Chicago Adopts Highest Sales Tax Among Major Cities

When Cook County, Illinois adopted a one percentage point county sales tax increase yesterday, its county seat — Chicago — vaulted to the top of a dubious list: major cities with the highest sales tax. Including state, county, city, and public transit sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. impositions, Chicago's combined sales taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. will return to its former high of 10.25 percent as of January 1.

I've received a number of calls and emails asking if Chicago's pending rate represents the highest combined state and local sales tax in the nation. It won't. That distinction goes to a handful of towns in Tennessee and one in Arkansas (with 12 percent combined rates), all with populations of a few thousand people or less. A smattering of small municipalities in Arizona, Louisiana, and Oklahoma also feature higher combined rates.

Tennessee, however, foregoes an individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. (except for on interest and dividend income), and thus leans heavily on the sales tax as a source of state revenue. While Arizona, Arkansas, Louisiana, and Oklahoma impose all of the major tax categories, they also lean disproportionately on the sales tax, with sales tax collections as a percentage of total state and local revenue ranging from 32.4 percent in Oklahoma to 39.3 percent in Louisiana, perhaps in response to low property tax collections. The national average is 22.7 percent reliance on the sales tax for state and local revenue.

Chicago stands out because it's a high sales tax amidst a sea of high taxes, even with the partial sunsets of the 2011 Illinois tax hikes. Its rate as of January 1, 2016 will also stand out as the highest rate in a major city. You can quibble with definitions of what constitutes a major city, but by any possible measure, Chicago will impose the highest city rate as of 2016.