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Has tax revolt doomed tax reform?

TAX REFORM -- has it become the unintended victim of the tax revolt in Illinois? A strange outcome, that the revolt against taxes should make it nearly impossible to enact a more equitable tax system! Yet reform may be victimized by revolt unless legislators can make some thoughtful and difficult decisions in the near future.

The test can come during this session of the General Assembly if H.B. 2564, proposed by Speaker William Redmond and the House Democratic leadership as part of a six-point tax relief program, comes up for consideration and debate. The bill would phase out the 4 percent state portion of the sales tax on food and medicines (cities and counties collect another 1 percent) over a three-year period. The tax would drop to 3 percent on January 1, 1980; to 2 percent on July 1, 1980; to 1 percent on July 1,1981, and to zero on July 1,1982. But can the state balance its budget without the considerable revenue that comes from the tax collected on the sale of food and medicines?

The three-year transtition is intended to soften the blow of this revenue loss. The state sales tax collected from grocery stores in fiscal 1980 is expected to come to $332 million; another $9 to $12 million is expected from the tax on drugs. Thus abolition of these portions of the sales tax would reduce state revenues by about $340 million.

Prior to adoption of the 1970 Constitution, exemptions from the sales tax were considered unconstitutional. But language in the new Constitution allows "reasonable" exemptions (Art. IX, sec. 2). Thus an exemption was made last year (S.B. 736) for manufacturers on purchases of business machinery and equipment. This tax is being phased out over a six-year period and is expected to cost the state $20 million in fiscal 1980 out of a total expected sales tax revenue of $2.345 billion (governor's budget book, pp. 293-4). It is hoped that more industry and payrolls will be attracted to Illinois by this tax break. The revenue loss is small.

But the initital loss from a phaseout of the sales tax on food and drugs would, at the start, be about double that from the manufacturers' exemption, about $42.5 million. And eventually the state would lose even more than $340 million because of inflation.

Such a loss would require either drastic budget cutting or a tax increase somewhere else, probably in the individual income tax.

The rub

That is where the rub comes. The income tax collected from individuals is expected to raise $2.031 billion in fiscal 1980 at the current rate of 2 1/2 percent. The rate might have to be raised, perhaps by stages, to 3 percent to replace the revenue now raised by the sales tax on food and medicines.

As a general proposition, the substitution seems fair enough. The income tax is based on ability to pay, while the sales tax on food and medicine is a tax on the necessities of life. The latter is a regressive tax which hits low income groups more than those in the upper brackets.

The unfairness of taxing food and medicines is recognized by many states. Of the 45 states that levy a sales tax, 22 grant broad exemptions on the sale of food and food products for human off-premises (that is, nonrestaurant) consumption, according to Commerce Clearing House (December 1978). And 37 states grant exemptions for drugs, medicines, prosthetic devices and the like. A few states allow income tax credits in lieu of-- or to supplement --the exemption on food or medicines, according to the Federation of Tax Administrators.

The presence of Speaker Redmond in the picture, however, gives hope for achieving this tax reform this year or the next. Redmond has his own separate bill (H.B. 2688) for repeal of the tax on food and medicines. He is now serving his llth term in the House and may be planning to retire in 1980. No one should be surprised if this experienced lawmaker decides to use all his skills to achieve repeal of the tax on food and medicines as the capstone of his legislative career.

The fault

It would be easy -- and tempting -- to denounce the legislators and governor for not pushing the exemption of food and medicines from the sales tax to a speedy enactment and for not moving efficiently toward measures which would generate needed tax revenues in an equitable way. But I am afraid that the fault lies in us, the voters, and in the uncritical fashion we treat anyone who tries to talk sense about public finance.

Many will recall that in the 1972 Democratic gubernatorial primary, Paul Simon mentioned the possibility of replacing the sales tax on food by raising the income tax by a small amount. He was clobbered. (Since then he has been elected to Congress from the 24th district.) And Gov. Richard B. Ogilvie, who pushed for the adoption of a much needed new revenue source, the income tax, was defeated for reelection. So why should any elected official want to run the risk of attempting genuine tax reform when voters seem only to want a revolution?

Editor emeritus Bill Day followed tax legislation closely as director of the Legislative Council, 1960-74.

June 1979 / Illinois Issues / 35