A coalition of Illinois policy and civic leaders released Modernizing Illinois' Sales Tax: A Pathway to a Sustainable Future, which outlines the potential impacts of updating the state’s sales tax system. The report — coauthored by organizations that represent a broad range of government and tax policy viewpoints — details how specific reforms could apply sales tax to more consumer services, address revenue shortfalls, and ensure sustainable funding for essential public services like public transit and education. The report concludes that reform could generate nearly $2 billion annually in new state revenue and provide much-needed financial stability for Illinois communities.
"Illinois’ outdated sales tax system no longer reflects our modern economy and is undermining the state's fiscal stability and perpetuating inequities. But there is a clear path forward here: expand the sales tax base to include consumer services,” said Joe Ferguson, President of the Civic Federation. “This is not just a policy choice — it's a necessity if Illinois is to remain a competitive force in the region and meet the needs of its residents. Now, the question is not whether change is needed, but whether our lawmakers will act."
Key findings from the report:
- Illinois’ sales tax structure is outdated. The current tax system primarily taxes goods, even though consumer spending has shifted significantly toward services over the past several decades. Illinois taxes only 29 out of 176 consumer services, far fewer than most neighboring states.
- Modernization would promote more tax fairness. High-income households spend five times more on untaxed services than low-income households, creating an unfair system. Illinois’ current system also gives preferential treatment to service-oriented business over retail firms. Expanding the tax base to include services would help correct this imbalance.
- New revenue would help support critical services. Expanding the sales tax to include consumer services could generate nearly $2 billion annually for the state, with additional funds flowing to local governments and public transit agencies.
“As Illinois’ second-largest revenue source, the sales tax is a critical tool for funding public services. However, our current structure, largely unchanged since the 1930s, no longer reflects today’s service-based economy,” said Erin Aleman, Executive Director of the Chicago Metropolitan Agency for Planning. “By modernizing our tax system, we can create a fairer structure that ensures long-term fiscal stability while securing essential investments in transit, education, and local communities.”
Considerations for implementation
The report provides a framework for the Illinois General Assembly to consider as it evaluates potential reforms:
- Ensuring broad application of the tax to comply with constitutional requirements while exempting essential services such as healthcare, housing, and childcare.
- Exempting business-to-business services to avoid tax pyramiding and maintain economic competitiveness.
- Adjusting tax rates and strategically considering targeted income relief — such as an expansion of the Earned Income Tax Credit —to maximize revenue while minimizing the overall tax burden on consumers.
- Working with local governments to provide a legal and administrative framework for transitioning their existing service taxes to the new statewide system.
- Establishing an independent advisory panel to oversee implementation and assess the long-term impact of tax changes.
As Illinois faces significant funding challenges — including a $770 million transit funding gap, unfunded pension obligations, and the need to fully fund K-12 education — bold action is required to secure the state’s financial future. The report’s recommendations offer a pathway toward a more sustainable and equitable sales tax structure that aligns with modern economic realities.
“Having the Illinois sales tax apply primarily to the sale of goods, not services, is a losing proposition, given that in 2022, the sale of goods accounted for just 17% of state GDP, while the sale of services accounted for 74%,” said Ralph Martire, Executive Director of the Center for Tax and Budget Accountability. “Leaving most of the largest and fastest growing segment of the economy out of the sales tax base means the revenue it generates can’t grow as the economy expands. Of course, the cost of providing public services does. This shortcoming is one of the primary reasons Illinois has difficulty funding its pensions, and making adequate, sustainable investments in core public services — like K-12 and higher education. The only way to fix this shortcoming, once and for all, is to expand Illinois’ sales tax base to include consumer services, just like our neighboring states Iowa and Wisconsin already do.”
“The data shows that our current state sales tax system isn’t just creating instability for public budgets and critical services like education and transportation, it is disproportionately burdening lower income consumers and entire sectors of our economy,” said Illinois Economic Policy Institute Executive Director Josh Weger. “But it also makes clear that modernization can be crafted to correct these imbalances and put more businesses on a level playing field, while still delivering targeted relief to taxpayers who are struggling the most with rising costs.”
Read the Modernizing Illinois’ Sales Tax report at https://bit.ly/moderntax.
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The Center for Tax and Budget Accountability is a nonprofit, nonpartisan research organization committed to advancing social and economic justice for all through evidence-based, best practice public policy solutions that are sustainable over time. Our evidence-based research has helped generate fundamental changes in education, healthcare, housing, economic development, and tax policies in Illinois and nationwide. Visit ctbaonline.org for more information.
The Chicago Metropolitan Agency for Planning is the region’s comprehensive planning organization. The agency and its partners developed and are now implementing ON TO 2050, a long-range plan to help the seven counties and 284 communities of northeastern Illinois implement strategies that address transportation, housing, economic development, open space, the environment, and other quality-of-life issues. Visit cmap.illinois.gov for more information.
The Civic Federation is an independent, non-partisan government research organization that provides robust and objective fiscal analysis, recommendations, and oversight for the benefit of civic and business leaders, the media, and the general public in Chicago and the State of Illinois. Visit civicfed.org for more information.
The Illinois Economic Policy Institute is a nonprofit, nonpartisan research organization that uses advanced statistics and the latest forecasting models to promote economic growth for businesses and working families. Visit illinoisepi.org for more information.