A couple of organizations that specialize in tax policy say Illinois should apply sales tax to consumer services. It would stabilize state revenue over economic up-and-down cycles, says Ralph Martire of the Center for Tax and Budget Accountability, who says products, which are taxed now, represent less of the economy than they once did, and services more.
“The transfer in the modern economy has been so significant from the sale of products to the sale of services that today, the value of our sales tax, as far as what it hits in our economy, has been reduced by over 50 percent from where it was in 1965,” he said.
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Services represent 72 percent of consumer spending now. The Taxpayers Federation of Illinois also calls this good policy, and the governor has said he’s for it.
A study by the Center for Tax and Budget Accountability and the Taxpayers Federation of Illinois finds that of the 45 states that have sales tax, Illinois’ is the narrowest in terms of what transactions are taxed.
The groups’ proposal calls for apply the tax only to consumer services, not medical, professional or business-to-business services.
With an expanded tax base, the state could cut the tax rate to make the switch revenue neutral. However, Martire says if the rate stays the same, it would mean another $2 billion in state revenue, and more in city revenue, assuming cities go along with the expanded sales tax base.