Taxpayers in Illinois know all too well that their state government’s budget is often written in red ink, but to the surprise of many, this year lawmakers delivered a balanced budget. However, in typical Illinois fashion, lawmakers relied on numerous tax increases to meet the $85 billion in outlays while failing to make any meaningful spending reforms. Everyone wants Illinois to be as prosperous as it once was, but further tax burdens on the middle-class will only exacerbate Illinois’s economic problems. If prosperity is to return to the Prairie State, it needs real reform to lessen burdens placed on taxpayers. So, will someone please tell the politicians?
Illinois’s fiscal situation is critical: It retains the lowest credit rating among states at just a notch above junk level largely due to the $134 billion in unfunded pension liabilities, the economy has grown at an anemic 1 percent annually since 2015, and millions have fled to other states since 2001. According to the nonpartisan Tax Foundation, taxpayers there are saddled with one of the largest tax burdens in the country.
Instead of lowering the tax burden, reining in spending, and addressing the forthcoming pension crisis, here’s a quick look at how the Democratic-trifecta nickel-and-dimed taxpayers and consumers in the 2019 session:
Doubled the Gas Tax. Beginning July 1st, Illinois’s 19 cents-per-gallon tax on gasoline will double to 38 cents-per-gallon and is estimated to generate more than $1.2 billion annually from consumers. A higher gas tax will mostly affect lower and middle-income taxpayers, who will have to give the government more in taxes each time they fill up their vehicle. Surprisingly, Illinois’s current gas tax is lower than four of its five neighbors, but once the updated tax takes effect, it will be higher than each of its neighbors. It is likely that drivers living in border counties will simply drive just over state lines to avoid the tax, especially in Missouri, which will have a gas tax half that of Illinois.
Approved a Progressive Income Tax. With the passage of Senate Joint Resolution Constitutional Amendment 1, voters next November will decide to either keep the constitutionally mandated flat tax or allow for a graduated income tax structure. While tax rates will not change automatically, if voters do approve such a change, it would give the legislature the power to set tax rates according to income. And under the Governor’s “fair tax” proposal, middle class married couples collectively earning $100,000 or more would be subject to a higher income tax rate. The Governor hopes to raise $3.2 billion annually from this negative change - that is if middle class and rich filers don’t flee the state.
Increased Taxes on Tobacco Products. Starting July 1st, Illinois’s $1.98 cigarette excise tax will increase to $2.98 per pack, and a new 15 percent wholesale tax will take effect for sales of e-cigarette products. Currently, Illinois’s cigarette excise tax is levied at $1.98 a pack and is higher than four of its five neighbors, except Wisconsin. However, the cigarette excise tax is set to increase by $1 to $2.98 and would be higher than every single one of its neighbors and an astonishing 17 times higher than cigarettes bought in Missouri. While cigarette tax increases usually correspond with a short-term bump in revenue, after a few years, revenue drops precipitously due to smuggling or declines in smoking rates and often results in lower-than-anticipated revenues.
Taxed Remote Sellers. Beginning January 1, 2020, remote sellers have to collect and remit the Illinois Use Tax of 6.25 percent from all the sellers who sell through an online marketplace, even though they have no physical nexus in Illinois. This new standard is particularly concerning for small and medium online retailers who do not have the capacity or infrastructure to meet the compliance rules for Illinois and the numerous other states that have adopted similar legislation.
Taxed Marijana. Lawmakers also legalized the sale of marijuana and marijuana-related products for adults over the age of 21. According to the Illinois Policy Institute, the taxation of these products looks as follows: “Purchases of cannabis flower or products with less than 35% THC are slapped with a 10% tax. Cannabis-infused products such as edibles come with a 20% tax. Products with a THC concentration higher than 35% come with a 25% tax. Illinois municipalities and counties will be able to levy additional local taxes.” The legalization law also creates a new licensing system for businesses looking to cultivate and sell marijuana. According to IPI, “On top of a $100,000 application fee, dispensaries would pay a Cannabis Business Development Fee amounting to the lesser of 5% of the company’s total annual sales or a flat $750,000.” This is a large operating cost for small businesses that could deter market activity in this space.
Higher Fees for Drivers. For those who own vehicles or are looking to register vehicles, they will have to send Springfield more of their money. Under the updated law, drivers will now pay $148 for most cars, up from $98 today, and for owners of electric vehicles the fee increases to $250, sharply up from the $17.50 they pay today.
New Tax on Sports Betting. With the recent Supreme Court decision striking down the Professional and Amateur Sports Protection Act of 1992, and thereby allowing states to legalize sports betting, Illinois has become the latest state to permit sports gambling. The Illinois law places a 15 percent tax rate on sports betting, about twice as high as neighboring Iowa. Particularly concerning is Illinois’s exorbitant license and integrity fees - which can cost traditional facilities $10 million and $20 million for online sports betting operators. Interestingly, online operators are locked out of Illinois for 18 months unless they are connected to a brick and mortar location.
These are just some of the multibillion dollar tax and fee increases approved by Illinois, but if lawmakers had a dollar for each revenue enhancement proposal introduced this session, the state treasury would surely be overflowing. But at least lawmakers can take credit for balancing the budget - until 2021 when they face another budget crisis.