CHICAGO – Cook County, Illinois’ repeal of its tax on sweetened beverages highlights the tax fatigue Chicago area governments face, which could get in the way of future attempts to generate fresh revenue, Moody’s Investors Service said in a special commentary.

The repeal represents “a credit negative because the county loses revenue and it reflects practical constraints on revenue raising,” Moody’s wrote in the Thursday report.

Soda on a shelf in Cook County, Illinois
Moody's labeled Cook County's repeal of a sweetened beverage tax a credit negative.

Cook County, which includes Chicago and neighboring suburbs, passed the penny per ounce tax on soda and other beverages to raise $200 million to close a budget gap. Board president Toni Preckwinkle also billed it as a means to reduce consumption of drinks many believe lead to obesity and diabetes.

The tax faced a lawsuit from the beverage industry, consumer complaints and warnings that many were flocking to neighboring counties to make their purchases. The board overwhelmingly voted earlier this month to repeal the tax effective with the Dec. 1 start of the county’s fiscal year.

As a home rule unit of local government, the county has expansive powers to raise various fees and taxes, but “the political backlash against the unpopular soda tax highlights the practical limitations on raising taxes, even if a government is legally permitted to do so,” Moody’s said.

“This practical limitation is particularly critical for Chicago-area local governments, given the significant revenue needs of Cook County, the City of Chicago, CPS and other entities,” analysts added.

The county had previously raised its hotel and sales taxes, Chicago Public Schools has raised its property tax, Chicago has raised its property tax levy and imposed a water/sewer surcharge and imposed a tax on plastic bags, while the state in July raised the income tax rate.

The backlash against the soda tax extended beyond tax fatigue as it also reflected its portrayal as benefiting public health, the large percentage increase in the purchase price of certain drinks, and the logistical challenges with the tax roll out, Moody’s said.

“While these challenges would not apply to other types of tax increases, any future tax hikes in the wake of the soda tax repeal will likely be met with some political opposition, exacerbating budget pressures for Cook County and other area local governments,” Moody’s said.

The county must now work to close the gap ahead of passing a fiscal 2018 budget. Preckwinkle has warned of at least 10% in across the board cuts to deal with the revenue loss and few commissioners have suggested a new revenue stream.

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