New car trade-in tax will hit Illinois drivers New Year’s Day

Illinois will impose a new sales tax on vehicle trade-ins beginning New Year’s Day. That’s why car dealerships have been running radio ads for weeks telling Illinoisans to come on down before the ball drops.

It wasn’t quite the Boston Tea Party, but Cook County residents revolted in 2017 after a penny-per-ounce tax hike on sugary drinks.

The infamous “soda tax” was barely a blip in residents’ total tax bills, which are among the highest in the nation. But they felt abused, they called their county commissioners and the tax hike was ultimately repealed. Some credit that tax with ending Cook County Commissioner Toni Preckwinkle’s chance to become mayor of Chicago.

Similar frustrations are brewing statewide with a tax hike set to drop Jan. 1. While it’s not on a purchase as common as a Coke, the new scheme will set some drivers back $1,000 or more.

Illinois will impose a new sales tax on vehicle trade-ins beginning New Year’s Day. That’s why car dealerships have been running radio ads for weeks telling Illinoisans to come on down before the ball drops.

Here’s how it works.

Take an Illinoisan trading in her car valued at $20,000 to buy a new vehicle for $35,000. Right now, she pays sales tax on the difference between the trade-in and the new car: $15,000. Applying Illinois’ average state and local sales tax rate of 8.74%, the sales tax on this deal is $1,311.

The sales tax bill on that same deal will go up nearly $900 next year.

Beginning Jan. 1, a maximum of $10,000 in trade-in value will be exempt from the sales tax. So in our example, instead of paying sales tax on $15,000, she’ll have to pay sales tax on $25,000.

“You already paid sales tax when you bought the vehicle the first time around,” said Pete Sander, president of the Illinois Automobile Dealers Association.

And now you’ll be taxed when you sell it. This unfair double taxation is why Illinois first exempted trade-ins from sales taxes in the 1950s.

The new tax is expected to raise $60 million for Gov. J.B. Pritzker’s capital plan. The Illinois Policy Institute identified $1.4 billion of waste and pork in that plan, including dog parks, swimming pools, snowmobile paths, pickleball courts and a privately owned theater.

Due to other tax hikes signed into law this year, residents won’t just pay more to sell their car. They’ll also pay more to drive it, park it and get a license plate sticker.

Keep that in mind as the governor promotes his progressive income tax hike throughout 2020. Voters will decide in November whether to axe the state’s constitutional flat income tax protection in favor of Pritzker’s progressive income tax. He calls his $3.4 billion tax hike proposal the “fair tax,” because initially, Pritzker’s proposed income tax rates only hike taxes on individuals making over $250,000 a year.

Everyone else’s income tax bill stays the same or goes down, the TV commercials will say. And there will be a lot of them. Pritzker dropped $5 million into a ballot committee promoting the tax earlier this month.

Here’s what those ads won’t mention: Pritzker’s plan doesn’t even relieve Illinoisans of the tax hikes he’s already passed.

Under Pritzker’s proposed progressive tax system, a married couple in Illinois with two kids earning the $79,168 median annual income and paying the average property tax bill of $4,157 would see $195 in income tax relief.

But if that family has two cars, they’re in the red.

The registration fee for regular passenger vehicles will jump to $151 from $101 on Jan. 1. When combining that $50 hike with the doubled state gas tax, a typical family with two cars will pay $300 more each year just on their vehicles. That’s before adding in the state’s new parking tax. And forget about the trade-in tax.

Pritzker has more than wiped out any promised savings. And unlike the Cook County soda tax, voters have likely lost their chance to repeal the trade-in tax, for now.

But they need only wait until November to voice their opinion on Illinois tax hikes at large.