Chicago's head tax was long called a job killer, but is there evidence to back that up?

For as long as it’s been alive, Chicago’s employer head tax has been derided — in one colorful way or another — as a job killer.

“It's much more than a head tax… it's a scalping tax,” said the late Ald. John Hoellen (47th) in an hour-long debate four days before Christmas in 1973 when the council approved the policy.

A decade later, even progressive former Mayor Harold Washington said he wanted to reduce and then nix the disfavored tax — requiring companies to pay $4 per month for each person they employ — “in order to stimulate economic growth,” though he never did.

In 2011, when the City Council voted to slash and repeal the policy by 2014, former Mayor Rahm Emanuel applauded Council members and declared, “The head tax is a job killer.”

Fifty-two years after its inception, those talking points have endured as Mayor Brandon Johnson’s attempt to revive a version of the hated head tax — at $33 a month for employees at companies with 500 or more workers — faces staunch opposition from a group of City Council members sensitive to the concerns of Chicago’s business community.

But the actual effect of the head tax on employment is unclear.

A WBEZ analysis of city tax data and publicly available economic data, reviewed by four economic and labor experts, found a lack of evidence that Chicago’s previous head tax, or its repeal, is to blame for job loss or growth in Chicago.

“It really is hard to assign any kind of causation to the head tax,” said Audrey Guo, an economics professor at the Santa Clara University’s Leavey School of Business, who has written two leading research papers on the impact of payroll taxes on employers.

At the same time Guo’s research suggests that certain types of employer taxes can slow job growth at smaller, newer firms, and can slow growth of lower-paying jobs at larger companies.

WBEZ’s analysis sheds light on who would potentially be affected by Johnson’s proposal: less than 1% of all licensed businesses in Chicago; roughly 20% of jobs at companies across the city; and companies where an average salary is estimated to be roughly $111,000.

Johnson has argued that those costs to large companies are worth the revenue from a tax earmarked for community safety programs that have played a role in historic reductions in Chicago’s violent crime. As Chicago faces a $1.2 billion budget gap, the mayor has criticized proposed alternatives to the head tax — such as an increased garbage collection fee — as punitive on low-income residents, resulting in City Hall’s ongoing budget stalemate.

A tale of two trend lines

For those looking for evidence that the 1974 head tax had a detrimental effect on Chicago jobs, a line chart showing the city’s labor nosedive of the 1970s and 80s might seem like a smoking gun.

Robert Bruno, a professor of Labor and Employment Relations at the University of Illinois, said there were much larger forces at play.

“There was a real hollowing out of manufacturing jobs,” he said. “That was true in a lot of areas that had depended on its manufacturing base. The 80s were a terrible decade across the country, and the head tax had nothing to do with it.”

Aldermen opposed to the head tax at the time were well aware of the downward jobs spiral, perpetuated, too, by outmigration to the suburbs and a national recession from 1973 to 1975.

“A great amount of the jobs have gone to the suburbs. A great amount of the workers have gone to the suburbs, and an awful lot more would like to go to the suburbs,” said then-Ald. Francis Lawlor (15th) in arguing against the tax.

Chicago saw job growth after the tax was fully phased out by 2014. But that upward trend, which takes place simultaneously in the suburbs, started before the repeal, in the recovery period after the 2008 housing market crash and recession.

“The best test period you have, in my mind, was in place from ‘95 to 2015 where the trend lines [between the city and suburbs] look identical,” said Ralph Martire, the executive director of the Center for Tax and Budget Accountability.

Chicago did enjoy steeper economic recovery from the 2008 recession than in the suburbs. Could that be because of the repeal of the head tax several years later?

“The city of Chicago has more to offer for business in a business location than suburban Cook does, generally speaking,” he said, pointing to Chicago’s post-pandemic recovery that also has appeared to outpace the suburbs.

You would need “a pretty sophisticated econometric model” to determine the head tax caused that upward trend, Martire said. Guo and Bruno concluded independently that the available data and research on Chicago’s previous head tax isn’t conclusive enough to call the policy a job killer.

Civic Federation President Joe Ferguson said he, too, has not seen compelling evidence that would constitute calling the head tax a job killer:

“Everybody asks that question,” he said. “And the answer is, ‘No, I haven't seen it.’”

“But the fact of the matter is…, the burden isn't on those who are on the receiving end of it. It's on the government to actually explain from the data exactly what the impact is going to be.”

Less than 1% of companies would pay

Johnson’s team hasn’t released information on the companies it believes would be affected by the current head tax proposal.

But it’s possible to draw some conclusions based on payments to the city’s previous head tax, with the caveat that Chicago’s business landscape has changed since 2014.

WBEZ obtained anonymized city data through a public records request that shows the total head tax paid per company per fiscal year from Jan. 1, 2000, through Dec. 31, 2013. That’s when the head tax applied to companies with 50 or more employees.

