Recreation Taxes – Broaden the Amusement Tax

 Revenue: $105 million

The City currently charges a tax of nine percent on certain amusements within the City.[1]  A five percent tax is imposed on all “live theatrical, live musical or other live cultural performances that take place in any auditorium, theater or other space in the city whose maximum capacity, including all balconies and other sections, is more than 750 persons.”[2]  There is no tax for these live performances if the capacity of the venue is less than 750, which includes the majority of the City’s theater and music venues.  The amusement tax is not imposed at all on “religious, educational and charitable institutions, societies or organizations”.[3]  Health club memberships are also exempt from the nine percent amusement tax. [4]

Under this option, the City would:

  1. Apply the nine percent amusement tax to all live theater, musical, and cultural performances;
  2. Eliminate the amusement tax exemption for live theater, musical, and cultural performances in establishments with capacities under 750 persons;
  3. Eliminate the amusement tax exemption for non-profit organizations; and
  4. Eliminating the amusement tax exemption for health and sport club membership fees.

Increasing the City’s amusement tax rate and broadening its base could generate over $100 million in additional revenue.

Note on calculations in this option: Keep in mind that many of the calculations are rounded in this option to account for the imprecision and lack of Chicago level data for some of the estimates.

Apply the nine percent amusement tax to all live theater, musical, and cultural performances

According to amusement tax data, over the last two years live theater, musical, and cultural performances have accounted for a small portion of amusement tax revenue.  For the two years between July 2009 and June 2011, amusement tax receipts relating to live performances totaled an estimated $18 million out of a total of nearly $170 million.[5]  Thus, the City received an average of $9 million in each of the last two years from amusement taxes paid by live performances.  At a tax rate of 5 percent for live theater, musical, and cultural performance, this means that these entities had $180 million in annual ticket sales.  Therefore, increasing the live theater amusement tax to nine percent would yield an additional $7 million annually.

Eliminating the Amusement Tax Exemption for Live Theater, Musical and Cultural Performances in Establishments with Capacities under 750 Persons

The table below shows the receipts of the City’s performing arts companies and promoters of performing arts, sports, and similar events that are subject to federal income tax from 2007 Economic Census data.

2007 NAICS code

Meaning of 2007 NAICS code

Meaning of Type of operation or tax status code

Number of employer establishments

Employer sales, shipments, receipts, revenue, or business done

7111

Performing arts companies

Establishments subject to federal income tax

79

$117.8 million

7113

Promoters of performing arts, sports, and similar events

Establishments subject to federal income tax*

57

$233.5 million

Total

136

$351.3 million

*The 2007 Economic Census does not report receipts for establishments subject to the federal income tax at the Chicago level for code 7113.  To estimate this number we did the following. NAICS code 7113 is comprised of two more specific codes 71131 (promoters with facilities) and 71132 (promoters without facilities).  For 71131, data at the Chicago level was reported on the receipts of establishments subject to the federal income tax (we assume that this is equivalent to the City’s for-profit/non-profit distinction and use this language from this point forward) and equaled almost $131 million.  For 71132, the data was only reported for all establishments and not split between non-profits and for-profits.  To estimate the receipts for for-profit companies included in code 71132, we assumed that the percentage of receipts generated by for-profits in category 71132 was the same as the percentage generated by for-profits in 71131, which was 85%.   Thus, of the nearly $121 million reported for all establishments included in code 71132, we assumed that almost $103 million was attributable to for-profits.

These organizations had receipts of approximately $350 million according to the 2007 Economic Census.  Since the amusement tax currently falls on approximately $180 million of this activity, we assumed that the $170 million difference between the $180 million being taxed and the $350 million reflected in the census data was produced by firms with capacities smaller than 750 people.  An amusement tax of nine percent on this $170 million yields $15.3 million.

Eliminating the Amusement Tax Exemption for Non-Profit Organizations

The table below estimates the 2007 receipts for all performing arts companies (theaters, operas, and dance companies), all promoters of performing arts, sports, and similar events (which is where live music venue revenue is most likely to be captured), and all museums, historical sites, and similar institutions.

