Car dealers may have a busy New Year’s Eve if Illinoisans try
to beat a significant sales tax expansion on vehicle trade-ins that starts in
The state currently collects no sales tax on a car’s trade-in value, which acts
as credit toward a new vehicle purchase. By law, sales tax only applies to the
difference between trade-in value and the new vehicle’s purchase price.
That changes Jan. 1. Under Senate Bill 690, signed June 28 by Gov. J.B. Pritzker,
state and local sales tax will be applied to any trade-in value above $10,000.
The new tax is expected to cost Illinoisans $60 million a year – which was
earmarked not for roads, but for vertical infrastructure such as new state
buildings and renovations.
The least a driver looking to trade-in will face is 6.25% in sales tax, the
state’s rate. Municipalities often add their own sales tax, averaging 2.49%.
Statewide the average combined state and local sales tax is 8.74%, but it ranges
as high as 10.25% in Chicago.
Take, for example, an Illinoisan buying a new vehicle for $35,000 – about the
average cost in 2018 – and trading in her car valued at $20,000. Currently, she
would only pay sales tax on the difference, or $15,000. The average sales tax on
this transaction would be roughly $1,311.
In 2020, trade-in credit above $10,000 will be taxed in addition to the
difference between the new and used car prices. In this example, the $20,000
trade-in will not be taxed on the first $10,000 in value, but the remaining
$10,000 gets taxed along with the $15,000 difference between the new and used
car values. So sales taxes will be applied to $25,000 of the transaction, which
will cost her $2,185.
So the same car deal will cost her an extra $874 in sales taxes if she waits
until Jan. 1.
The tax change also opens the door to double taxation for
anyone with a trade worth more than $10,000.[to top of second column]
“You already paid sales tax when you bought the vehicle first time around,” said
Pete Sander, president of the Illinois Automobile Dealers Association.
While the tax change will hit everyone, it most affects those who like to trade
their vehicle every year or two, Sander said.
Drivers already thinking
about trading in their cars will “certainly take advantage” of the
five-month window before the New Year, Sander said. There is some
concern this shift in purchases will hurt sales in 2020, he noted.
While drivers can avoid Illinois’ doubled gasoline tax by buying
across the state line, they can’t escape the trade-in tax because it
applies to out-of-state purchases. State leaders passed 21 new or
expanded taxes and fees to fund a $45 billion infrastructure bill
and record $40 billion state budget.
Illinois’ motor fuel tax
increase went into effect July 1, doubling the state gas tax to 38
cents and making Illinois’ pain at the pump No. 3 in the nation.
Based on Illinois Policy Institute calculations, Illinoisans will
pay $100 more in the first year under the 38-cents-per-gallon state
gas tax. And now the gas tax is tied to inflation, meaning it will
automatically rise in future years without requiring lawmaker
approval. It is projected to hit 43.5 cents by 2025.
Illinois drivers will pay the nation’s highest base fee and fifth
highest overall fee for vehicle registration, also meant to raise
funds for Pritzker’s $45 billion infrastructure plan. Drivers of
standard passenger cars will see registration fees jump from $98 to
$148 in 2020. The $50 increase is estimated to raise $441 million in
revenue. Registration fees for large vehicles – buses, trailers and
semi-trucks – will increase by $100, raising $49 million in new
The gas tax hike and increased vehicle registration fees erase
Pritzker’s promise of middle class income tax relief – a major
selling point of his plan to replace Illinois’
constitutionally-protected flat income tax with a progressive income
tax system. The progressive tax question will be before voters in
Those 21 tax and fee hikes total $4.7 billion. Of that, $2.1 billion
started hitting taxpayers July 1 and the rest kick in Jan. 1,
including the trade-in tax.
As long as state lawmakers continue trying to tax their way out of
Illinois’ fiscal mess, their credibility will remain somewhere well
below that of a used car salesman swearing it was only driven by a
little old lady to church on Sundays. Instead, they should be
offering taxpayers an extended guarantee that they will pass
meaningful reforms to put the brakes on spending and stop driving
Click here to respond to the editor about this article