The dramatic drop in retail spending caused by the COVID-19 pandemic is significantly reducing local government revenues, which is most concerning for communities that heavily rely on sales tax*. Of the 284 municipalities in northeastern Illinois, 30 percent heavily rely (more than 20 percent of their revenue) and another 34 percent somewhat rely (up to 10 percent of their revenue) on this income stream.
Although COVID-19’s full impact on the retail industry remains unknown, U.S. retail sale estimates for April 2020 show a year-over-year decrease for nearly all retail categories. Retail stores with the largest year-over-year decline include clothing and accessory stores (-89.3 percent), furniture and home stores (-66.5 percent), and electronic and appliance stores (-64.8 percent).The categories that continue to do well are food and beverage stores (12 percent), grocery stores (13.2 percent), and non-store retailers like e-commerce (21.6 percent).
Forecasts by Costar Analytics show a loss of over 4 million square feet of retail space in the Chicago market due to permanent store closures between now and 2021. Retail vacancy in northeastern Illinois is already high (6.3 percent) relative to other regions, likely due in part to the way that our tax system incentivizes retail development in excess of market demand. The temporary closure of non-essential retail businesses, coupled with an increase in online retail sales, may accelerate storefront retail vacancy in the region.
Changing retail and consumer habits pose a challenge to the sustainability of a financial model where sales tax makes up a large portion of municipal revenue. Two recommendations that communities should consider for addressing this issue involve shared services and tax reform. More background on the recommendations below can be found in ON TO 2050, the region’s comprehensive plan.
Use collaborative leadership to address regional challenges. To mitigate sales tax revenue shortfalls, local government collaboration is an important strategy for providing public services on a reduced budget. Municipalities, especially lower-capacity communities, should explore developing partnerships with neighboring jurisdictions for sharing or consolidating services to offer necessary services while reducing costs.
Develop tax policies that strengthen communities and the region. Another important strategy is to advocate for the State of Illinois to modernize the tax system. The recently enacted Leveling the Playing Field for Illinois Retail Act will help municipalities with sales tax shortfalls. Beginning on January 1, 2021, online purchases will be subject to local sales taxes based on the location to which they are shipped or delivered. Expanding the sales tax base to include Internet sales will help communities create a more balanced land use mix and support the type of retail development that is more desirable.
More improvements are needed to give municipalities a strong foundation for a strong economy. All communities must have sufficient revenues to provide public services and infrastructure. The Chicago Metropolitan Agency for Planning will continue to monitor trends to help communities respond and recover as they navigate the current and post-pandemic retail landscape.
* state and local sales tax revenue generated from general merchandise (not food and drug sales)