A Chicago Corporate Head Tax is a Bad Idea

There's nothing progressive about lowering employment growth.

Another reminder about our next event: We’ll be at Uptown Taproom on November 5th, from 5:30-7:30pm, for a conversation with Evanston Mayor and IL-09 Congressional Candidate Daniel Biss. You can RSVP here.

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As we’ve covered previously, the math is really hard this budget season. With a budget gap of nearly $1.2 billion to close, Mayor Johnson’s initial budget proposal includes a significant focus on increased revenue for the city. Property taxes seem fairly toxic after last year’s failed $300 million proposal, so we’re seeing a grab bag of ideas. Some of these are new, like the proposed social media tax. Others are old ideas that just never seem to die - like the corporate head tax.

From 1973 to 2014, Chicago imposed a head tax of $4 per employee per month on businesses with at least 50 employees in Chicago. In 2014, under Mayor Emanuel the city repealed this tax in what was widely viewed as a pro-business decision. Johnson’s new proposal is for a much higher head tax - $21 per month per employee, imposed on all companies with at least 100 employees working in Chicago. The budget estimates this would bring in $100 million in revenue next year.

Opposition to the proposal has been swift; most recently Governor Pritzker weighed in with his opposition to the idea, given that it “penalizes the very thing that we want, which is we want more employment in the city of Chicago.” I agree with Governor Pritzker, and I do not believe this tax is a good idea. I’d like to be clear that my position here does not come from any particular desire to protect corporate profits. It is instead on the basis that the tax is highly likely to have a negative impact on Chicago, both in terms of employment growth and economic activity in the city.

The regressive impact on jobs

Start with a fundamental issue with head taxes: unlike a payroll tax or corporate income tax, they charge the same amount for each worker, regardless of how much that worker earns or how profitable a business is. And this would impact quite a lot of workers. While the mayor’s office has repeatedly referenced the tax impacting only 3% of employers, the math suggests it would impact roughly 1 in 3 employees in the city.¹

A company pays $250 annually whether they’re employing a retail worker making $35,000 per year or a software engineer making $150,000. For the retail worker, that’s 0.7% of their total compensation. For the engineer, it’s 0.17%. That’s a 4-5x difference in proportional burden. You might still view the $250 as a small amount in either instance, and I’m sure that some businesses would just pay it. But decisions get made on the margin, and some businesses will certainly look at the extra cost and decide not to hire that extra worker. In those instances, that unhired employee is disproportionately likely to be a working class job. In addition to the actual tax, it’s also worth considering the overhead cost that dealing with the tax imposes on employers, who now need to spend more time on accounting and bookkeeping about exactly how many days each of their employees worked in the city.

To draw a comparison to an issue many readers (and both of us!) are particularly passionate about: this is basically the same dynamic YIMBYs talk about with respect to housing regulations. When you add small fixed costs and administrative burdens to development - impact fees, lengthy approval processes, parking requirements - you get less housing. And the projects that get killed aren’t usually luxury development. Those projects have enough margin to absorb the costs. What you kill is the missing middle: the small apartment buildings, the starter homes, the naturally affordable housing that only pencils out if costs are low.

Head taxes work the same way. They don’t stop Google from hiring another $200k engineer. They stop restaurants from hiring another server. They stop retail stores from adding weekend staff. They make the marginal job - which is disproportionately likely to be a lower-wage job - less likely to exist.

It’s also worth pointing out that this dynamic exists if we zoom out to the corporate level, too. Imagine two corporations with 100 employees, one of which is a supermarket chain with pretty tight margins and the other a consulting firm bringing in much higher profits. Because the tax isn’t linked to corporate incomes, those firms end up paying the same tax - but it has a much more deleterious impact on the less profitable one. Again, this seems to be the exact opposite of what you’d want to encourage.

Workforce mobility matters, too

There is one key difference between the labor market and the housing market in my comparison above - houses don’t move.² Workers do. I was struck by a comment from city budget director Annette Guzman that their analysis of who would end up paying this tax was largely extrapolated from city data regarding companies paying the tax prior to its repeal in 2014. While I take her point that many of those companies still exist and employ many workers in Chicago, that seems incredibly naive compared to the post-pandemic reality of remote or hybrid work. I imagine many of those employers she’s referring to no longer require employees to be in the office five days a week.

As of last summer, weekday Metra ridership had only returned to around 60% of what it was in 2019, which implies a lot fewer regular commuters than we had pre-pandemic. It strikes me as fairly obvious that any large employers allowing for a hybrid in-office schedule could suddenly lower targets from 3 days a week to 2 days a week if it means side-stepping a head tax. That wouldn’t just be bad for our revenue projections; it would also be bad for Chicago’s downtown. I’m not a doom-and-gloom guy when it comes to the Loop - data just this month from the Chicago Loop Alliance shows that foot traffic is higher than it was pre-pandemic, with increased tourism and ‘people doing fun things’ offsetting the fewer commuters - but nor do I think we can take it for granted that weekday foot traffic will remain strong even if the city ramps up pressures encouraging remote work in the suburbs. I want more people working and going out to lunch and staying for drinks and generally stimulating the downtown economy in Chicago, not in Naperville.

