Income Taxes – Create a Commuter Tax

 Revenue: $300 million

Although several major U.S. cities impose a tax on the wages of nonresidents, often referred to as a commuter tax[1], Chicago does not directly tax nonresidents who work in the City.[2]  According to data from the census bureau, there were over 620,000 nonresidents who worked in the City in 2009.[3]  As of May 2010, the average annual wage in the Chicago metropolitan area was $49,140.[4]

Under this option, the City would impose an income tax of one percent on all nonresidents who work in the City.  Assuming that the average wage of nonresidents who work in the City is the same as the average wage for the metropolitan region, nonresident wages in the City total approximately $30 billion annually.  Thus, absent deductions, a one percent City commuter tax could generate approximately $300 million in additional annual tax revenue for the City.

Importantly, in order to create a commuter tax, the City would first need authorization from the Illinois General Assembly.[5]

Proponents might argue that an income tax on commuters is one of the fairest ways to raise revenue because it requires nonresidents who benefit from City services, such as police and fire protection, to help pay for the cost of those services.  Further, nonresidents who work in the City likely earn more than City residents, making them more able to pay taxes.  While 41.4 percent of City residents earn more than $3,333 per month, 52.1 percent of nonresidents who work in the City earn more than $3,333 per month.[6]  Additionally, they might also point out that Philadelphia, Cleveland, and Detroit have commuter taxes and New York City had a commuter tax until 1999.  If NYC still had a commuter tax in place it could have generated an estimated $700 million in 2011.[7] Opponents might argue that a commuter tax provides a strong incentive for businesses to locate in the suburbs to reduce costs. Studies of the commuter tax in Philadelphia have shown that the tax resulted in job losses in the city.[8]  Some might argue that the establishment of a Chicago commuter tax could lead other surrounding municipalities to impose their own commuter taxes, which might negatively affect the 300,000 Chicago residents employed outside the City.  Others might argue that the major cities that still have a commuter tax (Philadelphia, Cleveland, and Detroit) are generally considered economically stagnant and have lost a substantial percentage of their populations since 1950.[9]

Discussion and Additional Questions

Similar to the City Income Tax option, the most important consideration in deciding whether or not to implement this option is what impact this option would have on the decisions of employers to continue to locate in Chicago and the decisions of potential future employers to relocate here.  An economic theory first proposed in 1956, called the Tiebout model holds that people “vote with their feet” and choose “to live in a jurisdiction that best fits their (tax and spending) preferences”.[10]  Researchers have found evidence to support the idea “that local public services and taxes play an important role in determining the choice of a community of residence”.[11] While this is used to explain how individuals choose what jurisdiction to live in, it also can be helpful for understanding how businesses choose jurisdictions in which to locate.

Under this model, if the City were to institute a commuter tax, it would become less attractive, from a tax perspective, than other municipalities within the region.  Conversely, if the commuter tax revenue is used to provide some valuable public service, the City could become more attractive to current and potential employers than it would be without the commuter tax.

 Budget Details

Fund: NA Type of Revenue:  NA
The revenue appropriations begin on page 16 of the 2011 Annual Appropriation Ordinance.

http://www.cityofchicago.org/content/dam/city/depts/obm/supp_info/2011BudgetOrdinance.pdf

 

 


[2] Currently, the City charges an Employers’ Expense Tax (commonly referred to as a head tax) to “businesses that employ 50 or more full-time workers or employees that perform 50% or more of their work service per calendar quarter in the City of Chicago. Employees must earn more than $4,300 in a calendar quarter to be considered taxable.”  It is applied to both resident and nonresident employees.

City of Chicago- Department of Revenue. “Employers’ Expense Tax (7540)”. http://www.cityofchicago.org/city/en/depts/rev/supp_info/tax_list/employers_expensetax.html

[3] U.S Census Bureau. “Inflow/Outflow Report for Chicago.” Generated using the OnTheMap application available here:

http://lehdmap.did.census.gov/

[4] United States Bureau of Labor Statistics. May 2010 Metropolitan and Nonmetropolitan Area Occupational Employment and Wage Estimates: Chicago-Naperville-Joliet, IL Metropolitan Division.

[5] See Ill. Const. art. VII § 6(e); see also Commercial Nat’l Bank of Chicago v. City of Chicago, 432 N.E.2d 227, 229 (Ill. 1982).

[6] U.S Census Bureau. “Inflow/Outflow Report for Chicago” and “Home Area Profile Report for Chicago.” Generated using the OnTheMap application available here: http://lehdmap.did.census.gov/

[7] Independent Budget Office of the City of New York. Budget Options. February 2010. pg.42

http://www.ibo.nyc.ny.us/iboreports/options2010.pdf

[8] Eichel, Larry. “Commuter tax has driven jobs out of the city.” Philadelphia Inquirer. April 24, 2006.

http://articles.philly.com/2006-04-24/news/25394658_1_commuter-tax-wage-tax-commuter-rate

[9] Smith, Fred and Allen, Sarah. “Urban Decline (and Success) in the United States.”

http://eh.net/encyclopedia/article/Smith.Urban.Decline.doc

[10] Cordes, Joseph J.; Ebel, Robert D.; Gravelle, Jane G. “Tiebout Model” The Encyclopedia of Taxation and Tax Policy: Second Edition. pg. 437.

[11] Id., pg. 438.