As a candidate, Bruce Rauner proposed a tax on legal services. What will Governor Rauner do?

In July 2014, candidate Bruce Rauner proposed expanding Illinois' sales tax to selected businesses and occupations that provide services. Legal services are among those Rauner named in his proposal, which exempts accountants, financial advisors, and other professionals. The Illinois State Bar Association objects to a service tax on legal services because, among other reasons, it is a regressive tax ultimately paid by those who purchase legal services, not the attorney.

The sales tax expansion proposal can be found on Rauner's campaign website (http://brucerauner.com/wp-content/uploads/2014/07/bring-back-blueprint-jobs-and-growth.pdf). He estimates that Illinois can gain over $600 million in income via a tax on services.

The plan also supported the expiration of Illinois' temporary income tax increase. According to Greg Hinz of Crain's Chicago Business, that will create a budget shortfall of $2 billion in fiscal year 2015 and $4 billion in fiscal year 2016 (http://www.chicagobusiness.com/article/20141108/ISSUE05/311089982/rauner-should-seize-the-day-to-push-tax-reform). Based on Rauner's figures, a service tax on attorneys would net $167 million in new tax revenue - a fraction of the shortfall.

Rauner's plan argues that broadening the tax base will spur growth by reducing taxes on "work, savings and investment." He also says that a service tax modernizes Illinois' sales tax, which has been built around a goods-based economy, though the consumption of services has outpaced the consumption of goods since the early 1980s. The governor says that luxury services remain untaxed while essentials like food and clothing are taxed.

Lawyers but not accountants

The ISBA has opposed the application of a service tax to legal services in the past. In 1981, the ISBA, the Chicago Bar Association, and other plaintiffs sued Chicago, challenging the constitutionality of an ordinance that imposed a 1 percent tax on all purchased services. The ordinance exempted the commodities and securities businesses as well as all transactions on a futures or securities exchange for 10 years.

The Illinois Supreme Court held that the city's tax was unconstitutional because it represented a tax on occupations. Commercial National Bank of Chicago v. City of Chicago, 89 Ill.2d 45, 70 (1982). The Illinois Constitution prohibits home rule units like Chicago from imposing an occupation tax without the authorization of the General Assembly.

The ISBA and the CBA also argued that the ordinance violated section 2 of Article 9 of the Illinois Constitution because it was not uniformly applied. The exemptions provided for the securities and exchange industry unfairly taxed attorneys, who provide services substantially similar to those provided by securities and exchange businesses. The Illinois Supreme Court agreed, holding that the distinction between attorneys and securities and exchange businesses was "wholly arbitrary and cannot be upheld." Id. at 73.

Rauner's proposal exempts accountants and financial services providers but specifically lists legal services. Thus, the holding in Commercial National Bank of Chicago is likely to be an important part of any constitutional challenge to a service tax on attorneys.

A client tax

Jim Covington, Director of Legislative Affairs for the ISBA, says that Rauner's proposed tax on attorneys is in fact a tax on clients. Covington describes the tax as a "misery and misfortune" tax when applied to legal services.

In many situations, hiring an attorney is not a matter of leisure and choice, he says. A service tax on attorneys will tax people when they exercise their rights. Seeking delinquent child support, custody of a child, worker's compensation, or guardianship of an elder will be taxable.

Covington also points out that Rauner's proposed tax would disproportionately affect small businesses. Larger corporations will be able to avoid paying a service tax by employing in-house counsel. Small businesses, especially those that are just starting out, require legal services "as a normal part of carrying out business." This disparity is also seen when the tax is applied to the working poor and people of modest means - they will pay a higher percentage of their taxed income than wealthy people seeking legal services, Covington says.

Governor Rauner is expected to reveal more about his tax plans in his State of the State address on February 4 and his budget address on February 18. Until then, it is difficult to know exactly which legal services would be taxed, which would be excluded, and how the tax would be computed.