And that’s all just about existing workers who are currently in Chicago - to say nothing of potential future hirings or relocations at the corporate level. As remote work has become more of a thing and companies have done more geographically diverse hiring, we’ve done a great job attracting more employers, particularly in tech where you’ve seen companies like Meta, Cisco and, of course, Google expand their hiring plans in the city. I’d like to keep that trend happening - not give firms considering a Chicago expansion a reason to consider Milwaukee or Indianapolis or somewhere else for their expansion plans.

On this point, it’s worth noting as well that nearly no other large cities have a corporate head tax of this nature (of the twenty largest cities in the US, Denver is the lone exception). Many that have considered a head tax have quickly walked it back - Seattle’s $275 head tax lasted about a month in 2018 until it was repealed given staunch opposition from employers such as Amazon and Starbucks - perhaps in part because of the inherent mobility of corporations (nearby Tacoma cheekily enacted a $275 per employee tax credit to incentivize relocations following Seattle’s tax).

The academic case

Taking a step away from anecdotes, academic literature also shows negative employment effects to taxes of this nature. A 2024 study using Census Bureau data found that doubling the per-worker tax burden predicts 10% fewer new firm entrants, with a particularly high impact in high-turnover sectors like construction. Counties facing double the tax burden of neighboring counties saw 8.7% fewer new business entrants.

Another study in the Journal of Public Economics found that for every 1% increase in a firm’s payroll tax rate, employment growth declined by 2.24 percentage points. The negative impact was strongest for young workers and low-earning workers - again highlighting the regressive downstream impact.

More striking is research from Finland, where employment fell by 8.9% in response to 5% higher payroll taxes on firms.³ Notably, workers didn’t see wage reductions - meaning firms absorbed the cost by hiring fewer people, not by cutting pay. Again, the job losses concentrated among low-skilled, routine, and manual workers.

What happened when we repealed the head tax?

Finally, we can just look at what happened when Chicago repealed this tax 11 years ago. The Institute for the Public Good, an organization which exists, has a fairly simplistic chart in their report about a head tax which purports to show that the tax’s repeal had basically no impact on Chicago employment growth:

Source: ‘Modernizing the Head Tax’, Institute for the Public Good

I have a number of problems⁴ with this chart, but thought I should look at the numbers myself. In particular, I also thought it was worth looking not just at how Chicago’s employment growth compares to the national rate, but also to Illinois’s and to the broader metro areas. If repealing the tax helps employers move jobs from the suburbs into the city, that ought to show up in the comparative rates, too. Good news: it does!

The chart above shows change in total employment for each geography in each time period. In the 1990s, for example, the national employed population grew by nearly 12% (similar to Illinois and the Chicago-Naperville-Elgin MSA), though employment in the city proper grew by just 5%. Notably, the one period where employment growth in the city looks strongest compared to growth in Cook County, the broader metro area, Illinois or the nation as a whole is in the 2014 to 2020 time period.

I absolutely don’t want to give all of the credit towards the head tax repeal, but it seems to suggest that we were doing something right as it relates to job creation during that time period.

The Bottom Line

The head tax is bad tax policy dressed up as soak-the-rich populism. It’s the kind of thing that sounds good in a City Council speech, but creates real harm for the workers it’s supposed to help. If we want to find more revenues to close our budget gap, we have better options⁵, and we should focus on them. Chicago tried this before, decided it was a mistake, and eliminated it. We shouldn’t make the same mistake twice.

1. As the Tribune and Ald. Bill Conway laid out, to raise $100 million at an annual rate of $252 per employee, you’d need to be levying the tax on the employers of roughly 403,000 employees, which translates to about one-third of Chicago’s private workforce.

2. Okay, fine, *most* of them don’t move.

3. Some speculative math: if you assume the 400,000 workers impacted by this tax make $50,000 on average, then the $250 fee is raising payroll taxes by 0.5% for their employers. Similar job loss to the Finnish case would imply around 3500 lost jobs (400,000 x 0.05% x 8.9/5) as a result of the tax.

4. For one, City Council voted to eliminate the tax over time beginning in 2011, so it’d make sense for some of that 2010-13 growth to also come from the repeal. Second, I think it’s rather odd not to show the absolute growth rates we’re comparing if you distill everything to the relative growth rate alone. Third, it seems overly simplistic to only use the national average as a comparison, rather than any other regional or state-level comparisons. Finally, I find it a bit odd they drop the years 2008 and 2020 altogether and am unclear what ‘normalizing data comparatives’ means in this context. I would also note that this chart is the only concrete data point the Institute for the Public Good highlights in their report as evidence that the head tax does not have a negative impact on employment growth at the municipal level.

5. Your mileage may vary, but I remain particularly fixated on a higher garbage collection fee, as the mayor’s Budget Working Group recommended (page 69 here) - and estimated could bring in up to $300 million per year.