In the waning hours of its spring session, the Illinois legislature last week agreed to impose a 5% sales tax on natural gas bought out-of-state as part of its budget and tax package aimed at curing the state government deficit. The measure will mainly impact manufacturers, but the legislators modified the governor’s proposal by including several exemptions.

Illinois Gov. Rod Blagojevich is expected to sign the budget and tax package, which passed the legislature in much the same form as he proposed. A Democrat, Blagojevich boasted that he had for the most part avoided increasing taxes on individuals, while loading several new taxes on businesses and releasing special funds earmarked for road construction and other specific programs to be spent on other government items.

The new budget would include extending a 5% sales tax on natural gas to all deliveries of natural gas in the state, except those going to schools and other non-profits, government agencies and municipal systems, and power generators. Also exempt are businesses operating in Illinois’ 93 “Business Enterprise” zones, which are defined as economically disadvantaged. Also, a refinery, a fertilizer plant and a liquid petroleum plant were given special exemptions.

The state administration nevertheless said it expected to gain about $45 million from the natural gas tax or slightly more than half of what it initially estimated. Manufacturers, however, warned that the new tax measures would drive industry from the state.

“Manufacturers can vote with their feet and will move production to other parts of the country. They will move jobs to Asia, to South America, to other parts of the world where labor is cheaper, where regulatory costs are cheaper,” the Chicago Tribune quoted Greg Baise, president of the Illinois Manufacturers’ Association, as saying.

The governor initially had estimated that extending the natural gas sales tax would bring the state about $70 million, but that was based on $3.00 gas. With $5-6 gas the initial measure, without the exemptions, would have brought in about $120 million.

The state currently has a 5% sales tax on natural gas, which by default mainly applies to residential and small commercial users who buy their gas from the local utility. The new measure will apply the tax to large users who, because they buy their gas out of state, had not previously been subject to the tax.

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