Illinois killed the grocery tax. Chicago should keep it that way.

Dairy aisle at the newly reopened Save-A-Lot in West Garfield Park. Credit: City of Chicago

Governor JB Pritzker’s new budget did something that Illinois doesn’t do very often – it got rid of a tax. Starting in 2025, the state will no longer collect a 1% sales tax on groceries. It’s a good idea, and it’ll help working families across the state make ends meet.

But while the state collects the tax today, it doesn’t keep the money. Instead, the $320M that collected in 2023 was transferred to cities and towns across the state. Understandably, cities and towns are a little less excited about ending the tax. To placate them, the state passed legislation to allow cities to raise their own grocery taxes to make up the difference. Now, facing a budget crisis, Chicago is considering doing just that. Alderman William Hall, who’s chairing a committee to identify new revenue sources for the city, included a city grocery tax on a list of 16 options potential revenue-raising options.   

This is a bad idea. The grocery tax hits low-income families harder than anyone else. It also creates perverse incentives, reducing the consumption of healthy food and contributing to grocery deserts in South and West Side neighborhoods. There’s a long list of things we should do before we start hiking taxes – including policies to help the city grow faster and smart cuts to spending. And when the city does go looking for more revenue, there are far better options to consider.

A tax on working families

Almost everybody buys groceries. But milk, bread and eggs make up a much larger share of the budget for low-income households than they do for high-income ones. This is moderated a bit by the fact that SNAP (food stamp) benefits aren’t taxable, but the net effect still takes a much bigger bite out of the pocketbooks of low-income households than anyone else.[1]

Unsurprisingly, the remaining states that do have these taxes on the books aren’t generally known for their progressive policies: Mississippi, Kansas, Idaho, South Dakota, Tennessee, Alabama, Hawaii, Virginia, Utah, Arkansas and Missouri. Reinstituting a grocery tax would put the Chicago City Council to the right of Oklahoma, whose governor called the tax the most regressive in the state when he eliminated it earlier this year.

Grocery taxes and food deserts

Chicago also has a serious shortage of grocery stores. In neighborhoods across the South and West Sides, grocery stores are either closing or struggling to re-open. A key reason is limited purchasing power: lower-income neighborhoods, often with falling populations, are less likely to have the demand necessary to support grocery stores. This risks kicking off a vicious cycle: in the absence of basic amenities like a grocery store, it’s harder to justify staying in the neighborhood – meaning more population loss, and even less purchasing power.

This is a genuinely hard problem that the city’s been desperately trying to fix. Public funds have been used to support grocers that run the gamut from Whole Foods to the Inner City Muslim Action Network. Chicago is now on track to provide $13.5M in funding to Yellow Banana, a troubled discount grocer working to re-open six Save-A-Lot grocery stores across the South and West Sides.[2] And the city is even exploring spending $26.7M to open a network of publicly run grocery stores to address the issue.[3]

But as we spend tens of millions of dollars to combat food deserts, the grocery tax makes the problem worse. When we make groceries relatively more expensive, people buy less. Looking across a variety of grocery products, researchers find that a 1% increase in the price of dairy, meat, fish and vegetables yields about a .45% decrease in consumption. Chicagoans bought about $7B worth of groceries last year, according to data the city reported to the Illinois Municipal League.[4] So without that 1% tax, we could expect another $30-$32M in grocery spending citywide – concentrated in neighborhoods with a higher share of low-income households.

It's hard to measure just how much of an effect has on food deserts. No other big city is short-sighted enough to tax groceries, so there’s not a lot of great comparisons. But in rural areas, researchers find that grocery taxes reduce grocery store economic activity and employment. Chicago’s grocery tax isn’t big enough to account for widespread closures across the South and West side, but it’s actively hurting our efforts to address the problem.

We’ve got better options

A City grocery tax isn’t under consideration isn’t because politicians like regressive taxes that communities where it hurts. It’s because Chicago needs the money, and it’s easier to keep a tax that voters are accustomed to than add a new one. But as challenging as the fiscal picture is, we have better options to fill the $70M hole.

Our best options are pro-growth policies that increase city revenue. Speeding up approvals and permitting for new residential construction would be a great start – a single development in Old Town being held up by neighbors could generate $2.5M a year in city property taxes, plus millions more in nearby sales tax revenue. Raising the mandatory retirement age for police officers from 63 to 65 could help the department hold on to experienced officers and keep them paying into pension funds for longer.

