CITY COUNCIL AGENDA ITEM
ACTION REQUESTED:
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Pass the 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
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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.
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 a 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.
On August 19, staff presented an ordinance to increase the HRST by 0.25%; however, the City Council, by a vote of 5-4, approved a substitute motion to approve a 1% local grocery tax, as presented on July 15.
Out of an abundance of caution and to ensure the utmost procedural integrity, Naperville legal counsel recommends that the City Council re-adopt the grocery tax ordinance previously approved on August 19, 2025. Although the ordinance was duly considered and passed at that meeting, it was not explicitly listed on the advance agenda. This precautionary re-adoption will affirm the Council's prior intent while safeguarding the City against any potential technical challenges related to notice requirements, thereby supporting the timely implementation of this important revenue measure for the benefit of the community.
DISCUSSION:
Staff maintains its recommendation that the City Council approve the ordinance establishing a local grocery tax, in alignment with the recommendation of FAB. This action guarantees one-for-one revenue replacement, maintains greater revenue stability, and preserves the HRST at a comparatively low rate.
Approval of this action before October 1 is required to avoid a significant lapse in revenue collection. Staff is currently in the advanced stages of developing the 2026 annual budget. As previously forecasted, preliminary General Fund expenditures exceed revenues by approximately $2.5 million. Staff has made significant progress in identifying budget-balancing measures; however, failure to adopt an ordinance replacing revenue lost through the state’s elimination of the grocery tax would significantly increase the budget deficit.
If the City does not file an approved revenue replacement ordinance with the Illinois Department of Revenue by October 1, the next filing opportunity would be April 1, 2026. That would delay the collection of revenue to July 1, 2026, resulting in approximately $3.25 million in lost revenue.
FISCAL IMPACT:
The proposed 1% local grocery tax is a one-to-one revenue replacement for the elimination of the 1% state grocery tax, which is estimated at $6.5 million.