The Effects of Eliminating Illinois’ Grocery Tax

Keith Staats, JD Executive Director, Illinois Chamber Tax Institute
Deciphering Today's State & Federal Tax Law

Gov. J.B. Pritzker recently proposed eliminating the 1% state sales tax on groceries. The Illinois Municipal League almost immediately protested, citing the adverse impact on municipal finances.

Now, you may be asking yourself: Why would eliminating a state sales tax have an adverse effect on municipalities? Better yet, you may be wondering: Why does Illinois tax groceries at all? (Of course, those of you who live in Cook County and the counties served by the Regional Transportation Authority [RTA] know that your tax rate on groceries is higher than 1%.)

Here, I’ll explain why the state imposes a grocery tax, where the money goes, and how we ended up with a 1% rate.

WHERE IT ALL STARTED

This story goes back more than 30 years to when I was a young attorney just beginning my career in tax with the Illinois Department of Revenue (IDOR). At that time, sales tax reform legislation went into effect (in 1990), which ended the taxation of groceries. But local governments also received tax revenues from taxing groceries, so as a compromise, the legislation ended the portion of the state tax on groceries that was retained by the state and imposed a new 1% tax on groceries—the proceeds of which are distributed to local governments by the state.

Ultimately, the sales tax reform of 1990 was designed to eliminate the patchwork of locally imposed, administered, and collected sales taxes that began to proliferate during the 1980s. While that effort was somewhat successful then, today we’d say otherwise.

Article VII, Section 6 of the 1970 Illinois Constitution lists the powers of home rule units: Cook County and other municipalities with a population of more than 25,000 (unless they opt out). Notably, the Illinois Constitution grants home rule units broad powers to tax; however, the Illinois General Assembly can limit those powers with a three-fifths vote. In the 1970s and 1980s, home rule units exercised that power by imposing, among other things, local sales taxes that were administered and collected by the home rule units.

Prior to sales tax reform, not only were retailers with multiple locations required to file returns and make payments to the state, but they were also required to file returns and make payments to home rule units. As you could imagine, this was burdensome and also caused enforcement difficulties for the local governments. Therefore, in 1989, the Illinois General Assembly decided to limit the power of home rule units to impose their own sales taxes. As a trade-off for losing that local authority, the general state sales tax rate was raised from 5% to 6.25%, and the proceeds of the additional 1.25% were distributed to local governments in exchange for the elimination of their ability to impose their own local sales taxes.

The attempt to completely eliminate local sales taxes wasn’t completely successful. While the City of Chicago and the RTA were successful in having the legislation authorize the imposition of local sales taxes in Cook County and in the collar counties served by the RTA, home rule municipalities were authorized to impose local sales taxes. The legislation also authorized Rockford, Ill. to impose a non-home rule sales tax. (For some reason, Rockford opted out of home rule status under the Illinois Constitution.)

In all instances where the 1990 sales tax reform legislation authorized the imposition of local sales taxes, the local taxes were required to be administered and collected by IDOR. However, there are strict limitations on the additional percentages that can be added to these taxes. For example, there’s a requirement of notice that must be sent to the department and the local taxes must strictly parallel the state’s tax in terms of tax base, exemptions, etc.

TAXING AUTHORITY RULES

Not surprisingly, after the governor proposed to eliminate the 1% state sales tax on groceries, some local governments expressed their intention to impose their own local taxes on groceries. However, they don’t have that authority under current law. Non-home rule units have limited taxing authority under the Illinois Constitution and wouldn’t have such authority absent a specific grant of legislative authority.

If the units of local government wish to impose local sales taxes on groceries, there would need to be an amendment to state law to authorize such taxes. At the time of this writing, there’s been discussion of granting municipalities the power to impose their own grocery taxes. Of course, depending on how such authority is granted, that could bring us back to the same place we were in during the 1980s before the 1990 sales tax reform legislation.

If the state goes down that path, the existing model for the imposition of local sales taxes should be used, as any such tax would then be administered and collected by IDOR. Otherwise, you’d have the potential for a patchwork of local taxes administered and collected by local authorities and a huge burden on retailers with multiple locations—the same situation that the 1990 sales tax reform was designed to eliminate. After all, just think of how many local returns Jewel or Mariano’s would have to prepare and file just in the Chicago area alone.

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