As Democrats raise taxes, shoppers seek alternatives

chicagotribune.com

Beating Cook's sales tax

Cook County's rate increase may push more shoppers to search for greener retail pastures in the collar counties, Indiana or cyberspace

By Monique Garcia and Emma Graves Fitzsimmons

Tribune reporters

March 9, 2008

After shopping around for a new laptop, Patti Jo Mitchel took a 40-mile drive from her home in Chicago's Bridgeport neighborhood to a Best Buy in Indiana.

It wasn't a sale that lured Mitchel over the state line. It was the sales tax.

"On a big-ticket item like this, I figure it's worth it," Mitchel said while making her purchase Thursday.

By crossing the state border, she saved more than $32 on her $1,075 purchase of a laptop and accessories.

And the difference in tax rates from state to state, county to county and town to town is only going to grow because of recent hikes by the state legislature and the Cook County Board.

Economists and retail advocates say the increases give shoppers even more incentive to cross borders. Some consumers will be pushed out of stores altogether and into online shopping, where many pay no taxes at all.

"In a sense the folks in [Cook County government] are undertaking an experiment, and they are hoping the response will be small," Michigan State University economics professor Charles Ballard said. "If they raise the rate but don't lose a lot of business, they'll get a lot of revenue. On the other hand, if everyone flees to do their shopping, you could lose revenue.

"Unfortunately, you don't know what the magic number is until you've crossed it."

The General Assembly started the hikes in January by approving a 0.25 percentage-point increase in Cook County and a 0.5 percentage-point boost in the collar counties to help pay for transit. Those increases kick in April 1.

In the wee hours of March 1, the Cook County Board raised its share of the sales tax by 1 percentage point, an increase that takes effect July 1.

Because they are concentrated in certain counties, the hikes accentuate the crazy-quilt nature of sales taxes across the region. Many municipalities add their own taxes through home-rule powers.

In Barrington, a village where businesses and residents are divided between Cook and Lake Counties, the widening sales tax disparity is creating particular anxiety. When the higher rates take effect, shoppers on the Lake County side of the village will pay 7 percent on their purchases -- 2 percentage points less than those on the Cook side. The current difference is 1.25 percentage points.

Bill Schachner, whose Barrington Draperies and Shutters sits a few hundred feet inside Cook County, said the difference could cost him some customers.

"With the downturn in business overall, things aren't great as it is," he said. "This is kind of the icing on the cake."

Meanwhile, in the Deer Park Town Center, just inside Lake County, Kathy Rezny of York Furrier couldn't suppress a smile thinking about the tax hike that will hit her competitors in Cook County.

For many, especially those who rely on public transportation, it is impractical or unprofitable to cross borders just to save a penny or two on every dollar spent.

But some shoppers already are picking stores based on sales tax rates.

Julie Torp, 44, of Palatine got used to seeking tax bargains in Lake County when she bought pallets of bottled water to sell at her child's gymnastic meets. Though she now is about equidistant from Costco stores in Cook and Lake Counties, she continues to choose the latter to save money.

At the Lake Zurich Costco, her cart was loaded with paper towels and toilet paper taxed at 6.5 percent, compared with 8.75 percent in Schaumburg.

"To be frugal, we will choose this store over Schaumburg," she said. "If I have a choice, I'll come up here."

Economists say border communities have the most to lose by the tax increase.

"Downtown Chicago is unlikely to feel any real effect," said Michael Nelson, chair of the economics department at the University of Akron, who has studied cross-border shopping. "But if I was a retailer on the border, I wouldn't be very happy."

Studies vary on the impact sales tax increases have on shopping habits, Nelson said.

A 1986 study of the Tennessee- Kentucky border found that a 1 percentage-point hike in the sales tax of one county pushed nearly 4 percent of sales there into a neighboring county. A more recent study in West Virginia found that a 1 percentage-point increase in the sales tax on food translated into a 1.4 percent drop in sales.

These may not translate exactly to Chicago, but they provide a guide, Nelson said.

Other research shows consumers who live in areas with high sales taxes are more likely to shop over the Internet, in part to avoid paying taxes.

The U.S. Supreme Court has ruled that most online and mail-order retailers don't have to collect state and local sales taxes unless they have a physical presence in the state, such as a store, office or warehouse.

The Web site of a national big-box chain would likely add sales tax onto the purchase of a TV, but a California boutique selling dresses might not.

Although some online shoppers interpret their purchases as tax-free, they are not supposed to.

Illinois consumers who buy products online are required to pay a "use tax," which is assessed by the state at 6.25 percent, said Katie Ridgway, spokeswoman for the Illinois Department of Revenue.

"Consumers are under the same obligation to pay the use tax as any other tax," Ridgway said. She added the state has a number of audit mechanisms in place for enforcement, including working with customs on out-of-country purchases.

Also, those who leave Illinois to make purchases are required to pay to the state the difference in sales tax, Ridgway said.

But few people pay these taxes.

"It's basically tax evasion, and that's what officials should be concerned about," said Patrick Fleenor, chief economist with the Tax Foundation, a non-profit, non-partisan tax research group based in Washington. "By definition, border shopping is about distance, but the Internet takes that all away. Now anyone can be a border shopper and avoid paying."

Experts say it's impossible to determine just how many Cook County residents will look to the Internet or travel a little farther to save on taxes, but critics contend it's just the latest hit on consumers and retailers already paying for what they call bloated county operations.

"Instead of creating an atmosphere where people want to spend, we've now advertised that we are the most expensive county to purchase anything in," said Jerry Roper, president of the Chicagoland Chamber of Commerce. "The question that's being overlooked is, 'Why do we need more taxes?'"