As Mayor Brandon Johnson looks for new revenue, an income tax may be one of the city’s only progressive options. It comes with risks.
Mayor Brandon Johnson’s transition report published last week is full of ideas for the city to spend money: create a Department of Neighborhood Equity and Repair, reopen mental health clinics, build up a nonpolice emergency response system and more.
Absent from the 224-page report are any proposals for how the city can raise more revenue.
“We discussed specifics of the mayor’s tax policy … but did not reach consensus,” the report, published by his transition team, reads. “Ultimately, we reached agreement that the mayor should work to grow the tax base and reduce the reliance on property taxes.”
Johnson promised during the campaign to raise $800 million in new revenue, all without touching property taxes, which are typically how cities come up with the money they need in a pinch.
But with ideas like a financial transactions tax and a business head tax already hitting roadblocks in Springfield and the City Council, some supporters say an income tax on high earners may be one of the mayor’s only remaining options for raising significant revenues.
Johnson has not endorsed a city income tax. But a plan backed by many of his allies and supporters would levy a 3.5% tax on all household income above $100,000. Supporters say it could generate more than $2 billion in new revenue for Chicago, all without hitting its poorest residents or touching property taxes.
Such an effort would surely face major hurdles, including the need to change state law that would almost certainly face heavy pushback from business interests.
While local income taxes are unprecedented in Illinois, they’re common across more than a dozen states. Cities from New York to Kansas City to Birmingham have figured out sustainable ways to scrape income taxes from the people who live and work in their borders.
Income taxes in other American cities
Local income taxes are legal in 15 states, with six relying on them as a “significant source” of local revenues, said Katherine Loughead, a Washington, D.C.-based tax policy analyst. They are Maryland, Kentucky, Ohio, Pennsylvania, New York and Indiana.
Each city sets its rates and collects the taxes differently.
New York City has levied a tax on personal income since 1934. Its graduated income tax between 3% and 4% was budgeted to collect more than $17 billion in 2023, representing more than 15% of the city’s overall revenue. The tax is imposed on anyone who spends more than half their days in one of the five boroughs in a given year.
But New York, where state income tax ranges between 4% and 11% depending on each payer’s income, is an outlier because most of the other states have relatively low state income and property taxes, Loughead noted.
Pittsburgh, for example, collects a 3% tax on everyone who works in the city, with most of the money going to the local school district. The city collected about $111 million from income taxes in 2021, compared to about $152 million from property taxes. On top of those charges, Pennsylvania charges a flat 3% tax rate on individual income.
Columbus, Ohio, relied on its 2.5% income tax for most of the general fund revenue counted in its 2022 operating budget. Ohio levies a graduated tax rate between 2.8% and 4%.
Both states are dwarfed by Illinois’ across-the-board 4.95% rate.
“In Chicago, where taxes are very high already, you’d have to consider the total aggregate burden that residents would face” from a city income tax, Loughead said. “It may not be as pronounced in some of these other states.”
Chicago is budgeted to levy about $1.7 billion in property taxes this year, with most of the money paying directly into the city’s cash-starved pension funds. City officials expect to reap just over $90 million in sales taxes for the year.
The case for a Chicago income tax
Johnson has promised to raise massive new revenues without hiking property taxes or piling on fines and fees — a herculean feat given the Illinois Constitution bans multi-tier taxation, in which people are taxed differently based on their incomes.
“An income tax is one of the few ways we would be able to have a tax that’s truly progressive,” said Saqib Bhatti, a member of Johnson’s transition team and co-executive director for the Action Center on Race and the Economy.
Bhatti co-authored a May report that offered ideas to produce billions of dollars in revenue and cost savings. Johnson downplayed the report after it made waves for a host of ideas — like the income tax — that had not been included in his campaign platform.
Citing census data, Bhatti’s group predicts that a 3.5% income tax on high earners would bring the city $2.1 billion, which includes $1.6 billion from city residents and more than $400 million from commuters.
Bhatti said a progressive Chicago income tax could skirt Illinois’ ban on progressive taxation by setting a uniform 3.5% rate but exempting the first $100,000 of each household’s income. According to the Chicago Department of Housing, $100,000 is approximately the median household income for a Chicago family of three.
In Chicago, “we’re almost entirely dependent on property taxes and sales taxes,” said Bhatti. “The sales tax is extremely regressive. And a property tax is also regressive because … it’s a wealth tax focused on the type of wealth that working class people are more likely to have.”
The case against a Chicago income tax
Most cities rely mainly on property taxes for good reason, said Loughead, who is a senior analyst at the nonpartisan think tank The Tax Foundation.
“Property taxes are really economically efficient — there’s less ability to avoid them” than other taxes, Loughhead said. “Even if someone decides the taxes are too high and moves out of the area, someone else is likely going to move in.”
She added that sales taxes are also reliable because people continue to spend money on essentials during recessions, while incomes tend to fluctuate, especially for higher earners. States like New York and California, whose budgets rely heavily on high-end income taxes, often run into deficits when the stock market ebbs.
Critics from groups like the right-leaning Illinois Policy Institute pounced on the May report, arguing that a local income tax would be “devastating for Chicago’s economy” and drive middle class residents out of the city. The group claims Bhatti’s revenue estimates are too high and notes that the exemption of income up to $100,000 would still ensnare more than one-third of Chicago households.
But Bhatti pointed to Chicago suburbs like Evanston and Oak Park that are financially stable and growing in population despite having significantly higher property taxes than Chicago. Chicago property owners were charged a composite tax rate of about 6.7% for the 2021 tax year, compared to 8.9% in Evanston and 12.5% in Oak Park, according to the Cook County Clerk’s Office.
“People don’t choose where they’re going to live based on the tax rate. They choose based on the quality of life,” Bhatti said. “We’re talking about improving people’s quality of life by paying a little more in taxes.”