Chicago has the highest sales tax in the nation at 10.25 percent, and it would be right for taxpayers to assume this all goes to public funds. But a little-known law, now in the spotlight, gives 1.75 percent of Illinois sales tax back to retailers, amounting to $126 million a year, more than any other state, according to a study done by Good Jobs First, a Washington D.C.-based research group.

The study shows that 26 states offer retailer compensation, and 13 of these states have caps on the amount they return. As Illinois returns 1.75 percent with no cap, the state pays retailers back more money than any other state that participates in similar programs. Wal-Mart receives about $8.5 million annually in compensation.

In January, Illinois Sen. James Meeks (D-Calumet City) introduced a bill to end these sales tax diversions and redirect the funds toward education. With Wal-Mart hoping to build half-a-dozen more stores in Chicago (currently the only one is on the far West Side), and the recession decreasing tax revenues, this plan seems to be a worthy solution to covering the state deficit.

The original function of the retailer compensation was to reimburse corporations for accounting costs due to collecting sales taxes, but with developments over recent years to computerize the accounting processes, the expenses aren’t as much as they used to be, according to Progressive States Network, a left-of-center group supporting state legislative campaigns.

David Vite, president and CEO of the Illinois Retail Merchants’ Association, opposes this proposal and told Chicago Business, a Crain’s publication, the compensation only accounts for part of the collection costs.

But returning money to retailers for collecting sales tax makes about as much sense as returning money to people just for the act of filing their own income taxes.

One problem that might occur if the entire revenue stream is cut would be the resulting harm to small businesses. A simple way to solve this problem would be to implement a cap on how much can be compensated. Florida has a cap of $30 per month per location, while Arizona caps it at $10,000 per year. If a cap were implemented on Illinois, it would maintain support for small businesses while retaining a large portion of taxes from larger companies.

With Illinois facing a budget deficit of $9 billion, creative solutions for revenue are necessary. Retaining sales tax that would just be funneled back into large franchises like Wal-Mart is a perfectly reasonable solution.