By Leo Kantrow
Spend a few days in Chicago, and you will no doubt hear residents complain about the city’s high tax rates. But is this really an accurate assessment of the situation? When examining the sales tax rate itself, the answer appears to be a resounding “yes.” At 10.25%, Chicago’s sales tax rate is tied for number one, alongside Long Beach and Glendale, for U.S. cities whose populations exceed 200,000 (Tax Foundation 2019). It is commonly thought to be the reason for several negative local developments, from reduced business investment to increased migration towards the suburbs. For instance, consider purchasing behavior, geographically. Rather than going to the closest store, some Chicago residents do their shopping outside of the city. Why? According to Bryan Curran, a professor at Northeastern, the key is what economists call “elasticity”. “Elasticity refers to the sensitivity of the quantity demanded of a good to changes in its price. Therefore, for elastic goods, when taxes in a particular county are high, and goods are more expensive, consumers may choose to purchase less in that county, and more elsewhere, where they are relatively cheaper.”
Regardless of the scale to which that effect, and others, occur, a topic for which there is considerable debate, it is difficult to justify any reduction in tax rates at the moment. As Chicago’s pension (a type of retirement fund) crisis continues to worsen, more tax revenue will be required, not less. However, as indicated by the failure of the progressive income tax referendum in November 2020, attempts to increase tax rates are somewhat unpopular - and politically risky. So, what is the solution? According to Ralph Martire, the Executive Director of the Center for Tax and Budget Accountability, it may not have anything to do with the sales tax rate specifically. “The Illinois sales tax is primarily applied to goods, not services, unlike most other state’s sales taxes. If we expanded the sales tax base to include these otherwise untaxed services, the state would generate approximately $2 billion more in revenue per year.” Indeed, despite the relatively high sales tax rate, every year, Illinois residents spend around $200 less in sales taxes than the national average, primarily because of the smaller tax base (Center for Tax and Budget Accountability 2015).
Regardless of any future developments in the Chicago sales tax, it is clear that these sorts of tax-related issues will only continue to grow in prominence over the coming years.