How flawed tax policy created Chicago's 2025 budget crisis

The New Year arrives in less than 30 days, and with it the city’s next budget. But as things stand today, there is no budget for Chicago to implement come 2025. Meaning there’s no plan that details how much money Chicago will spend, on which specific services, covered by which specific revenues. To be clear, enacting an operating budget is the single most important responsibility elected officials have.

According to Captain Obvious, that makes it crunch time for Mayor Brandon Johnson and the City Council to reach a rational budget deal to ensure essential services aren’t compromised.

For that to happen, egos and harsh rhetoric need to be put aside. Which should be doable, if for no other reason than Chicago decision-makers find themselves in this precarious position due in large part to the confluence of factors that have developed over time, and can’t really be blamed on anyone in particular.

Key among these factors is the poor overall design of the revenue system that feeds Chicago’s primary operating budget — the corporate fund — which covers the core services people rely on the city to provide, like police and fire protection, streets and sanitation, mental health supports, and social services.

The problem is the city’s mix of corporate fund revenue sources typically doesn’t grow with the economy over time. Consider that current projections are the nation’s gross domestic product will expand by a healthy 2.7% during calendar year 2024, which is deemed strong growth by the vast majority of economists, and exceeds the historical average of 2.5%. If Chicago had functional tax policy, its revenue would increase next year. But it doesn’t, so it won’t. Chicago’s corporate fund revenue will decline on a year-to-year basis in 2025.

One revenue source that’s projected to generate less next year is the Corporate Personal Property Replacement Tax. The CPPRT, which is imposed on a business’s net profits, replaced a tangible personal property tax that local governments previously levied on a business’s assets in Illinois. Thirty-eight states, including neighboring Indiana and Wisconsin, still impose personal property taxes.

Between 2020 and 2023, CPPRT revenue more than doubled statewide, jumping by $1.84 billion or 255%. This significant spike was due to a number of unique economic circumstances, including everything from the release of pent-up consumer spending after pandemic restrictions were eased, to many corporations taking advantage of high inflation to price-gouge, resulting in record profits, that in turn generated record revenue. Those economic factors are gone, and CPPRT revenue is reverting to historical levels. So in 2025, Chicago’s CPPRT revenue will fall from over $442 million to around $273 million.

‘Tweaking small fees irks voters’

This decline is symptomatic of the real big issue facing Chicago: it relies on numerous, smaller taxes and fees that really aren’t based on or responsive to the modern economy, which is why revenue doesn’t grow with the economy. Heck, many corporate fund revenues don’t even keep pace with inflation, like the flat, $9.50 per month garbage collection fee, which has lost around 25% of its value in real terms since its inception and doesn’t come near covering the actual cost of trash collection.

But even though most of Chicago’s revenue sources don’t grow with inflation over time, the service costs the city has to cover do. Therein lies the crux of the problem. Shoddy tax policy forces Chicago’s decision-makers to regularly tweak various little revenue sources, just to keep pace with inflation and avoid making significant spending cuts. Constantly tweaking little revenue sources irks voters, which creates political pressure to back off.

When Chicago’s elected officials determine voters won’t tolerate raising enough new recurring revenue by adjusting the multitude of taxes and fees that finance the corporate fund, they end up plugging budget deficits by relying on one-time revenues, like from declaring tax increment financing surpluses and implementing spending cuts.

Sure, that gets Chicago through a particular budget cycle, but it doesn’t create any long-term fiscal stability.

Given the fast-approaching deadline, it’s clear structural tax policy reforms won’t be implemented in time to save Chicago’s 2025 budget. Which means any compromise reached now will include all the stuff we’ve grown accustomed to over the years, like spending cuts and reliance on one-time revenues. Hopefully, the final compromise will also include some tax and fee increases that’ll generate ongoing, recurring revenue, such as Johnson’s latest proposal to bump property taxes by just $68.1 million, significantly less than the $300 million he initially sought. After all, the more recurring revenue added this year, the smaller the hole next year.

Going forward, city officials will have to embark on the politically difficult task of implementing the meaningful, long-term tax policy reforms needed to get Chicago’s fiscal house in order. It’s either that, or stay on the merry-go-round of careening from fiscal crisis to fiscal crisis.

Ralph Martire is executive director of the Center for Tax and Budget Accountability and the Arthur Rubloff professor of public policy at Roosevelt University. 

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