Chicago ranks No. 2 in the nation for combined state and local sales tax

The Windy City tied with four other major cities as imposing the nation’s second highest sales tax on residents among 124 considered. The report warns the city’s new status could be costing Chicago businesses their competitive edge.

The city of Chicago ranks No. 2 in the nation among major cities for combined state and local sales tax rates, according to a new report.

The Tax Foundation study indicates these higher sales taxes are driving consumers away from Chicago businesses and into neighboring suburbs.

Chicago tied with four other major cities as imposing the nation’s second highest sales tax burden (10.25%) on residents as of July 1. Seattle and California cities Fremont, Long Beach and Oakland rounded out the second-place spot.

Tacoma, Wash., claimed No. 1 at 10.30%. Anchorage and Portland tied for the lowest sales tax rate at 0%.

The national study found that sales tax avoidance is most likely to occur in areas with a significantly different sales tax rate than neighboring jurisdictions.

This means major cities with higher sales taxes than surrounding areas are more likely to see an increase in online and cross-border shopping as residents look to avoid paying steep rates.

Given Chicago levies sales taxes on residents’ more than 25% higher than nearby cities such as Naperville or Wheaton, where rates are 7.75% and 8% respectively, those residents stand to save a lot by shopping elsewhere.

The Tax Foundation research further indicates consumers can and are traveling from high-rate areas to make major purchases in low-rate markets.

This isn’t a new phenomenon. Evidence from a 2008 Chicago Tribune report found that Chicago-area residents tend to purchase big-ticket items like cars in surrounding suburbs or online rather than from city businesses.

Not only does this put Chicago businesses at a competitive disadvantage compared to suburban retailers, but the city’s reliance on sales taxes raises the threat that decreases in that revenue will mean tax increases to offset losses.

State lawmakers already passed Public Act 101-0604 in 2019, a law requiring remote retailers and marketplace facilitators, such as Amazon and Walmart, to collect state sales tax on residents’ online purchases.

An amendment later that year expanded the law, mandating online business also collect local taxes for online purchases based on the delivery destination. That law went into effect Jan. 1, 2021.

Chicagoans have felt that pain more than most after the city passed a budget that included a $94 million property tax hike. Mayor Lori Lightfoot herself described as “likely the most painful budget we have ever faced.”

But forcing city residents—many already struggling economically from the effects of the pandemic—to pay more won’t fix the root cause of Chicago’s budget issues or stop the steady climb of city taxes.

Chicago leaders must address the unsustainable growth in pension costs that has led to annual shortfalls in city funding and prevented the city from passing a balanced budget since 2003, otherwise residents will face continued tax increases.

Pension obligations consumed 15 cents of every dollar the city of Chicago spent in 2021. By 2023, those city obligations will be $1 billion higher than they were when Lightfoot took office in 2019.

There is a solution that would reduce the exponential growth of Chicago’s pension costs to a sustainable rate while guaranteeing the current benefits of pension recipients.

Research from the Illinois Policy Institute shows an amendment that protects already-earned benefits but allows changes to their future growth rate could enable balanced pension reform.

The amendment would give Chicago leaders several options to reduce the city’s standing obligations, including pegging automatic annual benefit increases to inflation, raising retirement ages for younger workers, placing a cap on pensionable salary, and suspending annual cost-of-living increases to allow inflation to catch up to past benefit growth.

For nearly two decades, city leaders have demanded Chicagoans pay higher and higher taxes to fund the unsustainable benefits they promised to special interest groups. In return, Chicago businesses are becoming less competitive while city spending on core services has been diverted to support pension payments.

If residents want to prevent Chicago from reclaiming the No. 1 rank for combined state and local sales tax, city leaders will need help from their counterparts in Springfield, who are the only lawmakers with the power to fix Illinois’ state and municipal pension crisis.