Sales Taxes – Broaden the Sales Tax to Include More Services

 Revenue: $450 million

General merchandise sales within the City are currently taxed at a rate of 9.75 percent.  The table below shows the breakdown of the sales tax.[1]

Sales Tax Segment


State of Illinois ROT


City of Chicago HROT


Municipal ROT


Cook County HROT




RTA/County ROT


The City receives sales tax revenue from its Home Rule Occupation and Use Tax (HROT) and the Municipal Retailer Occupation and Use Tax (ROT).[2]  The sales tax is generally not imposed on services.  In Illinois, only 17 services are taxed, 12 of which are utility services, mostly related to electricity, telephone, and gas services.[3]  The other 49 states tax an average of 56 services.[4]

Under this option, the sales tax base would be broadened to include more services. According to data from the 2007 Economic Census and the Illinois General Assembly’s Commission on Government Forecasting and Accountability, approximately $20 billion worth of untaxed services performed in the City could be subject to a broadened sales tax. Because the City’s share of the sales tax is 2.25%, expanding the sales tax base to include services could generate approximately $450 million annually for the City.[5]  This estimate attempts to exclude business-to-business transactions from the tax base.  It does not take into account reductions in revenue due to behavioral responses to higher tax rates or account for lower revenue due to the inability to collect the full amount of the tax.

 The table below shows the ten industries that would be most impacted by a broad sales tax.


Receipts Subject to Sales Tax

Chicago Sales Tax Revenue @ 2.25%

Construction – Specialty trade contractors



Offices of physicians



Legal services



Portfolio management



Activities related to real estate



Repair and maintenance (automobiles)



Nursing care facilities



Offices of real estate agents and brokers



Offices of dentists



Accounting, tax preparation, bookkeeping, and payroll services




Proponents might argue that imposing a sales tax on services is fairer than the current sales tax, which largely impacts tangible goods, because the State and City should not use tax policy to favor one industry over another.   Further, as services have come to represent an ever larger share of the City’s economy, the existing sales tax base is shrinking.[6]  Additionally, they might argue that many services represent luxury goods that are more likely to be purchased by high-income people.  Finally, some might note that the exemption of a broad range of services from the sales tax “has drawn scathing criticism from tax policy experts, who have uniformly condemned it as a source of economic inefficiency [and] complexity,” with both left-leaning and right-leaning think tanks arguing against the exemption.[7],[8] Opponents might argue that a broadened sales tax would increase the cost of medical and legal services, making them less affordable for those with low-incomes.  More generally, an increase in consumption taxes (which include sales taxes) is generally thought to have a regressive impact, as people with lower incomes spend a larger percentage of their incomes on consumption than do people with higher incomes.[9]  Additionally, it might drive people to seek these services outside of the City.

Budget Details

Fund: Corporate Fund, 0100 Type of Revenue:  Chicago Sales Tax / HROT
This appropriation can be found on page 16 of the 2011 Annual Appropriation Ordinance.



Supporting Information

For a detailed list of the services included in the analysis and the underlying calculations view the spreadsheet below.


[1] City of Chicago. “2011 Budget Overview and Revenue Estimates.” pg. 56.

[2] The HROT and ROT have slightly different tax bases.

[3] Illinois General Assembly- Commission on Government Forecasting and Accountability. “Service Taxes: 2011 update.” pg. 6.

[4] Id.,. pg. 6.

[5] To estimate the revenue that would be generated from a broad-based tax on services, we started with the list of services the Illinois Commission on Government Forecasting and Accountability (CGFA) employed when it estimated how much revenue a broad-based service tax would yield at the State level.  Then, in order to estimate the value of sales that would be subject to a broad sales tax on services, we used data from the 2007 Economic Census that details “Employer sales, shipments, receipts, revenue, or business done” by the North American Industry Classification System (NAICS) codes.  For most services, this data was available at the City of Chicago level.  However, for certain industries this data was only available at the state level.  For those industries, we simply assumed that Chicago’s share of employer sales was proportional to its share of the State population.  For three industries for which data was unavailable at the State level, we used national figures and assumed that Chicago’s share was proportional to its share of the national population.  For several services already subject to taxes in Chicago, we did not include them in the potential tax base.  Once we estimated the sales for these industries, we attempted to determine the percentage of sales in each industry that were not business-to-business, as these types of sales are generally not subject to sales taxes.  Using final-use percentages from the CGFA’s study, we determined what percentage of these receipts were sold to final-users and thus were subject to the sales tax.  Using the 2007 data, final-use sales constituted an estimated $20 billion in receipts in these industries resulting in $450 million in sales tax revenue based on the City’s existing 2.25 percent sales tax.

[6] Chicago Metropolitan Agency for Planning (CMAP). “Broadening the Sales Tax Base to Keep Rates Low, Economically Competitive.” July 2011.

[7] Viard, Alan. “Goods Versus Services: A Call for Sales Tax Neutrality.” State Tax Notes, May 16, 2011 pg. 513.

[8] Mazerov, Michael. “Expanding Sales Taxation of Services: Options and Issues.” Center for Budget Policy and Priorities July 2009.

[9] Brooking Institution. “The Pros and Cons of a Consumption Tax.” March 2005.