CITY COUNCIL AGENDA ITEM
ACTION REQUESTED:
title
Conduct the first reading of an ordinance amending Chapter 1, Title 3 of the Naperville Municipal Code to establish a Municipal Grocery Retailers’ Occupation Tax and a Municipal Grocery Service Occupation Tax
body
DEPARTMENT: Finance Department
SUBMITTED BY: Raymond Munch, Finance Director
BOARD/COMMISSION REVIEW:
The Financial Advisory Board (FAB) held two meetings on April 28 and May 19 to discuss and recommend the implementation of a replacement revenue source for the City Council’s consideration.
FAB voted 5-1 in favor of recommending that the City Council implement a 1% local grocery tax; the dissenting vote was in favor of replacement revenue in the form of a Home Rule Sales Tax (HRST) increase.
BACKGROUND:
The State of Illinois has traditionally imposed and collected a 6.25% sales tax on general merchandise and a 1% sales tax on qualifying food, drugs, and medical appliances. The 1% sales tax is known informally as a “grocery tax” because it is charged on food traditionally purchased at a grocery store to take home, prepare, and consume. This tax does not apply to paper products, home goods or other non-food items sold in a grocery store. While collected by the state, the grocery tax revenue is passed through to local municipalities.
In 2024, as part of the Fiscal Year 2025 State of Illinois budget, the governor signed a bill into law eliminating the grocery tax on qualifying food items effective Jan. 1, 2026. The legislation also allowed municipalities to implement their own 1% local grocery tax, essentially serving as a one-for-one replacement for the otherwise lost tax revenue.
Without an identified replacement revenue for the state grocery tax, staff estimates a revenue loss of $6.5 million in the General Fund beginning in 2026.
DISCUSSION:
Despite the City’s revenue diversification and conservative budgeting practices, the $6.5 million revenue reduction, which would compound yearly because of the tax’s permanent elimination, presents a significant challenge to maintaining Naperville’s service delivery levels in the long term.
State grocery tax revenue flows into the City’s General Fund, which has a much broader mix of revenues than most other funds. This balance has traditionally allowed City services paid for out of the General Fund - including Police, Fire, and Public Works - to be funded by everyone who uses these services, including residents, businesses, and visitors.
As a service organization, personnel and the resources they need to perform daily operations make up the largest part of the General Fund. As shown below, these areas would be most impacted by a proportional $6.5 million reduction. Without replacement revenue, the City would have to review large-scale programs and personnel to achieve that level of expenditure reduction. Adjustments to other fees or taxes are unlikely to generate sufficient revenue to offset the loss of the grocery tax. Any reductions would have a domino effect on other services, as personnel serve multiple programs.
|
Budget Category |
2025 General Fund Budget* |
Category’s Share of the GF Budget |
Reduction |
|
Personnel |
107,125,821 |
73.9% |
4,803,389 |
|
Purchased Services |
22,097,619 |
15.2% |
990,830 |
|
Purchased Items |
10,498,796 |
7.2% |
470,753 |
|
Transfers |
3,179,026 |
2.2% |
142,544 |
|
Other** |
2,062,600 |
1.4% |
92,484 |
|
Total |
$144,963,862 |
100.0% |
$6,500,000 |
* Excludes Self-Insurance Fund transfers, public safety pensions due to their non-discretionary nature
** Includes contributions to other entities, reimbursement programs, and social service grants
At a high level, by looking at each department’s share of the General Fund budget and proportionally reducing it, dollar figures indicate that any solution solely dedicated to expenditure reduction would reduce programs and the people who provide them.
