FINANCIAL ADVISORY BOARD AGENDA ITEM
ACTION REQUESTED:
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Receive the report regarding the local impact of the State of Illinois’ grocery tax elimination and provide a board recommendation regarding revenue replacement
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DEPARTMENT: Finance Department
SUBMITTED BY: Raymond Munch, Finance Director
BOARD/COMMISSION REVIEW:
N/A
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 Illinois 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.
DISCUSSION:
Revenue from state and local taxes is an important component of Naperville’s revenue diversification philosophy, which balances economically sensitive revenue streams with stable ones so as not to be overly dependent on any one funding source. 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 all who may use these services, including residents, businesses, and visitors.
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. Despite the City’s revenue diversification and conservative budgeting practices, this significant amount, which would compound yearly because of the tax’s permanent elimination, presents a challenge to maintaining Naperville’s service delivery levels in the long term.
Financial Flexibility
For the past decade, Naperville has employed significant measures to maintain and, when possible, enhance service delivery, even throughout periods of global economic uncertainty. Following the Great Recession, in 2015, a concerted effort was made to lower the City’s debt by 25% and replenish its General Fund cash reserves to 25% over a period of eight years. These goals were defined in the City’s Financial Principles, which called for the development of structurally balanced operating budgets and the continuous improvement of cost-effective service delivery.
As part of this effort, a Home Rule Sales Tax (HRST) was implemented to provide a dedicated funding source for capital projects and debt repayment, to be paid for by all, including visitors, who use this infrastructure. By the end of 2022, debt was reduced by almost 36%, and cash balances had increased to nearly 37% of that year’s General Fund expenses.
These actions allowed flexibility and measured decisions during the subsequent pandemic years, allowing the City to maintain its existing service levels. Coming out of the pandemic, the City’s financial position allowed it to make strategic investments in service delivery utilizing existing operating revenues, such as sales and use taxes, charges for services, and property taxes. These investments included the addition of key personnel in operating departments (e.g., Fire, Police, Public Works, and Transportation, Engineering & Development), as well as the departments that provide essential services supporting operations (e.g., Information Technology, Finance, Human Resources, Legal, and Community Services).
These strategic investments in service delivery leveraged growth in existing operating revenue streams. At the same time, continued economic growth and a diverse revenue base have allowed the City to maintain the lowest property tax rate in over 50 years.
The results of these policy decisions around the City's finances, which provide the framework for appropriate service levels, are reflected in the City’s most recent community survey. Conducted in 2023, over 9 in 10 Naperville residents offered high marks for the overall economic health of their city, and 92% rated the quality of services provided by the City as excellent or good, a slight increase over 2016’s survey results.
Budgetary & Service Delivery Impacts
The City of Naperville is a service organization, with most of its General Fund dollars allocated to personnel and purchased services. It is important to note that the loss of grocery tax revenue specifically impacts operations within the General Fund and has no direct impact on the electric and water utilities, capital project funding, or other special funds within the budget.
The table below outlines each category's portion in the General Fund in 2025 and the impact of a proportional $6.5 million reduction.
|
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 non-discretionary nature
** Includes contributions to other entities, reimbursement programs, and social service grants
Without replacement revenue, the City would have to review large-scale programs and personnel to achieve that level of expenditure reduction. Any reductions would have a domino effect on other services, as personnel serve multiple programs.
The City's popular curbside leaf collection program is an example provided to illustrate this point. As noted in a 2024 program breakdown, much of the $1.5 million in program costs are related to permanent Public Works employees who perform other seasonal and year-round duties, including snow plowing, forestry services, storm sewer maintenance, and more. Approximately $50,000 of the $473,760 accounts for temporary staffing. If such a program were to be eliminated or reduced, the City would retain about $425,000 in personnel costs due to the overlap in providing year-round public works services. Otherwise, service reductions in multiple programs would occur.
|
2024 Leaf Program |
Costs |
|
Regular Wages |
$473,760 |
|
Overtime |
$222,920 |
|
Cartage/Hauling |
$225,000 |
|
Contractor Pickup |
$150,000 |
|
Disposal |
$350,000 |
|
Street Sweeper Rental |
$30,000 |
|
Equipment Maintenance & Operating Costs (i.e., fuel) |
$55,000 |
|
Supplies |
$24,400 |
|
Total |
$1,531,080 |
The same large-scale review of programs and services would have to occur in every department. 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. This would reduce service levels and the gains made over the past decade to right-size service levels for the community.
|
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.
