Reforming Illinois Municipal Electricity Use Tax:

A Case for Ending Residential & Small Business Subsidies for Industrial Energy Users

Wednesday, April 22nd

Reforming Illinois Municipal Electricity Use Tax: A Case for Ending Residential & Small Business Subsidies for Industrial Energy Users

Covering: Chicago · Aurora · Naperville · Rockford
Underlying Financial Model: Electricity Tax Rate Structure (Major Cities)

Executive Summary

Illinois municipalities have the authority to levy a use tax on electricity consumption within their borders. The rate structures currently in place across Chicago, Aurora, Naperville, and Rockford were designed decades ago (1997) and share a common structural flaw: they are inverted. The more electricity a customer consumes, the lower the rate they pay per kilowatt-hour (KwH). This means large industrial users and corporations pay a lower effective rate than residents and small brick-and-mortar businesses.

This brief presents a proposal to correct this inequity at the city level by restructuring tiers so that rates increase, rather than decrease, with consumption. Across three scenarios modeled for Chicago, Aurora, Naperville, and Rockford, the reform would generate between $46M and $110M in additional combined annual municipal revenue, while reducing or holding harmless the rates paid by residential and small commercial users.

Current State: The Inverted Rate Problem

How the Rate Structure Works

Municipal electricity use taxes are levied on a tiered basis, with different per-KwH rates applied to different bands of monthly consumption. In principle, a tiered structure could be designed to be either progressive (higher rates for higher consumption) or regressive (lower rates for higher consumption). All four cities modeled here use the latter: rates step down as volume increases.

Chicago's current structure illustrates the problem clearly:

The first 2,000 KwH in a billing period are taxed at $0.0061/KwH. By the time consumption reaches 500,000 KwH, the territory of large industrial users, the rate has fallen to $0.0032/KwH, nearly half. The largest users, consuming tens of millions of KwH monthly, pay just $0.0030/KwH.

Who Uses What

The consumption asymmetry is stark. Reference benchmarks used in the model:

  • A 750 SF apartment uses approximately 750 KwH/month: firmly in Tier 1.

  • A 1,200 SF home uses approximately 1,100 KwH/month: also in Tier 1.

  • A 1,500 SF retail shop uses approximately 2,250 KwH/month: crossing into Tier 2.

  • A 1,500 SF restaurant uses approximately 5,500 KwH/month: in Tier 2.

  • A large restaurant (8,000 SF) uses approximately 30,000 KwH/month: also in Tier 2.

  • Large industrial and data center users can consume millions of KwH/month: in the lowest-rate tiers.

Residents and small businesses are effectively cross-subsidizing large corporate users. The current structure is not a historical accident – it was designed to favor high-volume users. But municipal tax policy should not operate as an industrial subsidy at the expense of residents.

The Proposal

Core Principles

  • Progressive over regressive: Higher consumption should carry a higher, not lower, per-KwH tax rate.

  • Resident and small business relief: The lowest-tier rate (Tier 1, covering most residential and small commercial users) should be reduced or held harmless relative to today.

  • Revenue-positive: The reform should generate meaningful incremental revenue for municipalities.

  • City-level implementation: The change requires ordinance amendments at the municipal level, while the state’s role is to lift or adjust statutory caps that currently prevent progressive structuring.

The Three Scenarios

Three scenarios are modeled, each representing a different balance between relief for low-tier users and revenue generation:

  • Option A: Tier 1 and Tier 2 combined at the current Tier 2 rate. Result: significant resident and small business relief, with larger users bearing the burden of revenue generation.

  • Option B: Tier 1 at 20% below current. Tier 2+ scaled progressively upward. A middle path balancing relief and revenue.

  • Option C: Tier 1 held at the current rate (no change for smallest users). All higher tiers scaled progressively. Maximum revenue impact with no harm to low-tier users.

The State Level Change Required

Illinois municipalities derive their electricity tax authority from the state. Current state-set statutory caps and structural requirements constrain how tiers can be set. The proposal requires the Illinois General Assembly to authorize municipalities to adopt progressive (upward-stepping) rate structures within defined parameters.

Revenue Impact: The Numbers

Key observations:

  • Option A, the most resident-friendly scenario, still generates $15M in additional annual revenue for Chicago alone, while cutting residential rates by >20%.

  • Option C, the most revenue-intensive scenario, raises $90M for Chicago alone.

  • The reform is most impactful in Chicago due to its large industrial base, but all four cities see meaningful revenue gains under every scenario.

What This Means at the Building Level

For residents, retail, and restaurants – they would see an average decrease in their utility use taxes under Option A. Under Option B – residents would see a net decrease, with all other parties seeing a marginal net increase – with the largest net increase happening with the largest users in the city. 

Equity & Fairness

Residents and small businesses today subsidize large industrial users through the inverted rate structure — progressive rates end that cross-subsidy.

Revenue Growth

Even the most conservative scenario (Progressive A) delivers meaningful new revenue — $69M+ in Chicago alone — without raising taxes on Tier 1 users.

Inflation Correction

Rates set in 1997 have eroded ~50% in real terms. Adjustment is a straightforward correction for 28 years of bracket creep.

Local Control

The reform operates at the municipal level, allowing cities to tailor implementation to local economic conditions.

What this yields

How This Gets Done

Step 1: State Legislative Action

The foundation is a change to Illinois law authorizing municipalities to adopt progressive electricity use tax structures. The legislation should:

  • Remove or modify the statutory cap structure that requires flat or regressive tiers.

  • Establish a maximum rate ceiling per tier to prevent abuse.

  • Include an optional CPI indexing provision, allowing cities to automatically adjust rates annually.

  • Provide a standard ordinance template and implementation guidance for municipalities.

Target: Illinois General Assembly. Introduced as a municipal finance reform measure. 

Step 2: City-Level Ordinance Amendments

Each city must amend its municipal electricity use tax ordinance. This requires:

  • City council introduction and committee review.

  • Finance department modeling and revenue projections (data for which is provided in the accompanying model).

  • Coordination with ComEd and other utilities on billing system implementation timelines.

Step 3: Utility Implementation

ComEd and other distribution utilities must update billing systems to track tiered municipal tax obligations. This is administratively feasible – tiered structures exist in other tax contexts.

Conclusion

The current electricity use tax structure across Illinois' major municipalities is an artifact of an earlier era that systematically favors large corporate users at the expense of residents and restaurant and retail businesses. The mechanics of reform are straightforward: a state law change, followed by city ordinance amendments, and the financial case is compelling across every scenario modeled.

Questions? Reach out to comms@i4pg.org.