Illinois Gov. Pritzker should extend sales tax to services to close budget gap

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Scrambling to plug a $3 billion budget gap, Gov. J.B. Pritzker aims to raise $900 billion by closing "corporate tax loopholes."

Yet he won’t consider closing the biggest loophole of  all, one that costs Illinois as much as $3 billion annually. This loophole exempts half the economy—the faster-growing half, by the way—from a tax that applies to the other half.

I’m talking about the loophole that exempts services from sales tax, which Illinois levies almost exclusively on merchandise sales. Illinois has lagged far behind national trends in modernizing its sales tax system to reflect the long-term shift toward a more service-based economy. A generation ago, services accounted for about one-third of the economy; today it’s half or more, depending on how the data is compiled.

Illinois sales tax applies to only 17 services, far fewer than many other states tax. Neighboring states are way ahead of Illinois in taxing services. Iowa taxes about 100 services ranging from dry cleaning and dating services to landscaping and limo rides. Wisconsin taxes 14 more services than Illinois, and even "low-tax" Indiana beats us by eight, according to a 2017 report by the Illinois Commission on Government Forecasting & Accountability (COGFA).

These states are happy to scoop up revenues that Illinois leaves on the table. COGFA estimates Illinois could collect as much as $3 billion taxing the same services Iowa taxes, or up to $950 million matching Wisconsin’s service taxes.

An extra billion or three would go a long way toward closing the budget gap Illinois faces in fiscal 2022, which begins in July. But instead of reaching for a comprehensive, long-term revenue source likely to grow over time, Pritzker is patching together a budget with fiscal glue and masking tape. Along with the $900 billion in loophole-closing, he’s balancing next year’s budget by extending $700 million in spending cuts from fiscal 2021 and shifting money around from various government accounts.

A sales tax on services would generate more revenue and might enable Pritzker to restore some of last year’s cuts. It would also correct an unfair tax imbalance that burdens one sector of the  economy, but not another. Sales taxes are essentially consumption taxes. Why should consumption of goods be taxed, but not consumption of services?

A few examples underscore the unfairness and economic silliness of exempting services from sales tax. Buy a bottle of nail polish in Illinois, and you’ll pay anywhere from 6.25 percent to nearly 11 percent sales tax, depending on which town you buy it in. Buy a manicure in Illinois and you pay zero sales tax. The same goes for haircuts, massages, landscaping, accounting and legal services.

Opponents argue that taxing services would depress demand and hurt small businesses. That argument would be more convincing if it were borne out by the experience of states that tax services. It’s not. People in Iowa still get haircuts, despite the sales tax. In fact, many of the states that levy sales tax on a wide range of services are outpacing Illinois economically.

A broad-based sales tax on services would generate the revenue Illinois needs and make taxation fairer, without hurting the economy. It’s long past time for our political leaders to overcome their resistance to closing this loophole.

via Crain’s Chicago Business https://ift.tt/1mywUHL

February 17, 2021 at 11:18AM

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