The Transportation for Illinois Coalition’s proposal to replace the state’s portion of the gas tax with a 9.5 percent wholesale fuel tax is meeting with fierce opposition from distributors, who say such action would drive more motorists across the borders to fill their tanks and drive Illinois gas retailers out of business.
The coalition — comprised of labor, construction, transportation and trade associations and the Illinois Chamber of Commerce — is proposing the tax in tandem with vehicle license and registration fee increases to raise a projected $800 million annually.
Coalition co-chairman Doug Whitley, president and chief executive officer of the Illinois Chamber of Commerce, says something has to be done to build and maintain Illinois’ roads and bridges without relying on the feds because that well has run dry.
Illinois motorists would pay an additional 14 to 17 cents per gallon on top of the current tax if the proposal were adopted.
“The federal government has been unreliable in the past two federal highway bills,” Whitley said. “The federal gas (and diesel) tax has not increased since 1993, so they haven’t put any more money into the road fund either. Congress has had to supplement the Highway Trust Fund with additional money out of the General Fund just to shore up the Trust Fund. The states lack confidence that the federal government is going to help them.”
The coalition’s proposal, Whitley says, is linked closely to the end of the 2009 Illinois capital bill, Illinois Jobs Now!, which will expire in July 2014. There is no new state funding allocated toward construction.
“The level of funding for (capital) construction in Illinois will go from $3.5 billion to less than $1.5 billion,” Whitley said. “That is inadequate for maintaining IDOT’s 16,000 road miles and 900 bridges.”
Local governments in Illinois are responsible for maintaining an additional 123,000 miles of roads and thousands more bridges. “Without a renewed commitment on the part of the governor and the General Assembly, it’s anticipated that one in every three Illinois roads — and one in every 10 bridges will deteriorate to an unacceptable standard,” he said.
Volatility in motor fuel prices, Whitley concedes, is a drawback of the proposal.
“The bad news is that, just like the stock market, there’s a lot of volatility in fuel prices,” Whitley said. “The factor that is most frightening in Southwestern Illinois is the price differentiation between Illinois and Missouri. There’s nothing we can do about the folks in Missouri not having enough money to finance their roads,” he added, referring to the fact that Missouri’s state gas tax, as of press time, was 17.3 cents per gallon (35.7 cents total per gallon), compared to Illinois’ 39.1 cents (57.5 cents total). Our leadership is very conscious of the difference between states.”
As it stands now, Illinois has the fifth-highest gasoline tax in the nation. Chicago has the highest gas prices of any major metropolitan area in the U.S., according to the Illinois Policy Institute.
But Matt Schrimpf, president of the Illinois Petroleum Marketers Association and president of Piasa Motor Fuels in Hartford, questions whether Illinois leadership has weighed in on the coalition’s proposal. Schrimpf, whose company does business in seven states, says the proposal may do three very damaging things: 1) It would substantially raise the price of gas for consumers and take more of their disposable income per dollar, per gallon to feed the next tax; 2) It would send even more Illinois motorists across the state border to Missouri, Iowa and Indiana to buy their gas in cheaper-priced states; and 3) The new wholesaler tax may require smaller petroleum retailers to pay the levy ahead of time rather than after the fuel sale is made at the pump, as they do now.
“A small family business won’t be able to survive this,” Schrimpf said. “In addition, it’s very difficult to track rack prices. Typically in (distribution) terminals, there are multiple suppliers — between three and eight — per terminal. What prices do you use? How many are you going to tag?”
The petroleum marketers agree that the federal Highway Trust Fund is unsustainable to fund the future of states’ road funding needs. But Schrimpf questions why Illinois — a narrow state with major population centers on its borders — has to take the initiative in making itself less competitive.
