, it represents a material amount to those most hurt by rising gasoline and food prices: the working class and poor. High fuel costs have a disproportionate effect on household income, particularly in the lower brackets. For the affluent, $180 may be inconsequential; for those struggling to make ends meet, it makes a real difference. Even if just half of the savings is passed on to consumers, many families will be happy to redirect those dollars to the grocery bills or college savings.

Further, this reflects the average Illinois household. For those high mileage drivers who have long commutes to and from work, or for those who drive many miles as a part of their employment, the savings will be much larger. Illinois should take a cue from the vast majority of states that do not apply sales taxes to gasoline and eliminate the state’s portion of the gasoline sales tax.