CITY COUNCIL AGENDA ITEM
ACTION REQUESTED:
title
Option A: Concur with the Financial Advisory Board and staff to 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; or
Option B: Conduct the first reading of an ordinance amending the Home Rule Sales Tax and Downtown Food and Beverage Tax by amending Section 11 of Chapter 1, Title 3 and Section 9 of Chapter 1, Title 3 of the Naperville Municipal Code
body
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. 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.
Staff presented an ordinance to establish a replacement local grocery tax for first reading at the June 18 City Council meeting. 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.
DISCUSSION:
In addition to a local grocery tax implementation, FAB considered a revenue replacement option that would increase Naperville’s current 0.75% HRST to 1%. This action would result in a consumer spending an additional 25 cents per $100 on qualifying purchases. Staff presented this alternative due to its relative reliability as a long-term solution and a reasonable assumption that the dollars generated would be similar to those obtained through the grocery tax.
Below is a high-level overview of how the two replacement revenue sources compare and contrast. In-depth information and context are provided after the chart in various categories.
|
|
Local Grocery Tax (1.0%) |
Home Rule Sales Tax (0.25% increase for a total 1% rate) |
|
Items that are taxed |
• Food sold for consumption off premises • Infant formula • Vitamins & supplements The 1% tax on prescription and non-prescription medicines, medical appliances, & related healthcare items was not eliminated with the grocery tax. |
• All general merchandise (clothing, personal care items, electronics, diapers, toilet paper, appliances, cleaning supplies, home improvements, etc.) • Food prepared for immediate consumption (restaurants) • Alcoholic beverages |
|
Items that are not taxed |
• Candy • Soft drinks • Alcohol |
• Automobiles and other titled property • Prescription & non-prescription medicines • Medical appliances & related healthcare items |
|
Revenue generated |
$6.5M (estimate) |
$6.57M |
|
Resident vs. non-resident revenue generation |
• 50% of foot traffic comes from non-residents across all 21 major stores • 52% for top 10 stores • 54% for top 5 stores |
• 50% of revenue is estimated to be generated by non-residents |
|
Impact on lower-income consumers (SNAP recipients) |
Tax would not be charged on groceries purchased with SNAP benefits |
SNAP recipients pay HRST on all items |
|
Revenue stability |
More stable |
Less stable |
|
Comparable communities’ tax rates |
Matches the trend of local grocery tax adoption, providing customer consistency |
Would tie Naperville with several home-rule communities in the region versus having the outright lowest HRST |
|
State administrative fees? |
No |
Yes |
|
Impact on other local taxes |
No |
Yes - Downtown Food & Beverage Tax |
Revenue Generated
Staff used reasonable assumptions for both options to estimate revenue based on the best available 2024 data. However, the precise amount of revenue that a local grocery tax would generate is not known by either the City or the Illinois Department of Revenue (IDOR), as tax dollars for both grocery items and drugs/medical devices are reported to the state as a lump sum. City-specific numbers are unavailable for the 2022-2023 period when the grocery tax suspension was in place, as retailers reported statistics at a corporate level versus individual sites.
In addition, businesses self-report their sales codes to IDOR, and a business that sells groceries may not fall under a specific grocery code. Therefore, IDOR notes that a local government should not solely rely on its reports for an accurate assessment of potential grocery tax revenue generation.
Ultimately, this means that revenue generated by a local grocery tax could be materially more (or less) than the $6.5 million estimate, as staff can’t separate dollars brought in by grocery sales from those obtained through drug/medical device purchases. The implementation of a one-for-one replacement grocery tax mitigates this concern.
Staff estimates the $6.57 million HRST revenue after considering required reductions for the Downtown Food & Beverage Tax, described later in the memo, and the state’s 1.5% administrative fee.
Resident vs. Non-resident Revenue
Staff analyzed foot traffic data from all 21 Naperville grocery stores, including big box retailers with significant grocery sales, and found that 50% of foot traffic comes from non-residents. While the data does not specify the amount spent, staff reasonably assumes revenue generation would align with foot traffic percentages.
For HRST, the same data was obtained for 15 of the top brick-and-mortar retail and restaurant locations. That data suggests approximately 60% of foot traffic comes from non-residents. However, 16% of all HRST is generated from online sales, entirely attributable to Naperville residents. When that data is weighted against the foot traffic data, we estimate that non-residents generate 50% of HRST revenue.
Impact on Low-Income Consumers
At the June 17 meeting, staff noted that low-income households receiving Supplemental Nutrition Assistance Program (SNAP) do not pay sales tax on groceries purchased with those benefits.
However, those households receive no exemption from HRST or other sales taxes.
According to the U.S. Census Bureau’s 2023 American Community Survey, 2,790 households in the City of Naperville receive SNAP benefits, or 5% of the city's households. The data is further broken down by households with people over 60 years old and those without. That split is nearly 50/50.
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 stability and 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
As of June 27, 246 communities, including Batavia, Carol Stream, Downers Grove, Glen Ellyn, Hinsdale, Hoffman Estates, Palatine, Schaumburg, Westmont, Wheaton, and Woodridge (full list attached), have already adopted and filed with IDOR a replacement local grocery tax. Based on conversations within the DuPage Mayors’ and Managers’ Conference and the Will County Government League, most communities surrounding Naperville are expected to adopt a local grocery tax before October 1.
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.
|
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 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.
The administrative fee is not applied to the 1% municipal share of regular state sales tax, and staff has confirmed with IDOR that the fee will not be collected on local grocery taxes.
Another consideration regarding increasing the HRST is its corresponding impact on the Downtown Food & Beverage Tax (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, which all local grocery tax dollars would continue to support.
Community Support
On June 16, the Downtown Naperville Alliance (DNA) and the Naperville Development Partnership (NDP) submitted letters to the City expressing support for the continuation of a 1% tax on groceries. Neither supports an increase to HRST.
DNA noted that an increase in HRST would shift additional tax burden onto the general retail and restaurant sectors. At the same time, NDP stated its desire to keep Naperville’s HRST rate lower than that of other communities in the region. The Naperville Area Chamber of Commerce has also expressed to staff a preference for a replacement grocery tax versus an HRST increase.
FISCAL IMPACT:
If replacement revenue were not approved, the loss of grocery tax revenue would create a significant budget imbalance requiring expenditure reductions that would have permanent service-level impacts. The revenue generated by Option A or Option B would mitigate that budget imbalance.
Staff maintains its recommendation that the City Council approve Option A, establishing a local grocery tax, in alignment with the recommendation of FAB. Option A guarantees one-for-one revenue replacement, maintains greater revenue stability, and preserves the HRST at a comparatively low rate.