If a rushed provision contained within the Illinois General Assembly’s revenue bill actually comes to implementation, Illinoisans might find themselves paying at the pump with their credit card and then heading inside to pay their sales tax in a separate transaction.
That’s one possible outcome, at least in the short term, of the so-called Interchange Fee Prohibition Act, part of a bill passed in the wee hours of Wednesday morning and clearly the result of lobbying by the Illinois Retail Merchants Association.
Interchange fees, sometimes called swipe or credit card fees, represent the charges by banks and other parties to process credit card transactions, delivering merchants the guaranteed cash in a timely, secure way and also billing the cardholder. They are why some merchants sometimes charge you more (typically 2% to 4%) for using your plastic, or your Apple Pay, and they are a furiously contested thing. Merchants, who pay them, want to keep them low. Banks and processing companies, who profit from them, want to keep them buoyant. This is far from chump change: The fees netted the industry some $100 billion in 2023.
In the middle are consumers, many of whom are addicted to frequent flyer miles, loyalty points, cash back, Chase points and all the other incentives that credit card companies offer to keep their customers and that are funded by those very fees, which generally are lower outside the U.S., where rewards are much less generous.
Since the pandemic, of course, credit card use has exploded and thus so have interchange fees with all the inflationary implications. Sen. Dick Durbin is an outspoken critic and has been pushing his Credit Card Competition Act, even in the face of a settlement in March between the U.S. and Visa and Mastercard, which together represent 83% of credit card usage. Durbin refers to them as a duopoly. That settlement was supposed to cap and lower fees, but Durbin said in March that it represents only “temporary concessions negotiated by a few lawyers behind closed doors.” Durbin’s act would introduce competition into this shadowy realm by guaranteeing merchants a choice of who processes their transactions. We support that idea.
But that act would be a change in the law across the whole nation. Illinois’ wee-hours intrusion into the long-running battle between retailers and the card industry makes a monumental change to the interchange-fee arrangement in just one of 50 states — more than a headache for what after all is a technologically-centered processing business meant to function nationwide.
So what does the Interchange Fee Prohibition Act say? In essence, retailers will no longer have to pay interchange fees on sales tax (which we don’t have to remind Chicagoans is inordinately high in this state) but only on the pre-tax amount of a sale. The banks, credit unions and other credit-card interests (like airlines who sell their miles or points) are howling at that, partly because of the loss of revenue but also because this threatens to massively disrupt a national system that likely will cost a small fortune to retool, for the benefit of just one state.
We don’t care that much about how the fee revenue is apportioned between private entities, as long as there is fair competition, but many of those new state-mandated costs, we are persuaded, would fall disproportionately on small businesses. Your local restaurant likely would have to buy expensive new equipment capable of partitioning off the part of the transaction (the sales tax) that would not be subject to interchange fees. This would be one more barrier to doing business successfully in Illinois, a state already rightly perceived as less than friendly to business.
Why is Illinois sowing unilateral chaos? It was an eleventh-hour carrot for retailers so that Gov. J.B. Pritzker could get them to accept a $1,000 monthly cap on the so-called retailers’ discount, which currently allows them to keep 1.75% of the sales tax they collect for the state. Pritzker figured that the new cap would bring in about $100 million for the state’s general fund. The retailers’ lobbyists hate that cap for obvious reasons, but they dropped their opposition when they figured they could claw some or all of that loss back by not paying interchange fees on the sales-tax portion.
The cap would not significantly affect very small businesses but is especially bad news for big-box stores. Those same big guys would benefit the most from not paying interchange fees on the sales tax portion because their revenues are so high they could afford any costs. Hence, they are the winners here. Any benefits to local merchants are likely be eaten up by the hassle of the changeover, which might similarly hassle consumers.
All in all, our view is the relatively modest revenue bump for the state is not worth all of these burdens on small business. In essence, Pritzker unwisely spliced two unrelated issues together: how much of the sales tax retailers get to keep to cover their collection costs (a matter of public interest since it affects state revenues) and interchange fee apportioning (a matter that should be between private entities and does not benefit the state).
We have no problem with some kind of cap, which seems reasonable given that Illinois’ sales-tax allowance for retailers is one of the nation’s most generous. We’re more impressed with how Durbin’s act introduces old-fashioned competition rather than one state sticking its nose into the second issue and messing up a national system as a consequence. Plus we fear grief, and maybe extra costs, for Illinois consumers if and when this is implemented.
Springfield should repeal this act and think again. And if the retailer hit from capping the sales tax is worth the revenue to Pritzker and company, then Springfield should suffer the unhappiness of the merchant lobby as a political price rather than passing the buck to an unrelated commercial class with less clout in the capital.
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