City Income Tax/Occupational Privilege Tax (Head Tax)

City Income Tax: The City does not currently impose an income tax or occupational privilege tax on
residents or workers in Chicago.

Background
The City does not impose an income tax on residents or workers in Chicago. All residents of Illinois,
including Chicago residents, are subject to State and Federal income taxes. The Federal income tax is a
progressive income tax. The Illinois income tax is a flat tax, with an individual income tax rate of 4.95%
and a corporate income tax rate of 7.00%. A portion of these State income tax revenues 6.06% of
individual income tax revenue and 6% of corporate income tax revenue flow into the Local
Government Distribution Fund (LGDF), from which municipalities are paid their share of state income tax
revenue based on population. Prior to passage of the Illinois FY 2018 budget, the individual and
corporate income tax rates were 3.75% and 5.25% respectively and allocation to the LGDF from
individual and corporate income tax receipts were 8.00% and 9.14% respectively.

Over the past five years, revenue to the City from the State income tax has been impacted not only by
fluctuations in the economy, but also by changes in the State income tax rates and the portion of
revenues that the State allows to flow into the LGDF. Since 2012, revenue to the City from the State
income tax has ranged from $245.2 million to $286.5 million, with a 2017 year-end estimate of $250.0
million. Additional information on the share of State income taxes received by the City and revenue
history for these taxes can be found in the 2017 Annual Financial Analysis.
[https://chicago.github.io/afa-2017/]

Revenue Impact
Setting aside the legal issues discussed below, there a number of forms and structures that income taxes
can take. The following are estimates based on a few simple scenarios, including the concept of taxing
only commuters (e.g. non-resident employees).

Based on recent population and income data, it is estimated that a flat income tax on all workers in the
city at 0.5% could produce an estimated $420 million; if this was applied only to commuters, it could
produce an estimated $170 million. If the first $50,000 in income was exempt from the tax, a 0.5% tax
could produce an estimated $190 million; if this was applied only to commuters, it could produce an
estimated $90 million.

Legal Authority
Imposing any tax on income would require a change in state law, as the City does not have authority to
impose any tax "upon or measured by income or earnings or upon occupations." [Ill. Const. 1970, Art. IV,
Sec. 2.]

Even if the State authorized the City to implement an income tax, there are constitutional hurdles to
making that tax structure progressive the Illinois Constitution limits Illinois governments to imposing a
flat income tax. [Ill. Const. Art. IX Section 3(a).]

In addition, there are both U.S. and Illinois constitutional hurdles to taxing only commuters both
Constitutions restrict the targeting of a specific group of people to raise revenues, such that the City
could not impose an income tax on non-residents but not residents, nor could it impose an income tax at
a higher rate on non-residents than on residents. [See, e.g., Toomer v. Witsell, 334 U.S. 385, 396 (1948);
City of New York v. State of New York, 94 N.Y. 2d 577 (2000); City of Elgin v. Winchester, 300 Ill. 214, 216-
7 (1921).] It is possible that some kind of a fee could be levied if it were tied to specific, higher costs
associated with commuters. This would require conducting a study in order to demonstrate what those
costs are, and then basing any fee closely upon those higher costs. Such a fee would also require a
change in State law. See, e.g., Commercial National Bank v. City of Chicago, 89 Ill. 2d 45 (1982).

Other Cities
New York City imposes an income tax on all residents of the city, with a progressive rate ranging
from approximately 2.907% to 3.876%.
Most other cities that impose an income tax apply the tax to all wages earned in the city, such
that the tax applies to both resident and non-resident workers. For example, among the 12
largest municipalities in Ohio, each imposes an income tax rate ranging from 2.00% to 2.75%.
In San Francisco, a 1.5% income-based tax is imposed on the employer.
A number of jurisdictions impose a higher tax on resident workers than non-resident workers,
including counties in Indiana and Maryland and the city of Philadelphia, which imposes an
approximate 4% income tax on residents and an approximate 3.5% income tax on non-residents.
No major city charges a tax only on non-resident employees.

Income Tax Alternative Occupational Privilege Tax (Head Tax)

Prior 2012, the City applied a $4.00 per employee per month employer expense tax on all businesses
that employed 50 or more full-time workers or employees that performed 50.0 percent or more of their
work in the City of Chicago per calendar year. The tax was applied to incomes greater than $4,300 per
calendar quarter.

Beginning July 1, 2012, the City began to phase out the employer expense tax and reduced the tax from
$4.00 per month to $2.00 per month. The tax was eliminated January 1, 2014. Prior to its phase out,
the tax generated revenue averaging approximately $24.0 million annually.

The table below outlines similar taxes in other municipalities:

City/State Tax/Comments
Denver, CO Employee$5.75/month (income over $500/month)
Employer $4.00/month/taxable employee
Seattle, WA All licensed businesses in the City must pay a tax on all
gross revenues in excess of $100,000. Rates vary by type
of business.
San Francisco, CA Businesses in San Francisco pay business taxes based on
gross receipts which includes amounts from sales,
services, property dealings, interest, rent, royalties,
dividends, licensing fees, other fees, commissions, and
distributed amounts from other business entities.

Legal Authority
A fee charged per employee working in the City falls under the Citys home rule authority and would
require amending the municipal code.