2007 NAICS code

Meaning of 2007 NAICS code

Number of employer establishments

Employer sales, shipments, receipts, revenue, or business done ($1,000)

7111

Performing arts companies

171

$380.0  million

7113

Promoters of performing arts, sports, and similar events

74

$274.5 million

712

Museums, historical sites, and similar institutions*

41

$301.1 million

Total

286

$956 million

* The 2007 Economic Census does not report receipts for establishments at the Chicago level for code 712.  To estimate this number we did the following. For the Metropolitan Statistical Area (the Chicagoland area as defined by the Census) that Chicago is a part of, the 2007 Economic Census reported that there were 111 establishments generating $815 million in receipts under NAICS code 712.  Chicago had 41 of these establishments, but the amount of their receipts was not available.  Assuming that the 41 establishments in the City had an average amount of receipts as the establishments in the larger metropolitan area, then these 41 establishments generated $301.1 million in 2007.  This is a very conservative estimate as Chicago is home to the area’s most prominent museums and likely has a larger share of these receipts.

Thus, in 2007 these organizations had an estimated $950 million of receipts.  Subtracting the $180 million in revenue generated by  live cultural performances currently subject to the amusement tax and the $170 million in receipts that would be subject to the amusement tax if the small venue exemption is eliminated, leaves approximately $600 million in receipts.  Additionally, an estimated $30 million in receipts generated by museums and similar institutions is currently subject to the amusement tax.[6]  That leaves approximately $570 million that is likely attributable to non-profit organizations in these categories that is not subject to the amusement tax.  Applying a nine percent amusement tax to this $570 million would yield $51 million annually.

Eliminating the Amusement Tax Exemption for Health and Sport Club Membership Fees

According to the 2007 Economic Census, there are 189 businesses categorized as fitness and recreational sports centers. These businesses had gross receipts of $345 million in 2007.[7]  If the City applied the amusement tax rate of 9 percent to these gross receipts, it would raise $31 million annually.

The table below summarizes the four components and the revenue estimates described above.  By implementing each of the four components of this option, the City would raise approximately $105 million annually.

Amusement Tax Component

Annual Estimated Revenue Increase

Increase rate to 9 percent (from 5 percent) on firms that showcase live performances

$7 million

Apply tax at 9 percent to small venues showcasing live performances

$15 million

Remove exemption for non-profits

$51 million

Impose the amusement tax on health  and sports clubs

$31 million

Total

$104 million

In order to impose the amusement tax on health clubs would require a change in State law as the Illinois Supreme Court has ruled that applying the amusement tax on health or sports club membership is in essence a service tax which the City does not have the authority to impose.[8]

Proponents might argue that the various exemptions in the present amusement tax favor certain amusements over another for no rational reason.  Additionally, some of the largest beneficiaries of these exemptions (the Lyric Opera, the Chicago Symphony Orchestra, etc.) serve, on average, patrons that are wealthier than average City residents.[9]

 

 

Opponents might argue that there is a good public policy reason for each of these exemptions.  Imposing taxes on health and sports clubs would raise the cost of these activities, which would in turn make City residents less likely to visit health and sports clubs, thereby reducing their physical fitness.  Others might argue that smaller music clubs and theaters need the tax exemption in order to compete with larger venues and this is why the amusement tax was eliminated for small venues in 1998.[10]  Further, they might argue that live cultural performances add civic value and therefore should receive a tax preference.  Lastly, a general increase in the amusement tax will drive up prices meaning people will be more likely to attend events in the suburbs.

 

Budget Details

Fund: Corporate Fund, 0100 Type of Revenue:  Amusement Tax
This appropriation can be found on page 16 of the 2011 Annual Appropriation Ordinance.

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

 


 


[1] City of Chicago. Municipal Code. Section 4-156-020(A) (American Legal 2011).

[2] City of Chicago. Municipal Code. Section 4-156-020(E) (American Legal 2011).

[3] City of Chicago. Municipal Code. Section 4-156-020(D)(1) (American Legal 2011).