Then there are spending cuts. This isn’t the post to go line-by-line through the city budget, but if we were starting from a blank sheet of paper, how much of the city’s budget would we be comfortable paying for with taxes on low-income families? Outside of core public infrastructure and safety, it’s hard to imagine that much else would make the cut (the point is not that we should cut to the bone – just that we should be willing to do so before we tax bread and milk). And there are easier cuts to consider. The City is trying to spend hundreds of millions in remaining ARPA funds before the year runs out. Instead of setting up new programs that we’ll have to cut almost immediately, we can use ARPA dollars on programs the city is funding with TIF or corporate funds today, like affordable housing developments. Then we could reprogram city funds (or declare surpluses on freed up TIF dollars) to fill budget holes.[5]

The Community Development Commission just approved $23M in TIF funding to support Casa Yucatan LP’s 98 unit affordable development on the Lower West Side. Instead, the city could use ARPA funds to support the development, and declare a $23M TIF surplus, allowing the City and other units of government to fill budget holes. (Photo: Department of Planning and Development)

But even if we pull every pro-growth lever in the book, cut spending, and use ARPA dollars as creatively as possible, the city will still be looking for new sources of revenue. And there are plenty of options that are less regressive and perverse than taxing groceries:

• The city’s liquor tax brings in $30M a year, but it isn’t indexed to inflation. That means it’s worth 50% less than it was in 2007---we’ve left $10-$15M on the table. Nobody likes paying more for a drink, but liquor taxes are a lot more progressive than grocery taxes (high income households spend a lot more on booze). If higher taxes deter drinking at the margin, that’s not the worst outcome either – alcohol is involved in 40% of homicides, and studies show that higher liquor taxes are associated with reductions in violent crime.

• The city charges a flat garbage collection fee, regardless of how much trash you throw out. That generated about $60M last year. It’s less than it costs the city to pick up trash and it creates perverse incentives—residents who create less waste subsidize trash collection for the rest of us, and nobody is encouraged to recycle. Back in 2011, the Inspector General found that volume-based trash collection could generate $125M in revenue for the city, even after accounting for a 17% increase in recycling. That’s $175M in today’s dollars, which pencils out to $115M in incremental revenue after eliminating the city’s flat garbage collection fee.

• Cars create externalities like pollution and congestion, and higher income residents are more likely to own them (lower income Chicagoans are more likely to be on the bus, stuck in traffic). Raising the city tax on parking garages and lots is one option – it would also discourage landlords from holding on to empty lots. And raising the city sticker tax on the largest passenger vehicles is another option. Big trucks and SUVs are more likely to be owned by the rich, do more damage the roads, and are also much more likely to kill other drivers, pedestrians and cyclists.

This is just a start. Short of sending undercover police officers across state lines to pull off an Ocean’s Eleven style heist at the Hammond Casino, almost anything is a better idea than taxing bread and milk.[6]

These principles don’t just apply to a potential new city tax. Mass transit in the Chicago region is funded by an additional 1.25% sales tax, which applies to groceries. The region is currently in the process of a tough conversation about how to fund mass transit going forward: while we likely need to broaden the overall tax base, groceries should be excluded from the mix there too.

Chicago, and the broader region, are going to face some tough budget challenges over the next few years. Nobody likes cuts, and residents already pay some of the highest taxes in the country. I don’t fault Alderman Hall for including it in a wide range of options to raise city revenue. But a grocery tax is an idea that shouldn’t make it out of committee.

The bottom line:

• Grocery taxes are a terrible way to fund government. They hit working families at a much higher rate than other households, and they make it harder to keep grocery stores open in low-income neighborhoods.

• There are much better ways to raise revenue if we have to. Taxes on alcohol, garbage and driving are all more progressive, and create better incentives than taxing groceries.

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[1] Prof. Elizabeth Powers over at the Illinois Institute of Government and Public Affairs does something similar in an April 2024 Policy Brief, but comes up with much higher numbers for average SNAP benefits. I think it’s better to consistently use the Consumer Expenditures survey (for food expenditures, total pretax income, and SNAP benefits), than to jump between the Consumer Expenditures data and other sources for SNAP benefits. Either way, grocery taxes became a lot more regressive going forward with the expiration of emergency SNAP benefits in 2023.

[2] It’s too early to call time on the city’s deal here—the subsidies are tied to whether the sites actually open, and Yellow Banana just cut the ribbon on a re-opened store in West Garfield Park. This is just legitimately a hard problem. 

[3] This is probably now on hold given the city’s budget challenges. But it’s hard to imagine the city running a network of grocery stores efficiently, given service delivery challenges with other departments and sister agencies.

[4] The city told the IML that tax is worth $60-$80M in revenue a year. At a 1% tax rate, that translates to about $7B in total grocery expenditures.

[5] Even better – rather than relying on a one time shot of TIF surpluses to fill budget holes this year, we could plug additional money into advance pension plan payments, which would create more financial flexibility for years to come, and help the city secure more credit upgrades.

[6] Not only would it be illegal, but honestly we can’t afford the overtime.