by Adam Schuster, Illinois Policy
Illinois residents will soon be facing new or higher taxes and fees on gas, vehicle registrations, parking, marijuana, gambling, online shopping and more following actions at the Statehouse. In total, 21 new ways to extract money are estimated to raise $4.7 billion to pay for infrastructure and the state’s fiscal year 2020 operating budget – which despite the new money may still be as much as $1.3 billion in the red.
The changes span three different bills – SB 690, SB 689, and SB 1939 – and total 2,029 pages. All three bills were passed in a single weekend, meaning neither taxpayers nor lawmakers had time to fully read them.
Gov. J.B. Pritzker signed SB 689 on June 5 and is expected to sign the remaining two bills. The biggest tax hike proposed by Pritzker – scrapping Illinois’ constitutionally guaranteed flat tax and replacing it with a progressive income tax – would require voter approval on the November 2020 ballot to be enacted. Senate Democrats have estimated the rates signed by the governor would raise just over $3 billion.
While Pritzker has claimed his progressive tax plan would lower or at least not raise taxes on 97% of Illinoisans, just two of the revenue changes enacted this spring – doubling the motor fuel tax and increasing vehicle registration fees – more than wipe out any tax relief the governor promised. In fact, a typical Illinois family with two vehicles will end up $105 in the hole. And that’s assuming lawmakers don’t target the middle class for more revenue by changing the progressive income tax rates they passed.
Notably, the General Assembly passed and Pritzker signed a state budget that members of both parties claimed was balanced. The truth is it is out of balance by as much as $1.3 billion, despite significant new revenue.
Although Pritzker originally proposed 19 new or higher taxes and fees worth $6.9 billion, not all of his proposals were enacted and some new measures were passed that had not been previously discussed in public. Taxes Pritzker proposed but the General Assembly did not pass include the following:
Reducing the tax credit available to retailers for collecting sales taxes on behalf of the state ($75 million)
A new 5-cent statewide tax on plastic bags ($19 million to $23 million)
A statewide $1-per-ride fee on ridesharing ($214 million)
A 7% tax on streaming services such as Netflix and Spotify ($150 million)
Increased taxes on beer, wine and liquor ($120 million)
New tax and fee hikes not previously proposed include:
A $100 increase in vehicle registration fees for large trucks
Increased sales taxes on remote online retailers
New sales tax for online marketplaces
New progressive tax schedule for gambling proceeds that imposes lower taxes on table games than slot machines
Prior to the changes enacted this spring, Illinois residents already faced one of the highest total state and local tax burdens in the nation.
New revenue to balance general revenue budget ($1.7 billion)
Analysis from the Illinois Policy Institute has found the fiscal year 2020 spending plan is out of balance by up to $1.3 billion. This is despite more than $1 billion in new revenue for the first year. Several revenue sources proposed are one-time sources, while others will be lower in the first year but increase in subsequent years.
Recreational cannabis tax ($500 million)
Lawmakers have publicly stated they expect $57 million in tax revenue from the first six months of taxing recreational marijuana which will increase to $500 million annually after five years.
New tax on managed care health insurance organizations ($390 million)
Managed health care organizations, a type of health insurance company intended to control costs, will be hit with a new assessment fee based on the number of members they have and whether they are private or part of the state’s Medicaid program.
As explained by the Civic Federation, the plan will free up $390 million in general revenues through a combination of increased federal reimbursements and shoring up Medicaid accounts that are not part of the general operating budget.
Increase in sales tax for online remote retailers ($260 million)
Following the Supreme Court decision last year making it easier for states to require online retailers to collect sales taxes, lawmakers required companies such as Amazon to collect the state’s 6.25% tax on all transactions as of Oct. 1. Now, remote online retailers will also be required to collect the local portion of sales tax for online purchases based on where packages are being delivered. Combined state and local sales taxes average 8.74% across Illinois and range as high as 10.25% in Chicago.
Expanded tax amnesty program ($175 million)
Taxpayers who have failed to pay all income taxes owed to Illinois will have a chance to clear their liabilities without penalty from Oct. 1 to Nov. 15. This tax amnesty program will accelerate collections that would likely have been made through enforcement activity at some point, making this a one-time revenue source that will somewhat reduce future revenue collections.
