Groups cut to the chase: Tax services

Kevin Beese
Construction projects would generate the most money under the service tax proposal, generating an estimated $794 million annually. Photo / RoadView

Construction projects would generate the most money under the service tax proposal, generating an estimated $794 million annually. Photo / RoadView

Professional services could cost a little more in Illinois, if some fiscal experts get their way.

That could mean handing over more money for Rover when he has a grooming session, trimming the amount of money in your wallet after a haircut and breathing a little heavier because of the increased cost of your health-club membership.

But representatives of the Center for Tax and Budget Accountability and the Taxpayers’ Federation of Illinois’ say it is needed and have called for the state to expand Illinois’ sales tax to consumer services.

“For a sales tax to play a role in generating stable revenue for the fiscal system, it has to apply broadly to most transactions that occur in the consumer economy,” said Ralph Martire, executive director of CTBA.

“Today, consumer spending is the largest segment of both the nation’s and Illinois’ respective economies, accounting for nearly 70 percent of all economic activity,” he added. “Also, consumer spending usually does not decline substantially – even during major economic downturns. If a sales-tax base broadly applies to most transactions in the consumer economy, that sales tax will have the capacity to provide some stability to a state’s fiscal system, even when other more volatile revenues are declining rapidly.”

Extending Illinois sales tax from being almost exclusively on goods to include consumer services would generate $2.1 billion in additional revenue for the state, Martire projected. He said taxing services like pet grooming, haircuts, health-club memberships and lawn care would help stabilize revenue for the state and reform state tax policy to reflect the modern economy.

Of all 45 states that have a sales tax in place, Illinois ranks last in the number of services it taxes. Illinois only taxes five services. The lowest number of service taxes in neighboring states is 21 in Indiana. Iowa has 93 service taxes in place; Wisconsin, 76.

Carol Portman, president of the Taxpayers’ Federation of Illinois, noted that business-to-business sales are not part of the organizations’ proposal.

“There are a number of service industries which should not be included in the state’s sales tax base, “ Portman said. “For instance, both of our organizations recognize that business-to-business transactions should not be taxed because doing so creates economic distortions and inefficiencies that often result in ‘tax pyramiding.’”

She referred to tax pyramiding as when one economic transaction is taxed multiple times during production and distribution.

Taxing consumer services could help the state reap some of the $3.4 billion lost when the temporary state income tax, enacted in 2011, was allowed to expire in January.

Construction projects would generate the most money under the service tax proposal, generating an estimated $794 million annually.

The service tax idea is getting lawmakers’ attention.

“We need a tax code designed to work in the modern economy, but our current policy on the sales tax – with its narrow base on the sale of goods – is better suited to 1915 than 2015,” said state Sen. Toi Hutchinson (D-Olympia Fields), chair of the Senate Revenue Committee. “Expanding the Illinois sales tax base to include services is not a silver bullet that will solve all the fiscal problems facing the state, but it is needed and crucial step forward.”