When President Obama addresses Congress in his final State of the Union tonight, there will undoubtedly be one topic that jumps to the forefront: keeping the country safe from, and ultimately, tamping down the threat posed by ISIS. But as it turns out, the burden of becoming a self-sustaining economy, complete with an exhaustive tax system, may work better than any cruise missile or intelligence gathering effort could in toppling ISIS.
While in the past, terrorists groups like al Qaeda have leaned on outside financial support, ISIS sees the limitations in that model. As a result, they want to control their own funding. Some of that money comes from the oil holdings in their territory ($500 million per year), as well as illegal activity like bank looting ($500 million-to-$1 billion a year), and kidnapping ($20-to-$45 million a year). But a larger amount than any of those comes from taxes.
According to the Geneva Centre for Security Policy, ISIS imposes a form of an income tax (10 percent), business tax (10-to-15 percent), sales tax (2 percent), in addition to taxing all bank cash withdrawals (5 percent) and pharmaceutical drugs (10-to-35 percent). Estimates put ISIS' tax revenue at roughly $1 billion per year, with 2014's figure closer to the $2 billion mark.
Adam Chodorow is a Professor of Law at Arizona State University's Sandra Day O'Connor College of Law. His research and teaching interests lie in tax, administrative, and regulatory law, and he told me that the biggest threat posed to ISIS is self-imposed.
"A functioning economy is certainly what ISIS is aiming for, but holding territory and running it like a state requires them to provide government services and pay for them with taxes," Chodorow said. "Ruling is boring. It's detail-oriented. It's about middle management. You need infrastructure. You need someone to collect trash, fill potholes, do record keeping. The hard part is actually making the tough decisions that government requires, and making sure the trains run on time."
So as ISIS wrestles with this governing of their territories, the question shifts to the sustainability of their model. While ISIS' billion dollars per year sounds impressive, countries of similar size collect about $16 billion, suggesting that ISIS has a long way to go if it wants to operate like a real state. And the ability to expand that internal revenue just may not be there.
Many citizens are leaving ISIS-controlled territories because of the burdensome tax structure. Others are finding ways to avoid invoking the tax (such as avoiding banks altogether, and thus, the withdrawal tax). And ISIS may even begin putting its religious legitimacy on the line by exploiting a charitable giving tax described in the Quran.
"Zakat" is a religious obligation to the poor in the Islamic faith. As part of their taxes, ISIS enforces zakat on its citizens, but Chodorow warns that the way they utilize the funds could risk disillusioning their most fervent religious supporters.
"They run the risk of outraging true Islamic believers. Zakat is an annual tax of 2.5 percent of your wealth that's supposed to be distributed to help the poor. One of the things that ISIS is trying to do is claim that their tax is simply zakat, and therefore, it's religiously endorsed and required, thus giving it legitimacy. The problem is the money is supposed to go the poor, not ISIS' fighting on behalf of the fledgling state. This has the potential to undermine ISIS' claim of religious purity. The people that follow them because they believe they're truly devout, if they begin to pervert the rules, they run the risk of losing that following."
Add it all up and you have ISIS trying to navigate some dicey terrain on their way to being a functioning state. So have these taxes caused ISIS to reach a tipping point, where they're losing favor inside its own borders? It's too soon to say.
"From the reporting, it sounds like their taxes are becoming so onerous, people are leaving," Chodorow concludes. "At some point, they run the risk of destroying whatever economy exists there, but it's really hard to know how close they are to that point."