Recreational cannabis licenses ($170 million)
The governor’s proposed budget counted on $170 million in revenue from license sales to recreational marijuana dispensaries. This is likely to be a mostly one-time source of revenue with significantly lower collections in subsequent years.
Expansion of online sales tax to marketplace facilitators ($160 million)
Online marketplaces that facilitate transactions between third parties, such as Etsy and Ebay, will now be required to collect the state’s 6.25% portion of the sales tax.
Decoupling from federal tax code treatment for foreign derived income ($94 million)
The federal Tax Cuts and Jobs Act created a credit for businesses that export goods and services internationally, intended to encourage this income to be brought back to the United States. Because of interactions between Illinois’ corporate income tax code and the Internal Revenue Code, this would have reduced the effective state tax rate to 5.9% from the regular 9.5% corporate income tax (which includes the 2.5% personal property replacement tax).
This change eliminates that credit, imposing higher taxes on foreign-derived corporate income.
New revenue to finance “horizontal” capital spending on roads and bridges ($1.8 billion)
Pritzker campaigned on a new capital plan for Illinois, originally proposing $41.5 billion for his “Rebuild Illinois” plan. The plan passed by the General Assembly spends even more, at $45 billion over six years, including $10 billion in expected federal matching grants.
Senate Democrats have said $33.2 billion of the total new spending will go to transportation infrastructure, such as roads and bridges. Lawmakers refer to those projects as “horizontal” infrastructure spending.
The Illinois Policy Institute released an alternative no-tax-hike capital plan that would have enabled state and local governments to invest $10 billion more in repairing existing infrastructure, not including federal matching dollars. It emphasized transportation project need rather than the age-old practice of rewarding political loyalty with shiny new projects.
The horizontal infrastructure proposal Pritzker plans to sign is financed by a number of increased taxes and fees on Illinois drivers. Even with these taxes and fees, the proposals do not raise enough revenue to pay for all new spending. The plan also relies on over $20 billion in new bond debt.
Double state’s motor fuel tax ($1.3 billion)
Illinois’ motor fuel tax will increase from 19 cents to 38 cents per gallon, effective July 1.
This makes Illinois’ total gas tax burden the second-highest in the nation and possibly the highest when accounting for additional local authority to raise fuel taxes. Chicago will be able to add an additional 3 cents to its current 5 cents per gallon tax. Lake County and Will County will be able to impose a new 8 cent per gallon tax and the remaining collar counties of DuPage, Kane, and McHenry will be able to increase their per gallon taxes from 4 cents to 8 cents.
The state’s motor fuel tax will also automatically increase every year on July 1 going forward because it has been pegged to inflation. Drivers will be notified on June 1 of the size of the increase, which cannot exceed one penny per year. The total increase will hit nearly 25 cents by 2025, based on current inflation projections.
An analysis produced by Local 150 of the Operating Engineers, a union that does infrastructure work for the state, estimates the changes will raise more than $1.3 billion in total.
$50 increase in vehicle registration for regular passenger vehicles ($441 million)
Most drivers will see their vehicle registration fee increase from $101 to $151. The plan differs from Pritzker’s proposal to implement a tiered registration fee based on the age of a vehicle, which would have gone as high as $199 per year. Illinois’ vehicle registration fee was just $79 as recently as 2009.
$100 increase in registration fees for large vehicles ($49 million)
Large vehicles such as buses, trailers and semi-trucks will see a $100 increase in their respective vehicle registration fees.
15-fold increase in electric vehicle registration fee ($4 million)
The registration fee for electric vehicles would rise to $250 per year from $35 every other year. Previous proposals would’ve increased the fee as high as $1,000 per year, but the enacted increase matches the Pritzker plan to raise $4 million annually.
New revenue to finance “vertical” capital spending on buildings ($1.2 billion)
In addition to the state’s new transportation infrastructure spending, the Rebuild Illinois plan allocates billions of dollars for new spending on buildings such as state facilities and public universities. The bulk of funding comes from expanding gambling in the state.
Illinois’ last major capital plan in 2009 also relied extensively on revenue from gambling. A P