The ISIS economy just got a huge boost

The US is trying to choke off the Islamic State's revenue streams in Iraq and Syria. But the biggest slice of the ISIS budget may come from taxing the "Caliphate's" captive population, a source of wealth for the group that's harder for international actors to control.

While it's almost impossible to know the exact breakdown of the Islamic State's balance sheet, experts estimate that its biggest source of revenue is taxation. This means that its seizure of the ancient Syrian city of Palmyra and the Iraqi provincial capital of Ramadi could give the group's funds a big boost since both cities still have civilian populations.

The US has been targeting ISIS' oil revenues and donations from "overseas benefactors." But that still leaves ISIS free to collect millions in taxes, The Wall Street Journal reports.

The Islamic State (also known as ISIS, ISIL, and Daesh) has claimed territory across Syria and Iraq, forcing those who stay in those areas to pay taxes to the jihadist militants, sometimes in return for government-like services.

For example, sources in Palmyra, the ancient Syrian city Islamic State militants overran in May, told The New York Times that after executing perceived enemies, the group fixed the city's power plant, turned on the water pumps, and handed out free bread.

This is all part of the group's long-term strategy to gain a foothold and establish authority in the areas it claims to govern. ISIS wants to create an implicit social contract with those living in its self-proclaimed "caliphate," or an Islamic empire that aims to unite the world's Muslims under a single religious and political entity.

By collecting taxes from residents and providing civil services in return, ISIS appearst to behave like a government, creating a greater sense of legitimacy for the group's rule. But there's a thin line between taxation and extortion in the Islamic State.

"ISIS makes most of its money from plunder," Jonathan Schanzer, vice president for research at the Foundation for Defense of Democracies, told Business Insider in May. "We're seeing that over and over again. They go from one town to the next and knock over a bank or several banks and go house to house and extract whatever is of value."

"It's a racket," Schanzer said. "And that's how ISIS continues to survive and thrive."

Analysts at the nonprofit RAND Corporation estimated that in 2014, ISIS raked in $600 million from extortion and taxation and $500 million in money stolen from Iraqi banks.

In addition to giving ISIS added legitimacy, this fundraising strategy helps to sustain the group financially so it can continue its rampage across the Middle East.

ISIS also makes money from looting and selling antiquities on the black market, and Palmyra is known for its ancient ruins and museums.

Schanzer noted that the porous border between Turkey and Syria could make it difficult to police smuggling.

"You've got these fairly lawless borders, borders that have been exploited repeatedly," Schanzer said. "So the assumption is that we've got easy smuggling routes [to bring] illicit goods over the border."