March 17, 2023
In the current campaign for Chicago Mayor and City Council, several candidates have called for restoring the City’s employer’s expense or “head” tax, a tax that was repealed in 2014.
An employer’s expense tax, or head tax, is imposed on businesses at a flat rate based on the number of employees at that firm. Typically larger firms are subject to the tax. Head taxes in the U.S. are relatively rare.
Head Taxes in Other Cities
Denver imposes an occupational privilege tax on both employees and employers. The tax applies to businesses operating in the City and individuals who receive compensation of at least $500 per month. The employee rate is $5.75 per month and the employer rate is $4 per month per taxable employee. The tax applies not only to residents or businesses located in the City but also to any employee working in the City and any owner, partner, or manager engaged in business in Denver.
Pittsburgh currently imposes a tax on employers at a rate of 0.55% of the amount of total payroll expense generated by an employer in the city.
Seattle had a head tax from 2006 to 2009 before eliminating it. The city approved a new head tax in May 2018 that would have levied a tax of approximately 14 cents per employee per hour worked within the city. The measure was projected to raise roughly $45 million over 5 years to be used to build affordable housing and fight homelessness. However, the law was repealed after one month due to strong opposition from the business community, including large employers such as Amazon and Starbucks.
City of Chicago Head Tax: 1973-2014
The City of Chicago imposed a head tax from 1973 to 2014, through its home rule authority. Mayor Emanuel and the City Council phased out the tax between 2012 and 2014. The tax was imposed on businesses with more than 50 employees that performed 50% or more of their work service per calendar quarter in the City. Employees had to earn more than $4,300 in a calendar quarter to be considered taxable. The tax was imposed at a rate of $4 per employee. Exemptions from the tax were provided for:
- Domestic service in a private home;
- Newspaper delivery when the individual is under the age of 18 years;
- Employees who are immediate family (father, mother, spouse, son or daughter);
- Insurance Company Personnel;
- Not for Profit, Educational and Charitable Organizations;
- Agricultural Labor;
- Independent Contractors; and
- Business partnerships.
In 2009 and 2010, approximately 2,700 Chicago companies paid the tax, contributing approximately $35 million in revenue to the City. In July 2012, the tax was reduced to $2 per employee and then it was repealed in 2014.
Pros and Cons of Head Taxes
Supporters of head taxes argue that businesses, especially large employers, generate demands for municipal services, such as public safety, schools, transportation, infrastructure and garbage collection. Large scale business activity can trigger increases in housing costs, making housing less affordable for longtime or low-income residents. Finally, businesses often receive generous tax incentives from government in return for locating in a community and providing long-term economic benefits. Thus, it is reasonable to ask that companies assist in defraying increased costs and recouping revenues lost from incentives. In any case, taxes are rarely the primary factor in business locational decision making.
Opponents of head taxes argue that they are a disincentive for employers to hire workers because they are a tax on employment. The impact is particularly burdensome for medium sized businesses. If businesses decide to halt expansion plans or move to different jurisdictions to avoid paying the tax, then the taxing municipality is left with fewer jobs and economic growth than it would have had otherwise. Amazon cited the proposed Seattle head tax as a reason to pause its headquarters construction plans. Also, because head taxes can comprise a larger share of the cost of lower paid workers, they might have a negative impact on decisions to hire these workers.