NEW IPO Logo - by Charles Larry Home Search Browse About IPO Staff Links


Legislative Action Special Section


Sales tax reform: complicated simplification



Photo by Ken Burnette
ii880848-1.jpg
Sen. Richard Luft

Gov. James R. Thompson tagged it a "do nothing" session. But Illinois lawmakers this spring reined in Tax Increment Financing districts that threatened to run off with the state treasury. They took steps to simplify the sales tax. They raised taxes nearly $100 million. And they enacted what approximates a service tax on photofinishing.

The General Assembly created the problems with Tax Increment Financing (TIF) districts in 1986 when it added state sales and utility taxes to what had been a property tax program. Briefly, municipalities were allowed to draw the boundaries and designate TIF districts, to make public improvements in them and to use the increases in the sales, utility and property taxes to pay for the improvements.

As envisioned when passed, the program would bolster blighted areas that needed a catalyst to stimulate development. The addition of sales and utility tax money that would otherwise go to the state treasury was viewed as an extra incentive.

Things did not work out as planned. Some cities created districts to take advantage of developments already underway. Others put prime development sites into TIF districts. Districts ended up being drawn in order to capture state sales tax money rather than to promote development of blighted areas.

Photo by Kevin Jones
ii880848-2.jpg
Sen. Dawn Clark Netsch

There was one key control: The program was limited by appropriation. The General Assembly had to annually approve the money to be returned to local governments under the TIF program. That set off annual battles with the cities, which claimed they could not sell bonds without assurance that the money would be forthcoming. According to Department of Revenue projections, full funding could take $7.2 billion out of state receipts over 30 years. "I think the point was that here was a spending program that had gotten out of hand," said Douglas L. Whitley, president of the Taxpayers' Federation of Illinois.

The corrections embodied in S.B. 1534 (P. A. 85-1142) sponsored by Senate President Philip J. Rock (D-8, Oak Park) and Sen. Richard Luft (D-46, Pekin) limit the state's financial liability and provide an oversight and enforcement role for the Department of Revenue. The new law allows local governments to keep less of the new sales tax money, caps the amount that any one local government can receive and does away with the program in 20 years. The Department of Revenue is directed to check for compliance with provisions and to review existing TIF districts by February 1.

Sales tax reform represented two years of work that began with the Revenue Review Committee named by Thompson after the 1986 election and headed by the Taxpayers' Federation's Whitley. In the final days of the session, Whitley notes, there was more interest in amendments that provided the funding for sewage treatment plants than in the reforms themselves. In the final flurry Sen. Dawn Clark Netsch (D-4, Chicago) lost sponsorship of the bill she had championed for a year and a half. It was carried instead in the Senate by Luft.

The Illinois system of state and local sales taxes is a mess. Different rates are in effect in different parts of the state. Different items are taxed from place to place. Different governments use different forms to collect local taxes. The reforms sought to move towards a common base, to reduce the number of tax rates and to put the Department of Revenue in charge of the whole system. Key changes under H.B. 1859 (P.A. 85-1135):

  • The state takes over local taxes. The state rate is boosted from 5 percent to 6.25 percent, and local taxes go down a corresponding amount. The state will return the extra 1.25 percent that it collects to local governments. And that will add up to a gain in tax revenues. The change from local to state taxes will generate about $65 million in "new" money because out-of-state purchases taxed at 5 percent will be taxed at 6.25 percent.

August & September 1988 | Illinois Issues | 48


  • Home-rule governments can add a tax on what the state taxes in .25 percent increments. They can also tax things like alcoholic beverages, hotel rooms, real estate transactions, motor and aviation fuel and utilities. Local governments must collect those taxes. They may not tax food and medicines, but the statewide 1 percent tax on food and medicine remains. Taxes that either were or could be imposed by local governments are eliminated, including those on manufacturing, farm, graphic arts, coal and oil equipment.
  • In a parts and labor transaction, like installation of an auto muffler, the tax will be based on the selling price of the muffler, not what the serviceman pays for it. If parts and labor are not broken out, the tax is on half the total bill.
  • The Department of Revenue runs the system, collecting taxes and distributing the money.

Sales tax reform is relatively simple compared to what gets done with the $65 million in new use-tax money. The new money had been the carrot held out to local governments to convince them to go along with conversion to a state tax. However, lawmakers targeted the $65 million in new use taxes as the funding source for downstate cities under federal orders to build sewage plants. In the end lawmakers hit the fund for about $35 million annually (It varies slightly from year to year.) to pay the bonds for a $378.5 million sewage treatment plant program.

To make up for what was channeled to the wastewater program, local governments will receive .4 percent of total state sales tax collections, giving them $15 million to $20 million annually.

Finally to protect state revenues, lawmakers covered the .4 percent diversion with a new sales tax on photofinishing. That tax went into effect on September 1 and will generate an estimated $16 million in new money for the state this year. Total receipts will be $35 million annually.

The system remains imperfect. The revisions to the sales tax bill leave wide rate variations from 8 percent in Chicago to 6.25 percent downstate. "I think the Illinois system is still more complicated than it need be, but we made a lot of progress," Whitley says. He and representatives of the 226 communities that needed wastewater programs would dispute Thompson's "do nothing" charge.□

Michael D. Klemens


August & September 1988 | Illinois Issues | 49



|Home| |Search| |Back to Periodicals Available| |Table of Contents| |Back to Illinois Issues 1988|
Illinois Periodicals Online (IPO) is a digital imaging project at the Northern Illinois University Libraries funded by the Illinois State Library