Revenue Replacement Options
Traditionally, when it has been necessary to balance Naperville’s budget, that planning process involves a mixture of expenditure reductions and appropriate revenue-generating actions. For the 2025 budget, staff reduced its initial operational request by $2.1 million before bringing the budget forward. Staff will employ conservative budget practices during the 2026 budget process and internal measures to control requests impacting the General Fund.
In considering revenue replacement options, staff identified those solutions that would, based on their nature or historical trends, fill the $6.5 million gap in full while maintaining Naperville’s competitiveness with surrounding communities. Options identified include maintaining a 1% locally imposed local grocery tax or increasing Naperville’s HRST rate. Adjustments to other fees or taxes are unlikely to produce revenue sufficient to address the loss of the grocery tax. Additionally, a local grocery tax and the HRST are reliable revenue streams that establish a long-term solution.
Any ordinance enacting one of these options must be passed by Oct. 1, 2025, to ensure collection can start on January 1, 2026. Below is a brief overview of what each type of revenue replacement would achieve.
Replacement 1% Grocery Tax
• What it does: Applies the same 1% tax as the state did to food purchased at a grocery store to take home, prepare, and consume. It would not apply to any items for which the 1% state tax will continue to apply after Jan. 1, 2026.
• Impact: A 1% tax results in the consumer paying $1 for every $100 spent on groceries. Because it is a one-for-one replacement for an existing tax, customer receipts would not change, and the revenue generated would remain the same.
• What other communities are doing: As of April 2025, more than 50 communities around the state had implemented a replacement 1% tax. Locally, Downers Grove, Westmont, Wheaton, Schaumburg, and Lombard have passed ordinances enacting a replacement tax. According to the DuPage Mayors and Managers Conference, Will County Government League and Northwest Municipal Conference, most member communities are moving toward the adoption of a locally imposed grocery tax.
Increase the City’s Home Rule Sales Tax rate to 1%
• What it does: Increases the City’s current 0.75% HRST by 0.25% to 1% on general merchandise and food for immediate consumption. It is not applied to automobiles, groceries, or healthcare items.
• Impact: A 0.25% increase in the HRST results in the consumer spending an additional 25 cents per $100 in qualifying purchases. The City would continue to maintain one of the area's lowest total sales tax rates, as noted in the table below, and revenue is presumed to be similar to that generated by the grocery tax.
|
Municipality |
Current HRST Rate |
Current Total Sales Tax Rate |
|
City of Naperville |
0.75% |
7.75% |
|
Village of Arlington Heights |
1.00% |
10.00% |
|
Village of Downers Grove |
1.00% |
8.00% |
|
Village of Schaumburg |
1.00% |
8.00% |
|
City of Wheaton |
1.00% |
8.00% |
|
City of Aurora |
1.25% |
8.25% |
|
City of Evanston |
1.25% |
10.25% |
|
Village of Woodridge |
1.25% |
8.25% |
|
Village of Bolingbrook |
1.50% |
8.50% |
|
City of Elgin |
1.50% |
10.50% |
|
City of Elmhurst |
1.50% |
8.50% |
|
City of St. Charles |
1.50% |
8.50% |
|
City of Joliet |
1.75% |
9.00% |
Staff estimates that such an action would replace most, if not all, lost grocery tax revenue. In 2024, at the current HRST rate of 0.75%, $19.72 million in revenue was collected. A 1% HRST rate would have brought in an estimated $26.29 million in 2024, a difference of $6.57 million.
Conclusion
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 may be necessary to account for potential changes in the economic cycle. If economic conditions deteriorated, the compounding effect of the loss of the grocery tax would be significant and require service-level changes that would likely be unattainable in a form that meets community expectations.
At this time, staff is seeking a recommendation from FAB to the City Council regarding the appropriateness of implementing a revenue replacement option for the grocery tax due to the projected significant negative impact on the City’s General Fund and City services. FAB’s recommendation would be part of the staff’s presentation to the City Council at its June 17 meeting.