Understanding the Economics of Chicago’s Head Tax Proposal
Chicago is once again debating a policy that risks increasing government regulation, limiting individual freedom, and stifling economic growth in a city already under significant fiscal strain. The proposed Head Tax would levy businesses based solely on the number of employees they have working in Chicago. Supporters argue that it would force large corporations operating in Chicago to “pay their fair share” while funding government initiatives and social programs. Critics, myself included, see it as a fundamentally flawed tax policy that would disincentivize job creation, discourage capital investment and weaken the tax base that funds the massive budget in Chicago.
In simple terms, a head tax charges employers a flat fee for each employee on payroll, regardless of profitability, revenue or margins. In recent proposals, the tax would apply to employers with either 100 or 500 employees depending on the proposal. The rate would be set at either $21 or $33 per employee per month, with city officials projecting tax revenues of close to $100 million annually. So, for a firm employing 1,000 workers in Chicago, that translates into $250,000-$400,000 in additional business costs for just employing workers! The rationale behind this proposed policy is very hard to understand, while Chicago faces persistent budget pressures, rising contribution obligations, and increased spending demands. The way forward is not with increasing business taxes which will drive away employers, but cutting government spending, reforming the tax code, and reassessing social services in the city.
Unfortunately, perceived good intentions from the government do not translate into good economics. A head tax fundamentally misunderstands how businesses operate and allocate resources for maximum revenue and low costs. By tying tax liability directly to the number of employees a business employs, the policy simply raises the marginal cost of labor. This creates an incentive for employers to hire fewer workers, automate jobs, or relocate employees outside of Chicago. This tax hurts businesses regardless of whether the firm is struggling, losing money, or operating on very thin margins.
Economic research consistently shows that taxes on labor reduce employment growth. A 2025 article done by the Tax Foundation shows that head taxes in Chicago will increase taxes annually for businesses with 1,000 employees or more by $252,000. While it would also incentivize employers with under 100 employees not to hire any more. As adding a single employee to the tax triggering 100th would increase marginal costs by $25,200 per year. Enacting a tax that distorts marginal costs for businesses would quickly see higher unemployment, businesses moving operations, and lower wages for employees.
Chicago’s labor market makes this risk even more pronounced. The city is still grappling with shifts toward remote and hybrid work, as downtown Chicago sees low office occupancy. A head tax would further incentivize businesses to keep employees remote, shift future hiring to other cities, or employ workers in surrounding suburbs. This does not only affect large corporations but would affect Chicago foot traffic, restaurants, and services that thrive from employees working in the area.
There is also limited evidence that this tax would reliably produce the stable revenue that is being championed by the mayor. In practice, over the long run the tax base would shift; employers would hire less, move out of Chicago and try to minimize their tax liability. This would also decrease corporate taxes and payroll taxes, as employers decrease their labor forces, and businesses operate elsewhere. Seattle’s experience with a similar head tax in 2018 which was later repealed illustrates how quickly political backlash and concerns can derail these policies. While Chicago’s proposal is much more drastic in structure, the risk remains the same as revenue projections assume static behavior in a constantly shifting economy.
None of this is to deny Chicago’s real fiscal challenges and importance of taming their constantly growing social services. The city needs sustainable solutions and not stifling tax policies or regulatory structures. Policies that shrink the labor market ultimately undermine revenue growth and exacerbate the very inequalities that city politicians are supposedly fighting by reducing access to high quality jobs. If Chicago wants to get its fiscal house in order, it should focus on policies that broaden the tax base and unleash economic growth. This would include regulatory reform to decrease the costs of doing business in Chicago and simpler, lower taxes to incentivize taxpayers and not drive them away. Lower, flatter taxes with broader base growth generate more revenue over the long run than higher, narrower taxes that discourage participation.
The debate over the head tax should not be whether corporations contribute to the city’s wellbeing; they are already some of the largest contributors. They fund payroll taxes, property taxes, sales taxes, and create jobs in the city. The real question is whether Chicago wants to reward job creation or punish it, and from an economic standpoint the answer is crystal clear. While the head tax might be politically convenient, it is economically counterintuitive. If the city wants to thrive, it needs to expand access to free market opportunities and not penalize them.
References:
Chicago Tax Increases: Head Tax, Social Media Tax, Cloud Tax