Naperville could replace grocery tax with higher sales tax

The Naperville City Council will consider replacing the local grocery tax with an increased sales tax after city staff said tax revenue is falling short of expectations, in part because some stores did not comply with the new ordinance.

Last year, the council implemented a 1% local grocery tax to fill a $6.5 million budget deficit created when the General Assembly abolished the statewide grocery tax. The city’s new tax took effect Jan. 1.

At the July 21 council meeting, staff reported that tax revenue has fallen short of expectations because early compliance was weaker than anticipated.

“The Illinois Department of Revenue is the entity responsible for collecting the grocery tax, even though it’s imposed at the local level,” Naperville Finance Director Ray Munch said. “In the conversations that they’ve had with municipalities, it’s clear that many retailers heard that the grocery tax was eliminated and didn’t follow their local legislative process to understand that it was replaced at the local level in many jurisdictions.”

As of June 30, the year-to-date budget revenue collected from the tax is $1.63 million, about 25% less than the city’s original projections. Naperville received its first remittance from the new tax in April.

“While total revenues are below projections, monthly remittances increase each month, signaling improved tax reporting compliance by local businesses,” Naperville Deputy Finance Director Traci Marrocco said.

Marrocco declined to share the names of grocery stores that did not comply with the tax, citing confidentiality. When asked by the Naperville Sun how many stores in the city were not collecting the tax, she said she was unsure of an exact number.

“There is evidence out there that retailers were not collecting the tax,” Munch said. “I’ll be perfectly frank. I was watching it very closely when I shopped at grocers, and there were retailers in Naperville and elsewhere that were flat out not collecting the tax at the outset.”

Munch also said Naperville’s revenue improved over the first three months of collection, increasing from “$511,000 the first month all the way up to almost $600,000 in the most recent month.”

He noted that the city’s projections appearing to be off by 25% “might be a little bit misleading.” It is hard to project the timing of the income from a new tax, he said, but that the city received nearly $600,000 in June leads him to think the city will probably land in the “$6.5 million to $7 million range in actual revenue collection” by the end of the year.

Marrocco added that the city is tracking the businesses they expect to receive the grocery tax from to help ensure the city will hit the $6.5 million mark.

Despite improved compliance, some council members expressed strong opinions about the grocery tax.

“I have a concern about equity across Naperville businesses if (only) some are following the newly imposed tax. … I will reiterate my concern last fall that I don’t think we should be taxing groceries,” Councilwoman Mary Gibson said.

Councilman Ian Holzhauer agreed.

“We had quite a heated discussion on this up here, and essentially … the sole justification for using a grocery tax, a more regressive tax, over a home rule sales tax, was that it was a more stable source of income,” Holzhauer said. “With a 25% variance, that — sorry — just didn’t happen. It’s not even close to having happened.”

When the city was considering last year how to replace the income from the repealed state grocery tax, one of the options evaluated was increasing the sales tax by 0.25%, which can be done without voter approval because Naperville is a home rule municipality. The sales tax increase would have applied to restaurant meals and store purchases, including clothing, electronics and personal care products.

Holzhauer requested that staff prepare 2027 budget projections that include an option to eliminate Naperville’s grocery tax and replace the lost revenue with a higher home rule sales tax. Gibson and Councilman Ashfaq Syed supported the request.

Staff will bring back the information on the option for discussion at a future meeting.