Illinois’ current sales tax system does not reflect a modern economy

Tax policy is a deeply misunderstood topic. In general, most people believe that “conservative” states levy fewer taxes than states with more “left-leaning” leadership.

This is not always the case. For example, Texas and Florida each levy taxes on much more stuff than does Illinois — about 300% and 200% more, respectively. Every one of Illinois’ neighbors, except Missouri, taxes more stuff too.

While most states levy income and property taxes at varying levels on workers and landowners, the key difference lies in the sales taxes that are levied whenever a consumer buys a product or service. These levies currently represent around 20% of the revenues to our state’s general fund, and amount to its second-largest funding source.

But there’s a caveat. While almost every state taxes products we buy — such as clothing — far fewer states tax the 176 types of services, which have become far more prevalent in today’s economy — like digital streaming, gym memberships, personal care, and other professional services. Illinois only taxes 29 of these services, while Kentucky taxes 40, Florida taxes 60, Iowa taxes 89, and Texas taxes 90.

Indeed, consumer spending has shifted significantly toward services, with expenditures on consumer services growing 2.5 times faster than expenditures on goods over the last six decades. And research shows that high-income households spend five times more on untaxed services than low-income households.

A sales tax system that disproportionately relies on putting levies on goods and not services ends up creating more reliance on income and property taxes, therefore advantaging service-oriented businesses over retail outlets, and favoring wealthier consumers over those of more modest means.

In other words, it is not hyperbole to say that when it comes to sales taxes, Texas, Florida, Kentucky, and Iowa are more “progressive” and equitable than Illinois.

All of which brings us back to our state’s well-documented budgetary challenges. Due to the changing patterns of consumer spending, Illinois today collects about the same amount in sales taxes as it did in 1990, after adjusting for inflation. We have a $770 million mass transit fiscal crisis, $144 billion in unfunded pension liabilities, and higher prices on many consumer staples due to tariffs that will disproportionately impact low-income and middle-class consumers in the coming months and years.

So how do we meet our obligation to fund vital public services without imposing higher costs on those who can least afford it? As recent research by the Illinois Economic Policy Institute, Civic Federation, Chicago Metropolitan Agency for Planning and Center for Tax & Budget Accountability details, modernizing our sales tax system to reflect today’s economic realities could deliver such an outcome.

The report concludes that expanding Illinois’ sales tax base to include more currently untaxed services would generate as much as $2 billion annually for the state. It also could be structured in such a way as to exempt essential services like health care, child care, housing, and business-to-business transactions — while transitioning existing service taxes charged by many local governments into a less-fragmented statewide system.

Most importantly, by broadening the base of services on which the state collects taxes, such a system would boost revenues and enable the state to make the necessary investments to maintain vital services, and address currently unfunded obligations, and deliver targeted relief to consumers, businesses, working families, and even property owners who are struggling the most with rising costs under our currently outdated system. Indeed, this could ultimately create the fiscal space to lower overall sales tax rates and even to expand access to tax relief through Earned Income Credits and Child Tax Credits, or other measures.

Too often, our fiscal debates are presented as false choices between raising taxes and draconian cuts. There is a middle ground that most of our neighbors already have embraced. And that is to modernize our tax system to better reflect the way today’s economy works, so that we can create long-term fiscal certainty for public agencies, a more level playing field for businesses across all economic sectors, and to better target relief for Illinois families who need it most.

• Frank Manzo IV is an economist at the nonpartisan Illinois Economic Policy Institute.