A Chicago Commuter Tax Would Drive Business Out of the City

November 30, 2018

A forthcoming spike in pressure on Chicago’s public employee pension system has mayoral candidates turning anywhere and everywhere for funding to make hundreds of millions of dollars in additional retirement payments. The latest proposal? A tax on the wages of those working in Chicago but living outside city limits.

Bill Daley, among the candidates vying to replace retiring Mayor Rahm Emanuel, on Wednesday raised the possibility of creating several new taxes, including a commuter tax that would require nonresidents to send wage income taxes to City Hall.

The city’s high cost-of-living, including its already hefty tax burden, is one reason many Chicago employees commute in the first place. Each day, hundreds of thousands of individuals travel into Chicago or greater Cook County for work, including tens of thousands from Indiana. However, Chicago itself has seen several years of population decline, and even many suburbanites have become disenchanted enough to leave. Recent data from the U.S. Census Bureau shows net out-migration from Cook County and each of the surrounding “collar” counties.

A tax targeting suburban commuters would incentivize many employed in Chicago to seek work closer to home, and a departing workforce would give Chicago businesses more reason to think seriously about relocating to fiscally greener pastures. Ironically, Daley’s discussion of a commuter tax was part of a speech laying out his platform to increase Chicago’s population by over 280,000 people by the year 2030.

A Chicago Tribune editorial sheds light on why commuter taxes are so appealing to politicians: by definition, none of the people who pay a city’s commuter taxes can effect change to city leadership with their vote; instead, they’re left to vote with their feet.

While proponents of commuter taxes see them as a way to ensure nonresidents pay for the public benefits they receive while working in a city, it’s important to remember that nonresidents already pay a significant share of taxes in Chicago, including parking taxes and steep sales taxes. Further, Chicago is already known for exporting its tax burden to nonresidents. In 2008, SmartMoney magazine cited Chicago as the U.S. city with the highest tax burden on travelers.

Further, commuter taxes have lackluster track records in the other major cities in which they are levied. In a 2011 report, Chicago Inspector General Joseph Ferguson noted that a commuter tax in Philadelphia resulted in job loss in the city, and the major cities that do levy a commuter tax (Philadelphia, Cleveland, and Detroit) are all characterized by population decline and economic stagnation.

While it is tempting for local governments that are strapped for cash to look for ways to export their tax burden to nonresidents, this practice is legally dubious and creates unintended consequences that drive away employees and businesses. Ultimately, tax exporting gives constituencies a false and unsustainable sense of security, creating a temporary illusion that residents can benefit from additional public goods and services while someone else bears the cost.

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