“Why does Illinois have to be first in a flawed proposal like this one?” Schrimpf said. “We need to be asking the Illinois General Assembly to stop its diversion of $450 million in transportation funds. Another answer might be to ask Metra (the northeast Illinois commuter rail system) to pay a greater percentage of its budget. We need to be coming up with solid proposals that keep our gallons in Illinois. And we need to ensure that Illinois prices are competitive to neighboring states to encourage businesses and citizens to keep their purchases in Illinois.”
Although the numbers show that Illinois’ cigarette tax revenue more than doubled in July compared to the same period last year, details behind the stats actually reflect inventories returning to normal.
According to the Illinois Commission on Government Forecasting and Accountability, what initially appears as a hefty spike in revenues for the state was — in reality — evidence of cigarette distributors statewide restocking their pantries after their stockpiled purchases of pre-tax-hiked product from last spring-summer was depleted. July’s net increase was $18 million.
Revenues for August of this year were also up appreciably, 73 percent or $25 million, compared to a year ago.
Jim Muschinske, the commission’s revenue manager, says the General Assembly’s $1-per-pack tax increase on cigarettes (which took effect June 24, 2012) caused a last-minute “rush” of massive distributor purchasing last spring — one that the Illinois Department of Revenue tried unsuccessfully to prevent under the old tax rate.
“Last year, the IDR attempted to thwart that stockpiling by putting a floor tax on distributors to immediately put the higher rate on and limit the amount of cigarettes they could purchase under the old rate,” said Muschinske. “But the courts said no. So there was a big purchase statewide of cigarette tax stamps, those that are affixed to the back of the packs by licensed distributors. It took a number of months for the effect of that (excessive purchasing by cigarette distributors) to go away. Now we’re back at the statutory amount. So the dollar amount you see comparing July FY 2013 to July 2012 is no surprise.”
When legislators approved the $1-per-pack tax hike on cigarettes nearly 18 months ago, Illinois moved into 17th place in the U.S. and District of Columbia in terms of the highest excise tax rate on cigarettes. New York remains first at $4.35 per pack (in taxes alone), while Missouri is 51st at 17 cents per pack.
An excise tax is one that producers and sellers pay for and is normally included in the price of a specific commodity. In contrast, a sales tax is one that is typically paid for by the purchaser at the point of sale.
The cigarette tax increase was enacted as part of an overhaul of the Medicaid program; policymakers were aiming to eliminate a funding gap of $2.7 billion in FY 2013. Illinois estimated that the $1-per-pack increase would bring in an additional $350 million in cigarette tax revenue and generate a total of $700 million in cigarette tax revenues for the state in FY 2013, including reimbursements from the federal government.
Despite projections that the stockpiling would result in lower cigarette tax revenues, Illinois comptroller reports show that $382.6 million — more than $30 million beyond what was expected — came into state coffers during FY 2013 from just the $1-per-pack tax increase. Paired with federal dollars, the total for FY 2013 (based on year-end estimates) was $853.3 million, according to the Comptroller’s Office.
In July 2002, the last time Illinois raised its tax on cigarettes, from 58 cents to 98 cents per pack, the language in the bill was “more clear in restricting stockpiling on the part of distributors,” said Susan Hofer, spokeswoman for the IDR.
“When we learned that legislators (in 2012) were preparing to double the tax again, our agency tried to restrict stamp sales, but we were clearly told by the court that it was not legal,” Hofer said. “This action wasn’t even necessary a decade earlier because of the way the legislation was written. The 2002 law made it very clear that distributors could not stockpile,” she added.
The first time Illinois imposed a tax on cigarettes was in 1941, according to the IDR. It was paid by the distributor, just as it is today. Hofer says the tax was initially set at two cents per pack. The rate remained below 10 cents until 1969. In 1993, the tax increased to 44 cents and to 58 cents four years later.
While Illinois’ backlog of unpaid bills is more than $6 billion, there is some relief for the state’s vendors. A private, for-profit startup company called Vendor Assistance Program LLC — created at the behest of state officials — is buying receivables through a state-sanctioned process.
