CITY COUNCIL AGENDA ITEM
ACTION REQUESTED:
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Pass the ordinance amending Section 11 of Chapter 1 Title 3 and Section 9 of Chapter 1 Title 3 of the Naperville Municipal Code increasing the Home Rule Sales Tax by .25% and decreasing the Downtown Food and Beverage Tax by the corresponding percentage
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DEPARTMENT: Finance Department
SUBMITTED BY: Raymond Munch, Director of Finance
BOARD/COMMISSION REVIEW:
The Financial Advisory Board (FAB) held two meetings, April 28 and May 19, to discuss and recommend the implementation of a replacement revenue source for the grocery tax. 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 budget, the governor of Illinois 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.
On June 18, staff presented an ordinance to establish a replacement local grocery tax for first reading. At that meeting, several City Council members requested additional information on the alternative option of increasing the HRST instead of implementing a replacement grocery tax.
The City established an HRST in 2016 as a recurring revenue source to support ongoing capital improvements, thereby reducing the property tax levy's future debt burden. The HRST was established at a rate of 0.50%, which increased to 0.75% in 2018 and remains in place today.
At the July 15 City Council meeting, staff presented two options to the City Council: an ordinance to establish 1% replacement local grocery tax and an ordinance to increase the HRST to 1%. The City Council, by vote of 5-4, approved the first reading of the HRST ordinance and directed staff to include a two-year sunset clause for final consideration at the August 19 City Council meeting.
DISCUSSION:
In light of the significant revenue reduction that will result from the elimination of the grocery tax, staff presented a 0.25% increase in the HRST rate from 0.75% to 1.0% as an acceptable option to replace the lost revenue. Below are some of the key considerations for increasing the HRST.
Revenue Generated
Staff estimated the 0.25% increase to HRST would generate $6.57 million in revenue based on 2024 data after considering required reductions for the Downtown Food & Beverage Tax (DFBT) and applying the state’s 1.5% administrative collection fee. Year-to-date receipts for HRST indicate that the amount is closer to $7.0 million due to legislative changes implemented in January 2025 to address sales by out-of-state retailers. This accounts for the required reduction to the DFBT, as well as the state’s 1.5% administrative collection fee.
Resident vs. Non-resident Revenue
Based on foot traffic data and destination-based taxes paid exclusively by residents, staff estimates that non-residents generate 50% of HRST revenue.
Impact on Low-Income Consumers
Staff noted that some low-income consumers do not pay sales tax on groceries when using government food assistance benefits (i.e., SNAP). Increasing the HRST places an additional 0.25% tax on general merchandise. There is no relief from this additional tax for low-income consumers.
Revenue Stability
An analysis of sales tax records by category back to 2003 shows that the two state-designated categories that most grocery stores fall into, Food and Drug/Miscellaneous Retail, exhibit greater stability during an economic downturn.
During the Great Recession and pandemic, grocery-related categories experienced sales growth of up to 10%, while all other categories declined by 6 to 8%.
The “all others” category below represents items included in the HRST. Significant year-over-year declines can be seen in categories like Furniture & Household, Lumber & Building Materials, Agriculture, and Manufacturers during these periods.
|
|
Great Recession |
Pandemic |
|
|
2008 |
2009 |
2020 |
|
Food |
10% |
-3% |
9% |
|
Drug/Misc. Retail |
-1% |
1% |
-1% |
|
All Others |
-6% |
-8% |
-7% |
Comparable Community Tax Rates
Among the home-rule communities Naperville has historically compared itself to, all impose a HRST of 1% or higher. This small sample size is representative of the HRST landscape across the Chicago area, with most communities having an HRST rate of 0.25% to as much as 1% higher than Naperville.
In most communities, HRST is treated as general operating revenue, whereas Naperville restricts HRST for capital improvement funding. That restriction would not apply to the additional 0.25% under consideration here.
|
Municipality |
Current HRST Rate |
|
City of Naperville |
0.75% |
|
Village of Arlington Heights |
1.00% |
|
Village of Downers Grove |
1.00% |
|
Village of Schaumburg |
1.00% |
|
City of Wheaton |
1.00% |
|
City of Aurora |
1.25% |
|
City of Evanston |
1.25% |
|
Village of Woodridge |
1.25% |
|
Village of Bolingbrook |
1.50% |
|
City of Elgin |
1.50% |
|
City of Elmhurst |
1.50% |
|
City of St. Charles |
1.50% |
|
City of Joliet |
1.75% |
State Fees & Downtown Food and Beverage Tax Impacts
The state currently imposes a 1.5% administrative fee for Illinois Department of Revenue (IDOR) to collect locally imposed sales taxes. For every $1 million in HRST generated in Naperville, the City receives $989,500, and IDOR retains $10,500.
Another consideration regarding increasing the HRST is its corresponding impact on the DFBT, which funds the construction and maintenance of downtown parking facilities. Per the Municipal Code, any increase in the HRST automatically requires legislation that proportionately decreases the DFBT.
To maintain consistent revenue in the Downtown Parking Fund, HRST equal to the amount of the DFBT generated annually is deposited into the Downtown Parking Fund as a “make whole” agreement. If the City Council opted to raise the HRST as a replacement revenue source, the Downtown Food & Beverage Tax rate would be reduced to 0.50% and approximately $350,000 in additional HRST would be added to the Downtown Parking Fund, thereby diverting dollars away from the General Fund.
Sunset Clause
Upon first reading of the HRST ordinance on July 15, some members of the City Council expressed a desire to include a two-year sunset clause in the final ordinance. Per IDOR, sunset clauses in local tax ordinances are not recognized by IDOR. Regardless of any language in the enacting ordinance, future changes to a tax rate can only be implemented through the passage of a new ordinance. Therefore, a sunset clause has not been included in this ordinance. The City Council may take action to change locally established tax rates at any point in the future.
FISCAL IMPACT:
Staff estimates that raising the HRST by 0.25% would generate sufficient revenue to replace the lost grocery tax revenue.