Illinois should tax consumer services to fix its fiscal problems

In a couple of weeks, Gov. JB Pritzker will propose a general fund budget for the state’s upcoming fiscal year. This is a really big deal for a couple of reasons. First, it’s the state’s primary operating budget, with 95% of all general fund service expenditures covering the core areas of education, health care, human services and public safety. Second, current projections show the fund is facing a deficit just north of $3 billion next year, meaning Illinois lacks the fiscal capacity to maintain present spending levels on those services.

But balancing the books by scaling back existing spending would harm every community across Illinois. So it’s imperative that decision makers find a sustainable resolution to Illinois’ fiscal shortcomings. Unfortunately, that’s easier said than done.

Fixing fiscal problems is difficult for elected officials, because it necessitates dealing with one of the traditional third rails of politics: tax policy. See, politicians understand what polling data consistently confirm: on the one hand, most folks cringe when they hear any potential tax increase may be in the offing; on the other, most don’t support balancing the budget by cutting core services like K-12 education or caring for seniors. Worse, this fiscally-driven political conundrum gets exacerbated by right-wing, anti-government talking heads who consistently caterwaul that profligate spending is to blame for Illinois’ deficits.

Fortunately, it’s possible to craft real solutions to the state's fiscal challenges, if one is willing to take the novel approach — at least in this day and age — of relying on facts to identify the actual cause of the problem, and utilizing best practices to resolve it. Start with the contention that overspending is the genesis of general fund deficits. According to the facts, that claim is, technically speaking, bunk.

In fact, after adjusting for inflation, spending on core services is projected to be 9.1% less at the end of this year than it was under Republican Gov. George Ryan back in fiscal year 2000. Yes, real service expenditures have increased recently, but not by enough to make up for generations of inadequate funding and cuts. The list of underfunded current services in Illinois is exhaustive, but as a "for instance," just consider K-12 and higher education.

The current state investment in K-12 is over $2.6 billion less than what’s needed for every public school to implement those educational practices which the evidence demonstrates actually improve academic performance by students — otherwise known as what works. Meanwhile, real funding for higher education is down by $1.8 billion, or 41%, from where it was in FY 2000, leading to a dramatic spike in tuition at in-state, public universities, which benefits nobody.

Tax revenue is flat or declining

Overspending is simply not the reason Illinois currently has, or at any time in the last 30 years had, General Fund deficits. What the data show, however, is that flawed tax policy drives state deficits. For instance, when you take out federal stimulus dollars, stagnation and decline have typified the performance of most state taxes that feed the General Fund. In fact, since FY 2000, Illinois has only realized inflation-adjusted revenue growth from its individual and corporate income taxes — and then only because it increased both income tax rates. All other General Fund revenue sources have been flat or decreasing.

The most important revenue source that’s exhibited no growth over the past 25 years is the sales tax. Current estimates project total sales tax revenue for FY 2025 at $10.9 billion, which after inflation is $776 million less than in FY 2000.

The reason sales tax revenue has declined over time is that Illinois has one of the narrowest sales tax bases of the 45 states that impose a general sales tax. The base of a tax is simply what private sector economic activity is subject to the tax in question. Illinois’ sales tax applies primarily to the sale of goods, not services. That’s a losing proposition: Between 2000 and 2022, the sale of goods went from 21% of Illinois’ gross domestic product to just 17%, while the sale of services jumped from 69% to 74% of state GDP.

Leaving most of the largest and fastest-growing segment of the economy out of the sales tax base means the revenue it generates can’t grow as the economy expands. Of course, the cost of providing public services does. To fix that shortcoming, Illinois’ sales tax should be applied to the purchase of consumer services, as in neighboring Iowa and Wisconsin. Taxing other services, like business and professional services, isn’t good tax policy for a host of reasons.

Taxing consumer services would generate roughly $2.6 billion in new General Fund revenue. That nearly eliminates the projected deficit for next year. And because it aligns Illinois tax policy with today’s economy, it would also help sustain investments on core public services into the future.

Ralph Martire is executive director of the Center for Tax and Budget Accountability, a nonpartisan fiscal policy think tank, and the Arthur Rubloff Professor of Public Policy at Roosevelt University.

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