BY GREG MERMEL, C.P.A.
Income taxes are so visible, and so important a revenue source to government in the United States, that the adjective is often dropped. Most people equate "taxes" with "income taxes," particularly when uttered by politicians who are promising tax cuts. I certainly am guilty of that in this column.
But there are a myriad of other taxes that you pay. You have probably paid a dozen or more different taxes this week. If you bought any tangible object in Illinois, you paid sales tax. I’ll count that as one, though it is really four: different parts of the 8.75 percent you pay in Chicago going to the state, the city, the county and the Regional Transportation Authority. The extra one percent on meals in downtown restaurants goes to the Metropolitan Pier and Exposition Authority, which runs McCormick Place and Navy Pier.
Perhaps you put gas in your car. The price at the pump includes a federal gasoline tax, Illinois motor fuel tax, a Cook County tax, and Illinois sales tax–which is calculated on the price including the federal gasoline tax and Illinois motor fuel tax. Did you decide the tires needed replacing? That involved sales tax, of course, plus federal excise tax and another state tax earmarked for the cost of disposing of old teirs.
Pay your phone bill? There’s federal, state and Chicago excise taxes, plus another six fees mandated by government. Gas and electric bills are much the same.
A whole cluster of taxes is known as "sin taxes." In addition to sales tax, alcoholic beverages carry federal excise tax as well as city, county and state beverage taxes. Soda pop bears the Chicago Soft Drink Tax. The riverboat casinos pay an admission tax of two dollars per person, along with 15 to 35 percent of their revenues. And let’s not even talk about the many layers of taxes on cigarettes.
Travelers pay a lot of taxes, since they are seen as affluent and, at the state and local level, not able to vote against the officials imposing these taxes. Hotel rooms bear as many as four layers of state and local taxes. Car rentals are subject to two (plus sales tax) in Chicago. If you ask me really nicely, I will not attempt to explain the taxes buried in the obscure codes and fine print at the bottom of your airline ticket.
And, of course, property taxes on real estate rank only behind income taxes as a source of revenue.
The Invisible Becomes Visible
All these taxes are much less visible than income tax. Most of them are not paid at the consumer level, or if they are, the amount of each transaction is not that high. But all these small transactions do add up, and these taxes are vital to state and local governments.
In a recession–"slow economy," if you are being polite–tax revenues drop. People do not make as much money, so they pay less income tax. Retail sales drop, so do sales tax collections. Less truck and auto use, less gasoline taxes. And so on. At the same time, demand for government services increases: unemployment compensation increases, crime worsens, job training programs are needed along with incentives for business investment, more poor kids need free school lunches, and so on.
Raising the most visible tax, income tax, during a recession is generally thought to be political suicide, so where is the money to come from? The federal government can do deficit spending. In economic terms, it is as if the Federal Reserve turned on the printing presses and created more money.
But states and cities cannot do that. They have to spend the reserves they prudently set aside during the boom (if they did so) or find other revenue sources. Cities, in particular, can cover part of this with fees, fines and penalties. Chicago certainly has. Parking and traffic fines have been substantially increased, and the number of tickets needed before booting reduced to three. They have also raised the cost of many permits and licenses.
Coming Down the Road
Nobody quite knows what the incoming administration will do about the reported $2 billion state budget deficit, probably including Governor-elect Rod Blagojevich. But looking at what is happening elsewhere may give us a clue.
New York City’s solution to its budget crisis was an 18 percent increase in property taxes. We will not see that here, for two reasons. First, property taxes are strictly local in Illinois, so that does not help the state. Second, the accepted wisdom among Illinois officials is that more than a three or four percent increase invites voter rebellion.
Florida is making a major effort in use tax collection. Illinois has a use tax also, and I will guarantee that you have evaded it. Did you ever buy something on the Internet or from a catalog where the out-of-state vendor did not collect sales tax? Unless you filed an Illinois use tax return and paid the state what the tax would have been with an in-state vendor, you evaded that tax. And if you did pay it, you are a rare bird, indeed. Florida now requires every business in the state to file a use tax return or a sworn statement that they made no purchases requiring use tax. Significant audit activity of those filing the sworn statement is expected to follow.
And if we’re not having fun yet, consider what Los Angeles has recently done. Like most cities, they have a business license requirement. Unlike most cities, theirs is a disguised tax on gross receipts. For most businesses, the tax is $106.43 for the first $18,000 of gross receipts, and 0.591 percent of receipts above that amount. Also unlike most cities (Chicago included), Los Angeles provides no exemption for freelance creative businesses. They recently obtained from California’s state income tax authority a list of everyone in Los Angeles who reported independent contractor income last year, and wrote to them demanding three years’ worth of license fees, with hefty penalties for late filing and payment. The creative community, led by the Writers’ Guild, has screamed loudly. The city’s response, reportedly, was along the lines of, "Well, I suppose we could have been more diplomatic."
My response: "Why don’t you rent an office in Burbank?"
Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call 773/525-1778 (888/525-1778 toll-free outside the Chicago area).
Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He also sometimes produces theatre.