{"id":3038,"date":"2021-07-15T11:23:37","date_gmt":"2021-07-15T16:23:37","guid":{"rendered":"https:\/\/illinoistax.org\/?p=3038"},"modified":"2022-01-19T14:48:14","modified_gmt":"2022-01-19T20:48:14","slug":"what-illinois-sales-tax-tells-us-about-the-economic-effects-of-covid-maurice-scholten-mike-klemens","status":"publish","type":"post","link":"http:\/\/illinoistax.org\/?p=3038","title":{"rendered":"What Illinois Sales Tax Tells us About the Economic Effects of Covid"},"content":{"rendered":"

What Illinois Sales Tax Tells us About the Economic Effects of Covid<\/u><\/strong><\/h3>\n

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July 2021 (74.4)<\/strong><\/p>\n

by Maurice Scholten and Mike Klemens*<\/p>\n

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Retail sales have been a well-documented casualty of the COVID pandemic as shops, restaurants and bars have been forced to transform the way they do business, or close.\u00a0 That change has also affected governments that rely on sales tax receipts to fund their operations.\u00a0 Although the sales tax hit has been less than initially anticipated, it has varied by community.\u00a0 In this article we will use statistics from the Illinois Department of Revenue to examine how the pandemic has impacted Illinois state and local governments and different types of retailers.<\/p>\n

Illinois\u2019 complex system of state and local sales taxes – technically a combination of occupation taxes imposed on retailers and use taxes imposed on buyers (the buyer ends up paying both) – provide a closer look at retail sales.\u00a0 The system has two different tax bases: (1) general merchandise and vehicles, which are taxed at the high rate (the 6.25 percent state rate plus local add-ons) and (2) groceries, drugs, and medical appliances, which are taxed at the low rate (1 percent plus Regional Transportation Authority add-ons in Cook and the Collar Counties).\u00a0 The shorthand for the two bases is \u201cgeneral merchandise\u201d or \u201chigh rate\u201d on the one hand, and \u201cfood and drugs\u201d or \u201clow rate\u201d on the other.<\/p>\n

The Illinois Department of Revenue administers more than 20 separate state and local \u201csales\u201d taxes and keeps the data by location to be able to allocate the local portion to the appropriate taxing jurisdiction.\u00a0 It also has information on the kinds of businesses collecting the tax.\u00a0 This information offers insights as to what happened in Illinois during the COVID pandemic.<\/p>\n

In the early days of the pandemic, on April 15, 2020, Illinois\u2019 Office of Management and Budget revised sharply downward its latest estimate for sales taxes for the remaining two months of FY 2020 and for all of FY 2021.\u00a0 For FY 2021 OMB took its sales tax estimate from $9.038 billion to $7.453 billion.\u00a0\u00a0 Sales tax collections did better for both years and will end up exceeding the pre-COVID projection for FY 2021.<\/p>\n

Illinois was in no way unique, and sales taxes came in better than initially thought in states across the country.\u00a0 In the FY 2022 budget presentation in February, OMB attributed the improved FY 2021 numbers to federal stimulus payments, job losses concentrated in lower paying positions, consumers spending money on taxable goods instead of non-taxable services, pent up demand after lockdowns were eased, and development of delivery and curbside pick-up options.<\/p>\n

Overall Effect
\n<\/u>One way to look at the effect of COVID is to look at collections of various \u201csales\u201d taxes imposed on different tax bases.\u00a0 Because of natural fluctuations, i.e. retail sales jump during the Christmas holiday and back to school seasons, and fall off in January and February, we compare monthly collections in 2020 to the same month in 2019.\u00a0\u00a0 In each case we refer to the month the purchase was made, not when the tax was collected by the Department of Revenue.<\/p>\n

The numbers show that state Retailers\u2019 Occupation Tax collections (5 percent out of the 6.25 percent state rate on general merchandise \u2013 but not groceries or drugs – sold by Illinois retailers) fell beginning in March of 2020, and by December had yet to return to pre-COVID levels.\u00a0 See Chart 1<\/strong>.\u00a0 That\u2019s no surprise, given fear of COVID and restrictions on gatherings.<\/p>\n

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However, Illinois Use Tax Collections, imposed at the same 5 percent rate on the same base as the ROT but on sales by retailers outside Illinois, already on the increase as Illinois moved to require out of state retailers to administer its Use Tax after the Supreme Court\u2019s Wayfair<\/em> decision, jumped up significantly in April and continued at that higher level.\u00a0 See Chart 2<\/strong>.That\u2019s no surprise either, to those who have seen the growing number of delivery trucks in our neighborhoods.<\/p>\n

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Taken together, state ROT and Use Tax collections were down year over year between March and May but have grown since then.\u00a0 Given that Use Tax collections were trending upward before the pandemic, we can\u2019t distinguish between Wayfair <\/em>and COVID related increases, but it appears there was substitution of local purchases to online.\u00a0 See Chart 3.<\/strong><\/p>\n