Over the 14-year period, roughly 2,200 companies paid a head tax each year, the data shows.

On average, only about 188 of those companies employed 500 or more people at the time. If the tax were applied to companies of that size, as outlined in the mayor’s current proposal, less than 1% of all current companies with an active business license in Chicago would pay the tax.

Those companies accounted for, on average, 225,000 jobs each year, according to the analysis, which is roughly 21% of all jobs at companies in Chicago during that period.

That translates to, on average, 224,782 jobs covered by the new proposal, which is roughly 20% of jobs at companies in Chicago.

That analysis is an estimate and doesn’t definitively answer how many companies would pay Johnson’s proposed head tax today. That’s because the city doesn’t collect data on the number of employees at companies based here.

It’s unclear exactly what companies and workers would be impacted by the head tax, because there isn’t Chicago-specific data on what industries make up 500-plus employee companies. But data published by the Bureau of Labor Statistics offers some clues.

Employment and wage data released this year shows Illinois workers at businesses with 500 employees or more were paid higher average salaries than their counterparts at smaller establishments. The bureau doesn’t publish job breakdowns by company size at the city or county level.

Guo says the impact of a per worker tax would be higher for low wage jobs than six-figure ones.

“I suspect that most firms employing workers who are earning $100k or more a year, this is a drop in the bucket for them,” Guo said. “I'm thinking of it purely as ‘How much has the labor cost increased for me to hire workers?’ And so for someone earning $100,000 a year, it's like less than 1% of the wage bill. But then for someone who's a minimum wage worker… that's going to be much larger,” Guo said.

The tax could impact businesses in lower profit margin industries, like restaurants, more than others. But data shows that among Illinois businesses with 500 or more employees, few are in the food service, retail or arts and entertainment industries while those in healthcare, manufacturing and professional services, such as tech and consulting, are most common.

Guo’s research shows that payroll taxes — which are more comparable to head taxes — can be burdensome for smaller, younger firms, leading to a decline of 2.2% in year-over-year employment growth.

“If the head tax had been designed differently to actually encompass all employers, I would be more concerned about it being a job killer than the way it's currently designed,” Guo said.

How much money did the tax collect?

Bruno, the labor expert at the University of Illinois, said while there may be disagreements about the head tax’s impact on jobs, there is one undisputed fact: “It did raise revenue.”

“Revenue was collected,” he said. “And how do you measure the effects of all that revenue? How was that revenue used, and where did it go?”

During the time a head tax was in place, revenue went into the city’s general fund and helped pay for services like police, fire, street cleaning, and other essential city services. While former Mayor Richard M. Daley publicly criticized the tax, he never could wean the city off of the roughly $25 million in annual revenue it brought in.

His successor, Emanuel, succeeded in doing so — first by reducing the tax and then repealing it a few years later — but not without sacrifice and messy union battles.

Two of Emanuel’s powerful council allies, now-convicted former Ald. Ed Burke (14th) and current Ald. Brendan Reilly (42nd), asked the city’s librarians to forgo a pay raise instead of keeping the head tax in tact, after Emanuel had decided to reduce it to $2.

"We believe this must be part of the solution,” the aldermen wrote, according to the Sun-Times, “as opposed to rolling back the employee head tax reduction, as your union leadership has recently suggested. A reduction in this tax is essential to economic growth and job creation throughout Chicago and is not an option when our goal is to strengthen the city’s economic future."

The union representing librarians — the American Federation of State, County and Municipal Employees Council 31 — urged Emanuel and the City Council to reverse course.

The defense of a “corporate tax giveaway while suggesting that working folks take a pay cut is out of step with most people’s values,” AFSCME spokesman Anders Lindall told the Chicago Tribune at the time. “Why should the men and women who make our libraries run bear the funding shortfall alone?”

It wasn’t only AFSCME opposing the change.

In 2011, a cohort of unions that made an unlikely team slammed Emanuel in a letter published in the Sun-Times.

It was co-written by Michael Shields, then president of Chicago’s largest police union, the Fraternal Order of Police; Karen Lewis, then-president of the Chicago Teachers Union; along with the Chicago Federation of Labor and AFSCME Council 31.

“[Emanuel] will shorten library hours, close police stations and neighborhood health clinics, potentially lengthen emergency response times and eliminate hundreds of jobs amid historic unemployment,” they contended.

“At the same time, Emanuel's budget will give big corporations a $20 million-a-year break by eliminating the ‘head tax,’” the letter reads.

It goes on to note Emanuel’s stumping for President Barack Obama who was seeking reelection.

“Mayor Emanuel's priorities look a lot more like those of the president's anti-union, budget-slashing, protect-the-wealthy political opponents.”