[4] City of Chicago. Municipal Code. Section 4-156-020(D)(2) (American Legal 2011).

(“[I]initiation fees and membership dues paid to a health club, racquetball club, tennis club or a similar club or organization, when such club or organization is organized and operated on a membership basis and for the recreational purposes of its members and its members’ guests, shall be exempt from the tax imposed in subsection A of this section.”).

[5] To estimate amusement tax receipts related to live performance, we put over 93 percent of almost $170 million in amusement tax receipts for the two year period between July 2009 and June 2011 into several categories including live performance and museums.  Tax receipts were categorized on the basis of researching the name of the taxpayer to determine the taxpayer’s type of business.  For the receipts we categorized, over $14 million (8.5 percent) was attributed to live music and cultural performances.   Of the remaining nearly $11 million in receipts that was uncategorized, we assumed that 37 percent (see below) was attributed to live performance.   Thus, an estimated $18 million in two years of amusement tax receipts was attributed to live performances.  This equates to $9 million annually.

The reason that we assumed that a greater percentage of the uncategorized receipts were attributable to live performance was because the two largest categories of amusement tax receipt were sports venues and cable service.  We assumed that sport venues and cable service firms would be captured in the largest amusement taxpayers.  Since we categorized the largest amusement taxpayers and the taxpayers left uncategorized were mostly the smallest payers, we assumed that sports venues and cable service firms were completely captured in the 93 percent of receipts that were categorized.   Thus, the percentages used to attribute the uncategorized receipts reflect the other types of organizations share of the non-sport venue and non-cable service amusement tax receipts that were categorized.

We did not categorize 100 percent of the receipts as this would have been time-consuming and would only added a little more precision to the estimate.

Source for Amusement Tax Receipts: Department of Revenue

[6] To estimate amusement tax receipts related to live performance, we put over 93 percent of almost $170 million in amusement tax receipts for the two year period between July 2009 and June 2011 into several categories including live performance and museums.  Tax receipts were categorized on the basis of researching the name of the taxpayer to determine the taxpayer’s type of business.  For the receipts we categorized, nearly $5 million (2.7 percent) was attributed to museums and similar institutions.   Of the remaining nearly $11 million in receipts that was uncategorized, we assumed that 11.5 percent (see below) was attributed to museums and similar institutions.   Thus, an estimated almost $6 million in two years of amusement tax receipts was attributed to live performances.  This equates to $3 million annually.  Assuming a tax rate of 9 percent generated these receipts, this equates to gross receipts for these institutions of $33 million annually.

The reason that we assumed that a greater percentage of the uncategorized receipts were attributable to live performance was because the two largest categories of amusement tax receipt were sports venues and cable service.  We assumed that sport venues and cable service firms would be captured in the largest amusement taxpayers.  Since we categorized the largest amusement taxpayers and the taxpayers left uncategorized were mostly the smallest payers, we assumed that sports venues and cable service firms were completely captured in the 93 percent of receipts that were categorized.   Thus, the percentages used to attribute the uncategorized receipts reflect the other types of organizations share of the non-sport venue and non-cable service amusement tax receipts that were categorized.

We did not categorize 100 percent of the receipts as this would have been time-consuming and would only added a little more precision to the estimate.

Source for Amusement Tax Receipts: Department of Revenue

[7] This figure includes the receipts of non-profit health and fitness centers.

[8] Egler, Daniel and Strong, James. “City’s ‘Yuppie Tax’ Ruled Illegal.” Chicago Tribune June 21, 1988.

[9] Robert LaLonde, Colm O’Muircheartaigh, Julia Perkins with Diane Grams, Ned English, D. Carroll Joynes. “Mapping Cultural Participation in Chicago.” Cultural Policy Center at the University of Chicago. 2006.

http://culturalpolicy.uchicago.edu/publications/MappingCPICExecSumm.pdf

[10] Martin, Andrew. “Amusement Tax Dropped for Small Theaters, Cut for Others.” Chicago Tribune. November 13, 1998.

http://articles.chicagotribune.com/1998-11-13/news/9811130155_1_amusement-tax-tax-relief-venues