|
Department |
2025 GF Budget |
Department Share of GF Budget |
Potential Budget Reduction |
|
CMO |
2,043,578 |
1.4% |
91,631 |
|
CSD |
1,035,513 |
0.7% |
46,431 |
|
DPW |
28,299,132 |
19.5% |
1,268,898 |
|
Finance |
2,841,580 |
2.0% |
127,413 |
|
Fire |
35,750,025 |
24.7% |
1,602,987 |
|
HR |
1,756,550 |
1.2% |
78,762 |
|
IT |
12,070,295 |
8.3% |
541,217 |
|
Legal |
989,335 |
0.7% |
44,361 |
|
Mayor & Council |
355,582 |
0.2% |
15,944 |
|
Miscellaneous* |
3,851,710 |
2.7% |
172,706 |
|
Police |
46,263,235 |
31.9% |
2,074,386 |
|
TED |
9,707,327 |
6.7% |
435,265 |
|
Total |
$144,963,862 |
100.0% |
$6,500,000 |
* Encompasses funding for outside agencies that provide direct services to the City and the interfund transfer for two-thirds of maintenance expenses for Special Service Area 33 (Downtown Maintenance & Marketing)
The Police, Fire, and Public Works departments account for the largest share of the General Fund budget while also providing the City’s most critical services. Achieving the proportionate reductions noted above would likely require personnel reductions in those departments, which would have an immediate impact on public safety. Redirecting those reductions to other smaller departments would be very challenging, as those budgets are not large enough to accommodate such extreme reductions.
Because Naperville budgets conservatively, we lack the capacity to reduce General Fund expenditures without impacting core services and programs, such as public safety and public works, as demonstrated by the data below.
Staff compared the City’s 2008-09 (FY09) budget with the 2025 budget to analyze the City's spending on General Fund services now compared to before the budget cuts resulting from the Great Recession. In the graph below, the 2025 budget is $7.3 million less than the FY09 budget in today’s dollars (CPI adjusted).
Notably, the 2025 employee count of 996 remains well below the FY09 level of 1,101, despite currently serving a population that is 7.7% larger.
As the chart below demonstrates, Naperville’s General Fund also serves a higher population with less financial impact than other comparable suburbs. This analysis further suggests that the City continues to provide exceptional services at a lower cost to residents.
FAB Discussion & Recommendation
Staff carefully evaluated options to address the loss of grocery tax revenue, including expenditure reductions and revenue replacement. While it is necessary to look at expenditures during any budget-balancing process, staff believe those adjustments should not be in response to an outside entity’s decision that has a negative effect on the City’s financial position. FAB agreed with this position, noting that absent the state-mandated revenue reduction, no desire to reduce City services had been indicated by the City Council or the community.
Staff proposed two revenue replacement options to FAB: 1) a replacement 1% local grocery tax, or 2) a 0.25% increase to the HRST. The local grocery tax is an exact one-for-one replacement, while the HRST increase would generate a similar amount, estimated at $6.57 million.
Both staff and the FAB recommend implementing a replacement 1% grocery tax based on the following:
1. A local grocery tax is a one-for-one replacement for an existing tax; customer receipts would not change, with customers paying $1 for every $100 spent on groceries, and the revenue generated would remain the same.
2. Maintaining a grocery tax does not put an additional tax burden on other retail items, many of which are already taxed through regular state sales tax and HRST; a grocery tax maintains existing revenue diversification within sales tax categories.
3. Groceries represent a more stable sales category than HRST-eligible items, thus limiting a negative revenue impact during an economic slowdown.
4. The tax burden of a local grocery tax would be shared between residents and non-residents alike. According to PlacerAI data from the Naperville Development Partnership, nearly 52% of shoppers at Naperville’s top 10 grocery stores live outside of Naperville.
• Maintaining the existing HRST rate keeps Naperville’s rate favorable to other communities and preserves that revenue source should it be needed in the future.
In addition to the above, more than 100 communities around the state have implemented this replacement tax, including Downers Grove, Westmont, Wheaton, Schaumburg, and Lombard. Additionally, Aurora and Plainfield have indicated that they will move forward with implementing the replacement tax. This maintains a level playing field among municipalities and provides a consistent tax landscape for consumers.
An ordinance enacting a replacement grocery tax must be passed by October 1, 2025, to ensure collection can start on January 1, 2026.
FISCAL IMPACT:
The proposed 1% local grocery tax is a one-to-one revenue replacement for the elimination of the 1% state grocery tax.