The Tax Chicago Should Scrap

September 6, 2023

The Cloud Tax is doubly averse for Chicago businesses

When it comes to taxation, the City of Chicago has few rivals. When compared to other cities across the nation, Chicago typically ranks at the very top for imposing burdensome taxes on businesses and residents.

A city which taxes every possible commodity or activity within reach, Chicago taxes vehicle fuel, places a surcharge on 911 calls for both wireless and landlines, and levies taxes on, amongst other goods, natural gas, liquid nicotine products, the leasing of vehicles. Chicago even places a special tax on food and beverages for businesses which fall within the boundary of the Metropolitan Pier and Exposition Authority district.

A city with a ruthless tax code, for 2023, Chicago is on par with four other American cities for its suffocating sales tax, which rests at 10.25 percent. Chicago also competes rather well with other major U.S cities on its commercial property taxes. The second-highest rate in the nation at 3.78 percent — more than double the U.S. average for the largest cities in each state — to illustrate the extortionate tax rate for property in Chicago, Willis Tower paid a whopping $50 million in property taxes in 2022.

Chicago residents who are subject to property taxes do not fare well either. Though the household income is $65,781 per year, Cook County residents are forced to pay 6.697 percent annually, the median of which is $5,605. Property taxes soared in early 2023, with some Cook County residents grappling with increases of 100 percent or more. With 80 percent of property taxes collected in 2022 devoured by an increasing pensions bill, residents can expect further real estate tax increases to satisfy pension obligations along with a variety of new taxes to meet Mayor Brandon Johnson’s call for new spending on social programs.

While mayors and aldermen of yore have enforced some onerous levies — laying stifling taxes on all manners of business and commodities — one tax is distinctive for its weight on business in Chicago, the city “Cloud Tax.”

A tax rooted in two decisions rendered by the city’s Department of Finance in 2015, Chicago expanded existing law to permit the application of taxes on online services under Chicago’s Personal Property Lease Transaction Tax and the Amusement Tax. Information services are known as software as service (SaaS), platform as a service (PaaS), and infrastructure as a service (IaaS).

Under the ruling, the “Lease Transaction Tax,” was broadened to levy information or data which has been compiled, entered, and stored on a provider’s computer. Similarly, the “Amusement Tax,” was extended to tax streaming services for music, movies, games, as well as satellite TV delivered to customers in Chicago.

While both the “Amusement Tax” and the “Lease Transaction Tax” were recorded as law decades ago, the rationale behind the Department of Finance’s 2015 decision to reinterpret the ordinances was online services had taken the place of traditional street-side business. As information services grew, some brick-and-mortar businesses vanished after failing to compete against the digital economy. As physical stores disappeared, property tax revenue began to fall.

Though the original rate imposed was 5.25 percent, in the hot pursuit of more revenue, Chicago has twice raised the rate to 7.25 percent in 2020 and again to nine percent effective January 1, 2021. Though the Cloud Tax raised a paltry $39 million in 2017, the combined revenue collected from the digital tax after two rate increases was $120 million in 2021.

A cut or elimination of the cloud tax could help spur a recovery to business and the retail industry

There are ample reasons for cutting or repealing the Cloud Tax. First, it is decidedly anti-business. There is a general sense Chicago is in crisis. Though many factors contribute to Chicago’s spiral of decline — hopelessly broken schools and the growth of crime — crippling taxes aggressively targeting businesses only serve as another catalyst for corporations, mid-sized enterprises, or small businesses to retreat from the city.

Second, the Cloud Tax exacts a staggering toll on retail businesses. Although some retail firms successfully maneuvered through competition presented by the rise of online shopping, Chicago retailers were forced to endure another harsh ordeal inflicted by the effects of COVID-19 and numerous stores shuttered. Unfortunately, the pace of the recovery from the pandemic has been excruciatingly slow.

The sluggish pace of retail redemption has been broad: The retail vacancy rate in the Loop alone hovered around 28 percent as of February 2023, which rose from 27.4 percent at the end of 2021. A high from 2004 when the vacancy rate reached 18.2 percent, the retail vacancy rate has doubled since 2019. Combine the acute menace of retail theft with the repercussions of COVID and the Cloud Tax and the damage wreaked on retail businesses increases manifold.

Third, the combination of a Cloud Tax and FICA tax is particularly punitive on businesses. It is often overlooked businesses are compelled to pay the payroll tax: Federal income tax withholding, employee's Medicare tax, and employee's Social Security tax. When employees are faced with surging taxes, the demand for higher wages emerges. As wages rise, payroll taxes increase.

Last, the Cloud Taxis a tax on productivity. Businesses which wield SaaS systems do so to enhance efficiency. For businesses in Chicago to be beset with the Cloud Tax — and its high rate — discourages employers from using the SaaS service and forces employers to shift a higher workload to employees. The result of the additional assigned work is longer hours to complete tasks which would ordinarily be simplified by using the SaaS service. The outcome is depressed productivity and business owners forced to increase costs on their products and services.

The highest form of efficiency for business is the spontaneous cooperation between business owners and the City of Chicago. While all municipalities are required to raise revenues through taxation, Chicago is swiftly approaching the outer limits of its ability to raise taxes. With Chicago suffering from an exodus of business owing to burdensome regulations and taxation, further taxes will only drive businesses and wealthier residents out. Where will these businesses and residents wind up? Predictably, they will relocate to suburban Chicago or move out of state. A move which reveals business owners and residents are highly responsive to tax policy, the exodus further shrinks the Windy City's tax base.

The challenge for Chicago’s leaders today is to focus on a long vision. By most measures, the revenue raised from the Cloud Tax is trifling. A city which in 2022 passed a $16.4 billion budget, the yield from the Cloud Tax amounts to less than one percent of all tax revenue raised. Though a cut to or an elimination of the Cloud Tax would lower if not erase one of the city’s funding mechanisms, the tax is keeping many companies and talented businesspeople from both living in and doing business in Chicago.

Chicago lawmakers have a vested interest in keeping wealth generated in the city in Chicago. To do so, and to address one of the broad set of challenges the city faces, cutting or doing away with the Cloud Tax would make Chicago an attractive place to open a business, enable existing businesses relying on information services to flourish, and help place Chicago back on a path toward prosperity.

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