A sales tax is a tax imposed on a seller’s receipts from the sale of goods.

The term sales tax refers to a combination of several types of taxes. Sales tax includes both “occupation” taxes and “use” taxes. Occupation taxes are imposed on sellers’ receipts owed by sellers. Sellers reimburse themselves for this liability by passing the tax on to the amount paid by buyers, which are called use taxes. Therefore, use taxes are imposed on purchasers for the amounts they pay for goods and services. 1

Technically, sales tax includes a combination of the following:

  • All state and local sales taxes
  • Mass transit taxes
  • Home rule occupation taxes.2 This applies to all persons who are in the business of selling tangible personal property.
  • Non-home rule occupation taxes
  • Park district, county public safety and facilities, and county school facility taxes
  • Business district taxes3

Furthermore, the Illinois sales tax has three rates:

  1. For qualifying food, drugs, and medical appliances;
  2. For items required to be titled or registered;
  3. For all other general merchandise.

1 Illinois Department of Revenue, Businesses, Sales and Use Taxes, http://tax.illinois.gov.

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Sales tax is used to generate income for the state. Below is a graph illustrating how state revenues funneled into general funds have fluctuated since 1990. This chart focuses on state sources and is broken down into four categories:1

1. Net income tax (gross income taxes minus amounts to the income tax refund fund)

2. Sales tax

3. Other state sources and

4. State transfers.

The graph shows the income tax is the primary source of state revenue, followed closely by sales tax. According to the Commission on Government Forecasting and Accountability, the income tax comprised between 41 percent and 49 percent of all state revenue sources between FY 1990-FY 2010. In 2011, income tax rates were increased, leading to a corresponding increase in this composition. Since then, the income tax has comprised between 60 percent and 62 percent of all state revenue. Prior to the income tax increase, sales tax revenues generally represented 30 percent to 35 percent of all state revenue. Sales taxes now have dropped to about one-quarter of the total.2

25-Year History of State Funds going into General Funds in Illinois
25-Year-History-of-State-Sources-to-General-Funds-Revenues-in-Illinois.jpg
Source: Commission on Government Forecasting & Accountability, Illinois Revenue Volatility Study Public Act 98 - 0682.

 


1 Commission on Government Forecasting & Accountability, Illinois Revenue Volatility Study Public Act 98 - 0682, (Dec.31, 2014).

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Sales tax collections in Illinois are extremely volatile and is constantly changing. While the volatility can be attributed to changes in population, income, and consumption levels, it primarily stems from how and where the state collects its revenues.

In June 2014, then-Gov. Pat Quinn signed Public Act 98-0682 which created the ‘Illinois Revenue Volatility Study Act.’ Under this Act, the Commission on Government Forecasting and Accountability (COGFA) is required to conduct a study on the volatility of the sources of general revenue funds collected by the State of Illinois. The volatility in question refers to the lack of consistency and the variability in the collection of income and sales tax.

The Commission on Government Forecasting and Accountability notes a few different ways in which this volatility is likely to occur. Sometimes, it occurs after the tax structure of a revenue source has changed.1 For instance, COGFA notes that the liquor tax, for the most part, is a relatively stable revenue source. However, this source too has experienced some volatility, increasing twice in the past since FY 2000. Both times, the increase was due to a tax rate increase on alcoholic beverages.2

On other occasions, changes in volatility might be due to the amount of revenues collected from a particular source or it might be due to changes in factors that influence this amount such as economic viability.3


1 Commission on Government Forecasting & Accountability, Illinois Revenue Volatility Study Public Act 98 - 0682, (Dec.31, 2014).

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Illinois’ combined sales tax rate is higher than other states in the Midwest. The combined sales tax rate of a state takes into account both the state tax rate and the average local tax rate.

The average varies by city, county, and municipality. For instance, in Illinois, Chicago’s (Cook County) sales tax rate is 10.25 percent, Bloomington (McLean County) is 8.75 percent, Lawrence (McHenry County) is 7 percent, and Alexander (Alexander County) is 6.25 percent. The sales tax rate in your county can be found by searching the Illinois Department of Revenue Tax Rate Database.

State-level sales tax in Illinois is 6.25 percent and the average local sales tax rate is 2.45 percent. The combined sales tax rate in Illinois, therefore, is 8.70 percent. According to a study by the Tax Foundation, which compared state and local tax rates as of January 2018, Illinois’ combined tax rate is ranked 7th highest in the nation.1

While Indiana’s state sales tax rate is 7 percent—0.75 percent higher than Illinois’ state sales tax rate of 6.25 percent—Indiana municipalities do not levy local sales tax. This makes Indiana’s combined state and local tax rate lower than Illinois. Kentucky and Michigan also do not levy local sales taxes which makes their combined tax rates lower than that of Illinois.2

2018 Combined State and Average Local Sales Tax Rates in and Around Illinois
2017-Sales-Tax-Rates-In-and-Around-Illinois.jpg
Note: Combined State and Average Local Sales Tax Rates, Illinois and Neighbors (as of January 1, 2018). City, county and municipal rates vary. These rates are weighted by population to compute an average local tax rate.

Source: Tax Foundation; Taxpayers’ Federation of Illinois

 

1 Jared Walczac & Scott Drenkard, State and Local Sales Tax Rates 2018, Tax Foundation (feb.13, 2018).

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According to the Tax Foundation and the Taxpayers’ Federation of Illinois, an ideal sales tax is “one that is levied on all final consumer purchases.”1

When sales tax in Illinois first was introduced in the 1930s, it only applied to tangible goods. It is important to note that tangible goods do not include personal property such as real estate, stocks, chattel paper, bonds or any other “paper” interests. However, since then, the economy has comparatively become less reliant on tangible goods and more reliant on services. According to the Tax Foundation, because we now have a more service-based economy, the sales tax is not nearly as productive, for the purposes of generating state revenue, as it once was.2

A 2015 report from the Institute on Taxation and Economic Policy3 states that sales and excise taxes are “the most regressive element in most state and local tax systems.” This, the report notes, is because sales tax is levied at a flat rate and applies to spent income. While sales tax, therefore, has a substantially low impact on high-income families, the same is not true for low-income families who inevitably end up spending a larger portion of their income on paying sales taxes.4

The study notes Illinois is amongst the ten most regressive state and local tax systems in the nation. However, while nine of those state tax systems are deemed “regressive” due to their heavy reliance on sales and excise tax—Illinois is the only state that the report does not list in this category. Additionally, Illinois is one of only two “regressive state and local tax systems” that taxes groceries at a lower rate. The other state on the list is Kansas.5

Socioeconomic Class Comparison of Sales and Income Tax Burdens in Illinois
Socioeconomic-Class-Comparison-of-Sales-Tax-and-Income-Tax-Burdens-in-Illinois.jpg
Source: “Who pays? A distributional analysis of the tax systems in all 50 states.” Institute on Taxation and Economic Policy, 2015.

1 Jared Walczac & Scott Drenkard, State and Local Sales Tax Rates 2018, Tax Foundation (feb.13, 2018).

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3 Institute on Taxation and Economic Policy, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, Fifth Edition (January 2015).

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