Could taxing services like landscaping, salons, pet grooming lower other tax rates in Illinois?

Tucked into a recent three-year budget forecast report issued by the state legislature's Commission on Government Forecasting and Accountability is an acknowledgment that the state could expand its tax base by applying a sales tax to service-based businesses.

Something government finance experts say would generate billions of dollars and potentially reduce tax rates overall.

The types of services affected could include landscaping, pet grooming, beauty salons, mechanics, storage facilities and health club memberships, for starters.

"Illinois really only taxes the sales of goods, but we're leaving out too much of the economic base by not taxing consumer services, which is a continually growing portion of the state's economy," said Ralph Martire, executive director of the bipartisan Center for Tax and Budget Accountability. "This is a system that was introduced in the 1930s."

In fact, more than 70% of the state's economy is derived from the sale of services, while less than 20% is based on the sale of goods, according to various economic studies.

"Taxing more services could be used to bring in more revenue to the state," the commission's report suggests. "It could also be used to offset a portion of the sales tax on goods and allow for the overall tax rate to be lowered."

Proponents argue taxing these consumer services would modernize and stabilize the state's sales tax base, potentially making it more recession-proof.

But critics contend the change would burden thousands of small business owners and that any tax rate reduction might be only short-lived or never come to fruition. When the state received unexpected tax windfalls from internet sales, the tax rate wasn't reduced.

"The state is at a fork in the road, and all solutions should be considered," said Jeff Philips, a spokesman for the Civic Committee, a branch of the Commercial Club made up of senior executives from the Chicago area's leading employers. "At the same time, any proposed change to Illinois' sales tax would need to be accompanied by a comprehensive approach toward achieving long-term fiscal stability and strength."

Various studies suggest the state could generate an additional $1.2 billion to $2.1 billion a year depending on how broadly a service sales tax is applied. And some of those estimates are nearly a decade old, when the legislature last seriously considered applying the sales tax to consumer services.

The additional revenue could allow the state to lower the sales tax rate from the current 5% the state receives or even reduce the state's income tax rates on workers and businesses, supporters added.

"Taxing service-based businesses and lowering corresponding tax rates is exactly the kind of thing that everyone says is good policy. It's just really hard to do," said Carol Portman, president of the Illinois Taxpayers' Federation. "You'll have every business owner targeted hiring lobbyists and marching to Springfield."

And they won't be likely to find much support among elected officials in the Capitol.

"It's politics," Martire said. "No legislator wants to vote for a tax increase of any kind."

According to U.S. Census Bureau figures, Illinois generated $1,282 in sales taxes for every resident in 2021, the 17th-highest amount among the 45 states that impose a sales tax.

Washington and Hawaii were at No. 1 and No. 2, respectively, generating more than $2,000 per resident.

According to a 2011 study of consumer service taxing nationwide by the Commission on Government Forecasting and Accountability, Washington taxed 158 different types of services, while Hawaii taxed 160. Illinois taxes just 17 types of services, which are utilities like electricity, gas and telecommunications.

The commission's three-year budget forecast lists the application of a sales tax on consumer services as one of several "opportunities" for the state to improve its financial footing. Among the other suggestions are balancing the budget, reducing or eliminating the nearly $3 billion bill backlog, lowering interest rates for late bills and taking advantage of the state's current $1.1 billion surplus.

Recent efforts by state officials to address Illinois' financial problems have resulted in several improvements to the state's bond rating, though it remains one of the worst in the nation.

Even without a change in the sales tax base, the commission anticipates continued sales tax revenue growth over the next three years despite the lingering threat of an inflation-induced recession.

"Longer-term economic and tax revenue forecasts remain murky as the potential for a recession remains," the report states. "The state needs to continue to show fiscal discipline and demonstrate that the results of the past few years are not an anomaly."