Progressive tax paves way for city income taxes

October 22, 2020

Chicago Mayor Lori Lightfoot has not ruled out a local income tax to close city’s nearly $1.2 billion budget hole

PRESS RELEASE from the
ILLINOIS POLICY INSTITUTE

MEDIA CONTACT: Melanie Krakauer (312) 607-4977

Progressive tax paves way for city income taxes
Chicago Mayor Lori Lightfoot has not ruled out a local income tax to close city’s nearly $1.2 billion budget hole

CHICAGO (Oct. 20, 2020) – Cities and towns around the state could turn to local income taxes if Illinoisans choose to adopt Gov. J.B. Pritzker’s progressive tax hike on Nov. 3, according to an analysis from the Illinois Policy Institute.

The Illinois Constitution currently allows home-rule cities to impose local income taxes, with state lawmakers’ approval, although no cities currently collect them. Targeting income brackets one at a time could make a city income tax politically easier for state lawmakers to support. But progressive city income taxes would ultimately endanger the middle class.

In Chicago, the concept has been floated before. Mayor Lori Lightfoot faces an estimated city budget deficit of nearly $800 million for the 2020 fiscal year, and $1.2 billion for the 2021 fiscal year. Meanwhile, annual pension payments are rising by $134.1 million. Lightfoot has already requested approval for a progressive real estate transfer tax.

Illinois Policy Institute researchers say municipal leaders in many Illinois cities – including Peoria, Springfield, Alton, Kankakee, and Danville – are under similar fiscal strain.

What a city income tax could look like:

  • Initially, the proposed progressive tax amendment prohibited local income taxes. Lawmakers removed the language: “No government other than the State may impose a tax on or measured by income.” Without that language, residents have no protection from local income taxes if the progressive tax passes.
  • With progressive taxes, Chicago could implement graduated tax rates similar to New York City, with a bottom rate of 3.078% for individuals earning less than $12,000 per year and a top local tax rate of 3.876% for individuals earning more than $50,000.
  • 87% of municipalities face significant revenue shortfalls in 2020, according to an Illinois Municipal League survey. Article VII of the Illinois Constitution allows home rule units of government to impose a local income tax with the approval of the General Assembly, but the requirement that taxes be at the same rate for everyone has prevented that.
  • Historically, several groups have called for a city income tax. The Action Center on Race & the Economy, or ACRE, proposed a 3.5% Chicago city income tax on households with income over $100,000.

Adam Schuster, senior director of budget and tax research at the nonpartisan Illinois Policy Institute, provided the following statement: 

“Illinoisans should be aware that stripping the Illinois Constitution of its flat tax protection could have far-reaching effects that would decimate communities: a progressive city income tax as a quick fix to cash-strapped budgets and an economic crisis. We’ve seen what happens when city leaders get access to new revenue streams – the middle class suffers.

“Adding city income taxes to Illinoisans’ already high tax burden would damage struggling municipalities by dampening economic growth and job creation, driving out residents and making it even harder for small businesses to recover.”

To read more about city income taxes, visit: illin.is/citytax.