The basic idea of paying cash today for a stream of income in the future, a process known as factoring, is not new. An individual or business in need of immediate cash can assign a receivable due in the future to a third party in return for a cash payment of somewhat less than the full amount due. The third-party investor profits by collecting the full amount when it becomes due.
“People from the governor’s office and CMS (Illinois Department of Central Management Services) approached us,” said VAP Chief Executive Officer David Reape. “What they wanted to do was figure out a way that we could put a program together to monetize the penalties that are associated with late payment. It was very important to the state that if a vendor did $10,000 worth of work they got paid $10,000. The state was aware that there were a number of factoring organizations out there that were offering vendors fairly steep discounts in order to get cash sooner; that there were vendors that weren’t able to bid on state business because of the delay in payment; and that there were vendors that were really struggling to stay in business because of the delays. We came up with the program and helped the state develop the terms. It’s a unique kind of program.”
A qualified purchaser, in accordance with the state-approved program, offers Illinois’ creditors 100 percent of the amount owed by the state for goods and services provided. The Illinois Prompt Payment Act (30 ILCS 540) provides that the state must pay an additional 1 percent per month late fee on bills paid more than 90 days after they are due. By accepting assignment of receivables only after they are eligible for the late charge, qualified purchasers like VAP can afford to pay vendors the full face value of receivables. Ninety percent of the amount is paid to the vendor within seven to 10 days of assignment, and the balance in two additional installments. The first installment is paid after the qualified purchaser receives the amount due on the invoice and the second is paid after the purchaser receives the late payment charge.
In order to participate in the program, a vendor must have a receivable that is eligible to accrue prompt payment penalty interest under the act. In addition, it must be at least 90 days past due and free of any liens or encumbrances.
A test case was online Security Systems LLC, which does business as Metro Enforcement, a Rockford company that provides security for Central Management Services at various sites around the state.
Scott Holland, the company’s chief financial officer, says Security Systems was particularly hard hit by the state’s late payments because the great bulk of their costs were labor and the firm paid its employees once a week. Central Management Services officials suggested the factoring program as a way to solve the problem. Holland says the company gave it a try and has been pleased with the results.
The program was slow to get rolling as the kinks had to be worked out, according to Reape, but now VAP has more than 600 vendors enrolled. In mid-August a second factoring company was approved by Central Management Services and the agency is seeking more vendors.
“CMS has met with more than 20 companies regarding the VPP (Vendor Payment Program, the generic program allowed under state law) and several have expressed interest in joining the program,” representative Anjali Julka said. “Deutsch Bank is now a qualified purchaser to enter the program.”
The VPP is entirely voluntary; participation is limited only by the available capital committed to the program by qualified purchasers. Reape estimates there are more than 2,000 qualified vendors that could be taking advantage of the program.
“It’s about education,” Reape said. “It’s contacting vendors of the state, explaining the program, explaining the benefits and risks, getting vendors to come to our website and register. Some people have said to us, ‘This sounds too good to be true.’”
As part of the registration, vendors need to execute an electronic consent form. It is sent directly to the state and it authorizes the state to send the qualified purchaser information on that vendor’s qualified receivables. The QP then receives weekly updates on what’s available for assignment from its registered vendors.
Reape stresses that it’s an entirely voluntary process for a vendor. Vendors decide whether to participate or not, and they can even pick and choose which receivables they want to assign.
“We have vendors that just participate during certain times of the year and other times don’t,” Reape said. “It’s a cash flow tool. This is very much about helping the little guys, but we have big vendors, too. They see the need and benefit. Vendors of all sizes see the value in this.”
Reape says VAP has acquired $192 million in receivables this year but has a very large line of credit with which to work. He adds that this innovative program is attracting attention from other states and even some municipalities — and he has had some discussions about expanding beyond the state of Illinois.
“I think we have a great and unique program here that really is a win-win for everybody involved.”