June 04, 2025
The following is testimony delivered by Civic Federation President Joe Ferguson to the Chicago City Council Subcommittee on Revenue at a June 3, 2025 subject matter hearing to discuss maintaining Grocery Tax in City of Chicago, as well as revenues requiring state action including Sales Tax on Services, Local Government Distributive Fund, and Personal Property Replacement Taxes. The original testimony has been edited slightly for publication.
Earlier in 2025, the Civic Federation in partnership with Chicago Metropolitan Agency for Planning (CMAP), the Center for Tax and Budget Accountability (CTBA), and Illinois Economic Policy Institute, released a report calling for the State of Illinois to recalibrate our generationally outdated sales tax system that through its disproportionate weighting on goods puts Illinois and all of the units of government that rely on sales taxes out of alignment with our economy and at a comparative disadvantage to peer states. To put a fine point on it, our sales tax system is constructed for the economy as it existed in 1960, and because of that, it is burdensome, regressive, and fails to meet the funding needs for the services our city and region require.
Right now, the State levies a 6.25% sales tax on goods, of which 5% goes to the State budget, with the remaining 1.25% remitted to local governments. Counties, municipalities, and other local government entities can also levy sales taxes to produce revenue. Here in Chicago, our combined sales tax rates total 10.25%, with the additional 4% above the state levy set by the City (1.25%), Cook County (1.75%), and the Regional Transit Authority (1.0%). However, the sales tax system in Illinois primarily targets goods. Although the State and City levy a handful of separate taxes on individual services, these taxes are inconsistent and limited to a small subset of consumer services. Two datapoints help highlight why this matters. Of the 176 possible categories of services that might be the subject of a sales tax, Illinois taxes only 29, compared to the national average of 58 among the other 46 states with a general sales tax. Second, in 1960, the sale of goods was 70 percent of our spending, while today it is down to about 50 percent. This means that we tax a narrow base that is steadily shrinking.
By not taxing services generally, the City is forced to rely on a distortionary sales tax structure, leading to three problems. First, the City’s sales tax rate – that 10.25% - is one of the highest in the country. That’s a bad look and a worse reality for consumer and business behavior. Second, the higher rate does not translate to a correspondingly large amount of revenue for the City and other local governments because the application of the tax doesn’t align with modern consumer activity.
Third, and of special concern for Chicago, the sales tax is unmindfully regressive. Lower-income households spend a much higher share of their income on taxable goods, while higher-income households spend more of their income on discretionary, non-taxed services. By taxing goods and not services, we place a disproportionate share of the sales tax burden on low-income earners.
CMAP and the CTBA estimates show that a sales tax on services might generate as much as $127 million for the City. However, a sales tax expansion will all but necessarily (and appropriately) include exemptions and likely would be paired with a rate reduction, which would significantly decrease that number. However, expanding the sales tax base to include services would make our tax structure more progressive and sustainable over the long term, which is why the Civic Federation believes such a move should be studied for implementation.
At a moment when there is urgency to find more revenue, there are a couple of important caveats we would like to stress.
As a matter of policy, the Civic Federation would urge both the City and the State to consider reducing the overall sales tax rate as part of a package to expand the tax base to more services. A sudden expansion of the base will significantly increase the sales tax burden, and a rate reduction could go a long way towards softening the blow. The rate should be sufficiently reduced to keep revenue constant while expanding the base. From that starting point, sales tax revenue would grow gradually and sustainably in the future.
Second, as a matter of process, we want to caution the members of this committee that a sales tax on services is not an immediate fix to Chicago’s revenue problems. Sales tax reform is not a magic wand that will overnight solve problems that were decades in the making. Such a tax will require a statewide impact and comparative analysis, followed by legislation from the State. Passing such a bill will be anything but easy. To be clear – no area of politics is more inviting to special interests than this debate. There are 176 different categories of service, which means that 176 different groups will be lobbying in Springfield for exemptions. Even once legislation is passed, service providers and vendors will have to be notified of the policy change and given time to acquire the necessary equipment and expertise to comply with the law. So, when we are talking about City revenue from an expanded sales tax, we aren’t talking about revenue for the coming fiscal year, or likely even the one after that. Optimistically, we might expect increased sales tax revenue within three years of legislation being passed.
Turning to the Local Government Distributive Fund (LGDF) and Personal Property Replacement Tax (PPRT), we see a similar issue. It can be argued that both sources ought to provide more funding to municipalities like Chicago. The ratio of funds provided under the LGDF used to be 10% of individual income tax revenue and is now only 6.5%. However, that rate was only lowered when the overall income tax rate was increased, which has kept disbursements to the City of Chicago relatively flat. PPRT revenue is intended to be disbursed directly to local governments, but the State has diverted increasing amounts of it to State expenditures in recent years. However, the State just passed its budget bill a few days ago and is unlikely to be willing to amend it to provide more revenue to Chicago. As with the sales tax on services, if the City wishes to see additional revenue streams from the State, it will have to think long-term, meeting with lawmakers in advance of next year’s budget to secure future revenue.
Moving on to the topic of the grocery tax. The 1% tax on groceries is estimated to yield about $73 million for Chicago in 2026. Opponents of the grocery tax frequently target it for its regressivity. As with other goods, lower-income households spend a far higher share of their income on groceries than wealthier households. However, many of the lowest-income Chicagoans benefit from the SNAP program, which is already tax-exempt. However, middle-income households still feel a much higher burden from the grocery tax than higher-income households. Thus, the grocery tax may not be as regressive as it seems to be on the face, but it also surely is not progressive. I also wish to note here that the budget bill currently under consideration in Congress would, if passed, enact significant cuts to SNAP, which could change the incidence of a grocery tax in 2026. I hope that Council members will keep that possibility in mind when considering this tax.
The common thread between these revenue options is that they require forward thinking and much more collaboration with the state. Because our tax systems are uncalibrated to economic growth, local governments in Illinois are forced to rely primarily on high property taxes. This all points to the need for a recalibration of our tax policy in this state and coordination between Chicago and the State at the highest levels of leadership.
Revenue sources such as the PPRT and LGDF are essentially zero-sum. Leveraging these sources further for the City would result in commensurate reductions in revenue for the State of Illinois. Although the State is unlikely to relinquish revenue with nothing in return, the City’s desire for increased State support could be the foundation of a larger, and we believe, critically necessary, realignment of Illinois’ tax structure. Like the sales tax system itself, the larger tax structure is outdated and distortive, and this moment of budget pressures statewide calls for a long-term reset of revenue streams. To achieve this, the City must work with the State and other local governments to negotiate a more balanced tax structure that provides local governments with multiple self-controlled streams of revenue as well as robust State support. In addition to the sales tax reset being discussed, the elephant in the room is the property tax system, which, while conceptually progressive, is regressive in implementation and unduly burdensome because so many units of local government must disproportionately rely on it to sustain core operations.
Apart from the grocery tax, the revenue options up for discussion today have lengthy implementation timescales, meaning that the city needs to be doing the work now to have any meaningful prospect of accessing new potential revenues a couple of years down the line. Given the structural deficit Chicago faces, it is unlikely that our budget problems will be gone in a year or two, so the long-term planning and conversations with Springfield must be fully engaged now and include engagement of the senior-most elected officials. In the meantime, the City must equip itself to find other structurally-oriented solutions to its deficit challenge, rather than the at-the-margin with a lowest-hanging fruit orientation that has too often been the heart of past practice every time budget season approaches.