Chicago adopts $16.6B budget, adds $535M in taxes
Chicago aldermen for the first time pushed through their own budget, rejecting the mayor’s effort to impose a job-killing head tax. There are other taxes.
After months of debate, Chicago’s final $16.6 billion budget passed the City Council 29-19 on Dec. 20, but without Mayor Brandon Johnson’s $82 million head tax on businesses.
The question now is whether Johnson will veto a budget that was shy the 34 votes needed to override a veto.
The plan includes $535 million in tax increases, leans on one-time revenue sources, borrowing and assumed efficiencies to close the $1.15 billion gap the city was facing.
For the first time ever, city aldermen sidelined the mayor and took control of the budget process. After rejecting Johnson’s original budget proposal, aldermen instead passed their own plan.
The aldermen’s budget backed away from some of the mayor’s more egregious anti-growth proposals, such as the head tax of $33 per employee per month on companies with at least 500 workers. But the final package continues Chicago’s over-reliance on short-term fixes and higher tax burdens, making it harder for taxpayers and businesses to grow.
Some of the adopted tax increases, such as the higher cloud computing tax, threaten to disincentivize companies from moving to or expanding operations in Chicago.
The budget includes no pay freezes, furloughs, or higher health care costs for government workers, meaning they will face no changes as the city confronts enormous fiscal problems. In fact, many government workers will see raises next year.
Johnson’s office paid $3 million to accountants from EY to come up with ways the city could save money. They identified over $1.4 billion in potential savings.
Johnson initially tried to bury the report. Despite early inclusion by aldermen of some measures, the 2026 budget passed Dec. 20 contained few of the cost-cutting proposals from the report.
What changed?
The biggest point of contention was Johnson’s proposed corporate “head tax.” City aldermen rejected Johnson’s original proposal of $21-per-employee a month fee on businesses over 100 employees, then held steady in rejecting a revised $33-per-employee a month for businesses with over 500 workers. The rejection marks yet another failure by Johnson to pass any of his proposed “progressive taxes.”
Head taxes can eliminate jobs by increasing the costs of employing workers, especially as Chicago already contends with persistently elevated unemployment levels and competition from lower-cost regions. That’s why the city eliminated its head tax in 2014.
To offset roughly $100 million in lost head-tax revenue, the budget raises the cloud computing tax from the current 11% to 15%, exceeding Johnson’s original proposal of 14%. This is the single-largest increase in the budget, generating an additional $416 million compared with 2025 revenues.
Numerous studies have pointed out these taxes are especially harmful, making it more expensive for businesses to adopt emerging technologies in the AI and quantum fields. These taxes significantly undercut Gov. J.B. Pritzker’s ambition to turn Illinois into a technology and quantum computing hub, and will likely reduce employment in this sector. Because Illinois’ technology has been growing faster than any other sector, Chicago should focus on eliminating barriers to that growth rather than increasing them.
Additional tax increases include higher video gaming and ground transportation taxes along with an increase in shopping bag fees to 15 cents per bag. The city also adopted ideas from the budget task force, including street pole advertising and augmented reality ads.
Savings, collections and pensions
The budget leans heavily on improved debt collections from Chicago residents. It was estimated Chicago has carried more than $1 billion in uncollected debt in each of the past two years. Leaders project $92.6 million in additional revenue from stepping up collections.
On the efficiencies side, the budget incorporates a few elements from a report from consulting firm EY, which the city paid to find cost-cutting measures. These include vacancy cuts, fleet modernization and better service optimization with conservative estimates placing efficiency savings at $46.6 million – shy of the over $164 million EY said was possible the first year and up to $1.4 billion over 10 years. There will also be additional personnel savings.
One positive development is the aldermen’s decision to make the full advance pension payment to cover rising pension costs, reversing the mayor’s earlier proposal to reduce the payment by $120 million. This is a responsible decision that avoids undermining recent progress, especially considering Chicago has the worst-funded local pension systems in the nation.
Even a full advance pension payment is not enough to cover what actuaries say is necessary to reduce the debt. Considering recent legislation that spiked pensions for the city’s police and fire retirees, putting both systems close to insolvency, it’s important that further steps be taken to reduce pension liabilities for the city.
What taxes and risks remain?
Several tax increases proposed by the mayor remain in place, including those on sports betting, hemp products, social media, rideshares, yacht mooring and mortgage renewals for vacant buildings.
The budget relies on a record $1 billion in tax increment financing fund sweeps. While this will enable Chicago Public Schools to pay its disputed $175 million pension reimbursement, reliance on fund sweeps fails to resolve the city’s underlying structural deficits.
Finally, the city will be issuing nearly $450 million in new debt to help cover costs for its recently signed firefighters’ contract and legal settlements. The city’s bond ratings are already near rock bottom and this plan will likely see S&P lower it even more, with the firm citing overuse of one-time fixes for structural challenges.
Conclusion
While removing the head tax and preserving full advanced pension payments are responsible steps that help limit economic and financial damage, Chicago’s 2026 budget remains overly dependent on burdensome taxes that harm economic and job growth, borrowing and one-time fixes. Spending continues to grow at an unsustainable pace, and personnel costs remain too high.
Concerns have also been raised about whether the revenue assumptions are overly optimistic. Budget Director Annette Guzman and Chief Financial Officer Jill Jaworski have warned this plan would still fall $163 million short under more conservative estimates.
Future budgets will need to amend this with deeper operational reforms, including possible budget caps, cutting down on department spending and pension reform such as extending buyout options. Otherwise, the city’s finances will deteriorate farther, leaving taxpayers poorer for city leaders’ failures.