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Local governments that impose home rule Retailers\u2019 Occupation Taxes have fared worse in terms of collections, however, because there is no Use Tax associated with home rule taxes and home rule taxes do not apply to the more stable groceries and drugs.\u00a0 Home rule taxes have declined year over year each month since March.\u00a0 See Chart 4. <\/strong>The state has enacted new legislation, the Leveling the Playing Field for Illinois Retail Act, that seeks to impose ROT collection responsibilities (and higher rates) on remote retailers, effective in January of 2021. There are questions as to whether certain aspects of that Act would survive a legal challenge, but no such challenges have yet been filed.<\/p>\n

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Impact by Type of Business
\n<\/u>Department of Revenue data published by the type of business provides a second insight.\u00a0 It\u2019s important to note that the Standard Industrial Code (SIC) represents the classification of the retailer, not of the object being sold.\u00a0 Grocery stores sell non-grocery items, while drug stores sell groceries and lots of non-pharmaceutical items.\u00a0 Nevertheless, the trends are clear in Chart 5<\/strong>, which shows change in collections compared to the same month the previous year.<\/p>\n

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Hotels and motels saw a precipitous decline in sales taxes collected as COVID struck and have not significantly recovered, as did restaurants and bars.\u00a0 On the other hand, while car dealers and gas stations took an initial hit, they quickly recovered and by the end of the year were close to their previous year\u2019s level.\u00a0 Grocery stores saw an initial increase that then flattened out.\u00a0 Building supply sellers and liquor stores have consistently performed above their pre-Covid levels.<\/p>\n

Impact in Different Cities
\n<\/u>A third impact we can explore from the IDOR data is geographical.\u00a0 It\u2019s important to remember that more than 40 percent of sales taxes imposed in Illinois flow to local governments at a wide range of tax rates.\u00a0 In addition to 1.25% of the 6.25% state-wide tax, municipalities can, and many do, impose their own tax.\u00a0 Local add-on sales taxes range from the 0.25 percent non-home rule sales tax in Burr Ridge to a 2.75 percent home rule sales tax in Mount Vernon.\u00a0 For each time the pandemic forced a family to skip a $100 night at the local pizza joint, Burr Ridge would miss out on $1.25 in taxes while Mount Vernon would lose $3.75.<\/p>\n

Besides imposing varying tax rates, cities vary in who actually pays the tax they impose.\u00a0\u00a0 Those with large numbers of visitors \u2013 be they tourists or businesspersons or shoppers from a neighboring community \u2013 can \u201cexport\u201d their taxes off their residents. \u00a0Chart 6<\/strong>\u00a0shows the amount of Municipal Retailers\u2019 Occupation Tax (MROT \u2013 the 1 percent tax rate imposed on all taxable sales) per capita collected in six selected cities.\u00a0 Strikingly, Chicago \u2013 with its tourist and business travelers \u2013 sits below that state average. The assumption is that Chicagoans avoid the higher sales taxes in the city by purchasing outside the city when possible, depressing the city\u2019s taxable retail sales.\u00a0 Ironically, there are 48 cities in Illinois with higher home rule sales taxes than Chicago, but the total tax rate in the city gets boosted by Cook County Home Rule and RTA sales taxes.<\/p>\n

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While cities historically benefitted from being able to raise revenues from non-residents, the pandemic upset those patterns and cities reliant on tourism or business travel saw far greater hits to sales tax revenue.\u00a0 Chart 7\u00a0<\/strong>shows the percentage change from the same month the previous year in the 1 percent Municipal ROT that is part of the state\u2019s basic 6.25 percent sales tax rate everywhere and includes food and drugs.<\/p>\n

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Receipts declined in cities across Illinois when the pandemic struck, as illustrated by the statewide line total (the green line) on Chart 7<\/strong>, but after hitting a low point in May, climbed upward to be positive by December.\u00a0 While all cities followed this pattern, generally, there are significant differences in magnitude.\u00a0 Rosemont with its proximity to O\u2019Hare Airport and a host of entertainment and dining venues was the hardest hit city we looked at.\u00a0 Chicago with its tourism and convention business curtailed, was also hard hit.\u00a0 In these month-over-month comparisons, Springfield suffered financial losses when the General Assembly and accompanying lobbyists were gone in the spring.\u00a0 Schaumburg with its malls and shopping recovered by September, only to decline again.\u00a0 Meanwhile in southern Illinois Marion recovered quickly, then stagnated.\u00a0 Without the impact of COVID, we would have expected cities to be seeing increased receipts between 3 and 4 percent.<\/p>\n

Looking from a broader geographic perspective, the map below\u00a0shows the initial hit from the COVID pandemic by county, the percentage drop from April 2019 to April 2020 in County Supplementary Tax receipts (CST is the 0.25 percent tax that is part of the state\u2019s 6.25 percent rate imposed on general merchandise and returned to county governments.)\u00a0 On the map, the darker the color the greater the loss.<\/p>\n

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\nLooking at High Rate and Low Rate Sales
\n<\/u>We can take an even closer look at changes since COVID struck by examining sales data (the amount to which the tax rate is applied) from the ST-1 Sales and Use Tax Return, broken down by SIC Code, provided by the Department of Revenue. We have sales from:<\/p>\n