Chicago Netflix Tax Is Unfair, Unwise

Published September 28, 2015

Chicago faces a significant and growing public pension problem. Instead of tackling the problem head-on by holding down cost increases, Chicago Mayor Rahm Emanuel proposes several new or expanded taxes, which he says will slow down the debt growth from the revenue end. Emanuel’s half-billion-dollar property tax hike is getting most of the headlines, but he has also been pushing for taxes on e-cigarettes, ridesharing, and cloud computing.

The rapid growth of cloud computing has made it a tempting target for new sales taxes. Although several states are proposing new taxes on technological services, such as software upgrades, network design, and cloud computing, Chicago would be one of the first cities to expand its taxes on cloud services. It already extended its amusement tax to streaming entertainment services, now known as the Netflix tax.

Cloud computing in particular has fundamentally changed how consumers purchase and use software and computing services by moving many of the functions online. The shift of resources such as e-mail, database, and security services to a cloud infrastructure takes some of the burden of IT infrastructure off the consumer, saving both time and money.

Taxes on these services can affect nearly every industry, since virtually all businesses utilize outside companies for software and cloud computing to meet their individual needs. The tax will increase the cost of expansion, development, and modernization for nearly all industries, ranging from high-tech biotechnology companies to job-creating manufacturing and retail firms.

The public is beginning to push back. Six Cook County residents are suing the City of Chicago over the tax having never received a full vote before the City Council. It is a fair question. Any tax imposed by dodging the democratic process deserves strict scrutiny.

The proposed tax would place a burden on tech services that doesn’t apply to other products and services. Sales taxes work best when they are applied at a low rate and to a wide base. Placing a discriminatory tax on a single industry, as the tech service tax does, reduces the size of that industry while increasing the cost consumers pay for services.

Emanuel is targeting a popular new medium and exploiting it. Netflix users have moved away from traditional cable and satellite services because they have become far too expensive and because they force consumers to purchase unwanted channels. Everyday more people “cut the cord.” Emanuel’s new tax will only burden the cloud market with the same taxes that are contributing to the death of the cable industry.

Recent efforts to implement these taxes have brought on a massive pushback from industry leaders. Two high-profile tech service taxes—in Maryland and Massachusetts—were rolled back only a year after implementation. Michigan is likewise considering rolling back its tax on cloud computing after several high-tech firms threatened to leave the state.

Technology companies are strongly attracted to locations with a well-educated population from which they can draw talented programmers and developers, but a tax system that allows them to make a profit and grow their businesses is often even more important. Imposing taxes on technological services restricts the potential of one of the few remaining growth industries and drives companies and talent to more tax-friendly cities.

With Chicago’s tax burden already among the highest of any major U.S. city, policymakers should implement tax policies that encourage new businesses to enter the city, not drive them away.