Why most suburbs saw a massive boost in sales tax revenue

With the effects of the COVID-19 pandemic still fresh in their minds, Arlington Heights Finance Director Tom Kuehne and the rest of the village's budget team are used to playing it safe with revenue estimates.

"We always try to be really conservative with our revenue projections, especially right now, because we really can't be sure what's going to happen in the future," Kuehne said. "And we saw that uncertainty with sales taxes."

Illinois Department of Revenue records show Arlington Heights saw sales tax revenues climb 30% in one fiscal year. From July 2021 to June 2022, Arlington Heights received $5.7 million more in sales taxes than it did during those same 12 months a year prior.

Kuehne and crew had accounted for a modest increase, but they got about $4.5 million more than what was forecast. And they weren't alone.

A Daily Herald analysis of 95 suburban sales tax receipts during the state's 2021 and 2022 fiscal years shows the towns combined to average a 28.6% increase in sales tax revenues, resulting in nearly $230 million more.

"It's really three things all happening at once that pretty much caused it," said Eric Noggle, revenue manager at the state legislature's Commission on Government Forecasting and Accountability.

First, federal and state laws that took effect in January 2021 required companies to assess sales taxes for online purchases at the rate of the buyer's hometown.

"The online stuff is definitely helping, not hurting," Noggle said.

Then, COVID-19 stimulus funds paid directly to Americans reinvigorated purchases on physical products.

"People took that stimulus money and were using it on big-item purchases, where before a lot of money was being spent on services, which is not usually taxed in Illinois," Noggle said.

And the final catalyst for sales tax revenue growth statewide has been the historic increase in the inflation rate.

"When things cost 7% to 8% more, you're going to get 7% to 8% more in tax revenue, even if the number of goods being sold has plateaued," Noggle said.

But government finance experts warn that municipalities can't count on such enormous growth from one year to the next.

"There was a lot of direct assistance from the federal government during the pandemic to make sure everyone had enough money to pay for things," said Laurence Msall, president of the Civic Federation, a nonpartisan government research organization, "but all of that is going to come to an end."

He notes government agencies are not immune to inflation, either. Much of what these towns are purchasing these days costs more as well, cutting into the profits of that sales tax windfall.

And while most suburbs also received federal stimulus funds, those dollars came with an expiration date. Most of the funds have to be spent before the end of 2025, officials said.

"So you're buying at inflated prices, and those dollars might not go as far as they once did," Kuehne said.

Arlington Heights is part of the Northwest Municipal Conference, a consortium of nearly four dozen suburbs predominantly in Cook and Lake counties that cooperate on legislative issues and priorities but also often partner on large-scale purchases. They aim to reduce costs by buying in bulk.

"Through our suburban purchasing cooperative, we're still seeing supply chain issues, especially with vehicles," said Mark Fowler, agency executive director. "There are some towns that have backed out of (vehicle) purchases because they're simply not available or gone to out-of-state dealers. Others are saying they need to sit tight and make their vehicles last as long as possible until the prices start looking better."

Specialized vehicles, such as ambulances, have a 24-month waitlist. An emergency purchase of these types of vehicles may drive prices even higher for towns desperate for a replacement.

"Whenever you're dealing with unexpected revenue growth, it's certainly an opportunity to improve your financial condition by paying down debt or adding to your pension fund," Msall said. "It would be wise for these towns to not have just a short-term plan for any unexpected revenue but a long-term plan as well that takes into account the possibility of an emergency expense."

Noggle said it's also possible inflation could affect sales tax revenue from online purchases, which have been a boon for towns since 2021.

"All that extra revenue we've seen starts to wane if prices continue to go up because there will be less purchases," he said. "Because most people don't have endless amounts of money."

Kuehne estimated roughly 40% of Arlington Heights' additional sales tax revenue last year was from the new laws regarding online purchases.

"That's making up for all the years when that revenue wasn't coming in," he said.

Nowhere is the effect of those purchases seen more than in smaller, affluent suburbs that already have a very small commercial base to begin with.

In Barrington Hills, sales tax revenue grew from $66,587 in the state's 2021 fiscal year to $214,071 in 2022, a 222% increase.

Inverness and Wayne, also small bedroom communities, more than doubled sales tax revenues last year.

Some lower socio-economic suburbs didn't see the types of increases in sales tax revenues as their wealthier neighbors.

Fox Lake, for example, saw a 6.7% increase.

Rolling Meadows, Antioch, Round Lake Beach, Villa Park, Elgin and Glendale Heights all saw increases below 20%.

For now though, the sales tax revenue from online purchases doesn't appear to be slowing down.

According to the state revenue department's website, the village collected more sales tax in the first three months of the state's current 2023 fiscal year - July, August and September 2022 - than in those months in 2021.

"We're still going to be cautious in our planning," Kuehne said. "We always are."