Remember this oldie but voter-tantalizing goody from last winter’s campaign for mayor?
“Rahm would cut Chicago’s sales tax by 20 percent, saving working families up to $200 a year,” promised television campaign ads. “More money in your pocket? That’s Rahm Emanuel’s plan.”
Hasn’t quite worked out that way, at least not yet. Emanuel said in a recent interview he’s been too busy in his opening months as mayor to move forward on the pledge, but he vowed to get around to it eventually.
When, and if, that happens, Emanuel is likely to find that transforming a campaign sound bite into reality could be a tall order when it comes to the sales tax, a levy that seems simple on its face, is anything but, and increasingly has become a flash point for taxpayer discontent over sky-high rates.
Though his details were fuzzy, what Emanuel was talking about is an idea that’s been kicked around for a long time in Springfield and that many fiscal experts contend is long overdue: applying the sales tax to cover not just purchases of goods but also common services that represent a fast-growing segment of the retail economy.
The underlying principle is a trade-off. Rates can come down across the board, and government won’t be crippled as long as more is taxed. The state relies on sales tax revenue to pay for about one-fourth of its day-to-day operations; for the city, 16 percent.
The sales tax has been much in the news of late and hardly in a good way. Many shoppers in Chicago are furious about having purchases taxed at 9.75 percent, among the highest rates in the nation even after a slight rollback last year, and rates in many suburbs aren’t far behind. Increasingly, retailers and other businesses have turned to creative but controversial ways to route transactions through far-flung communities where the levies are lower.
At the same time, Illinois’ heavy reliance on the sales tax as a major revenue source has come under growing fire as unfair to the poor, a drag on commerce and an archaic tool that makes it harder for government bodies to cope with economic downturns.
A key problem, as many critics see it, is that Illinois has been far slower than other states to recognize that consumers these days spend an increasing share of their dollars on things like lawn care, pet grooming or recreation and less on tangible products like clothes or hardware.
The average state allows its sales tax to be applied to 56 different categories of services, according to the Washington-based Federation of Tax Administrators. In Illinois, the number is 17, most involving utilities.
That sets up curious anomalies. A key reason sales tax rates are so high here is because so little is taxed compared with elsewhere. And despite all the furor about lofty rates, Illinois residents pay less in sales taxes than neighbors in surrounding states where the rates are lower but more is taxed.
Per capita, Illinoisans shelled out $727 in state and local sales taxes in 2008, according to the Tax Foundation, a nonpartisan tax research group in the nation’s capital. The corresponding number in Indiana was $901, in Wisconsin and Iowa it was $814, and in Missouri, $852.
“The change in our economy from a product-based to a service-based economy has been dramatic,” said Ralph Martire, executive director of the Center for Tax and Budget Accountability in Chicago. “We don’t tax that in Illinois.”
In 1965, Martire said, the sale of goods, which are generally subject to the sales tax, comprised 32 percent of the state’s gross domestic product, the broadest measure of economic activity. By 2008, that share had dropped to 12 percent.
Over the same time frame, he said, the sale of services, which generally aren’t subjected to the tax, grew from 36 percent of the state gross domestic product to 60 percent.
One impediment to reform of the sales tax in Illinois is that it is broadly misunderstood. That extra charge added to your bill when you buy a refrigerator or a dress may look like one tax, but it is really a compilation of multiple layers of taxes from the state, city, county and such bodies as the Regional Transportation Authority.
What’s more, two of the biggest-ticket items in most household budgets, groceries and medicine, are subject to a far lower tax rate. The result is a hodgepodge of rules applied unevenly.
“Consumption is consumption,” said Tom Johnson, president of the Taxpayers’ Federation of Illinois. “If you’re going to tax consumption, why do you make a policy decision to tax just some consumption?”
The current system made more sense when Illinois imposed its first tax sales tax in the depths of the Depression, when the total rate was 2 percent, the corner store or Main Street was the heart of retail commerce, a lawn service or pet groomer were just for the ultrarich and nobody ever heard of a tanning salon let alone the Internet.
Clinging to that outdated model to apply the sales tax penalizes consumers of modest means who may not be able to afford many untaxed services but spend a greater share of their income on taxed goods, Johnson said.
One often-repeated example of that regressiveness involves lawn care. Wealthier homeowners are more likely to hire a lawn service, which isn’t taxed in Illinois. But if a do-it-yourselfer buys a lawn mower, that purchase is taxed.
Emanuel is only the latest in a long line of Illinois politicians to suggest broadening the sales tax, a change that would have to apply statewide and be approved by the Legislature. The failure of past efforts is vivid evidence of the tough political head winds any overhaul would face.
Former Republican Gov. James R. Thompson floated a plan in the 1980s, but it encountered fierce opposition from a variety of service industries. The same fate greeted a service tax initiative, attached to a broader tax hike bill, that passed the Illinois Senate two years ago but was buried in the House.
“Our members go ballistic when there’s talk about raising taxes,” said Kim Clarke Maische, Illinois director of the National Federation of Independent Business, which claims 11,000 members in the state.
Maische said the absence of a tax on services is a “bright spot” that helps those in service industries in Illinois keep costs down and stay competitive.
David Vite, president of the Illinois Retail Merchants Association, said perhaps the biggest roadblock to change is that lobbying against any broadening of the sales tax can get intensely personal.
“Someone is going to sit in that barber’s chair for 20 minutes or that beautician’s chair for an hour and 20 minutes,” Vite said. “Legislators hear from people, and it doesn’t make sense for the amount of money this would bring in to put up with that grief.”
Laurel Prussing, the mayor of Urbana in east-central Illinois, found out the hard way. The Democrat was elected to the Illinois House in 1992 from a Republican-leaning district and bounced by voters two years later, in part because her push in the Legislature for a service tax led to a barrage of negative TV ads.
“I was proposing extending it to certain services to pay for education,” Prussing said. “We got really beat up on haircuts and auto repair. My mechanic is still speaking to me, but it was rough for a while.”
Prussing’s lament points out a practical problem in these increasingly polarized political times. The wider a net a service tax proposal casts, the more professions are sure to mobilize to fight it.
On the other hand, cherry-picking services to tax and those to exempt can be hard to defend. Emanuel found that out when he suggested during the mayoral campaign that any new tax would be confined to luxury services and then, under attack from a rival, had a hard time defining what that meant.
These days, any tax revamp is a tough sell, Johnson said, but resistance might be less if backers could argue the goal was not to raise revenue but to make things fairer and forward thinking. Emanuel appeared to tap into that dynamic with his proposal to earmark new revenue from taxes on services to pay for a reduction in the city rate.
“If you do it in a way to say we want to make the tax structure fairer and we want to make it revenue neutral, maybe that has a different political implication,” Johnson said. “If you’re doing it to raise more revenue, then you get more push-back.”
