Chicago To Apply 9% ‘Netflix Tax’

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There should be small print on “Welcome to Chicago” signs – something along the lines of “businesses and innovators not actually welcome.” With its recent, growth-killing hike of the minimum wage and its ever-looming $20 billion pension hole, the Windy City finds itself at a major competitive disadvantage. Mayor Rahm Emanuel and his Department of Finance just made matters worse with the introduction of new tax rules that will notably increase the cost of using popular streaming services like Netflix NFLX -3.28%, Hulu, and Spotify.

Desperate for new revenue to fill its dwindling coffers, Chicago is applying a 9 percent tax to what official documents call “electronically delivered amusements” and “nonpossessory computer leases.” Together, this pair of new tax rules amount to a taxation on any city resident who accesses “the cloud” – a move that business owners, digital natives, and everyday consumers of streaming content are finding deeply troubling.

These intentionally broad new tax rules affect more than just Chicagoans who want to stream their favorite show on Netflix or play a new album on Spotify. The 9-percent hike also applies to businesses that use could services, such as realtors who access real-time listings and attorneys who rely on Internet court databases.

“This is one piece of a whole picture that impacts why business would not want to locate here,” said Michael Reever, vice president of government affairs at the Chicago Chamber of Commerce, in a recent interview with the Chicago Tribune.

Going into effect September 1 and expected to generate $12 million annually, this new “cloud tax” is just the most recent example of Chicago politicians taking a nickel-and-dime approach toward fixing their ailing economy. Mayor Emanuel recently announced a plan to require off-site parking companies to share revenue with the city for the “privilege” of being able to pick up passengers at O’Hare and Midway airports. He’s also attempted to increase taxes on everything from cable TV to stadium seats. The cumulative effect of these decisions is to make citizens feel shaken down for cash – and to discourage businesses from expanding in or relocating to Chicago.

Chicago can barely afford its current liabilities – and it certainly can’t afford to lose residents and businesses. Yet that’s precisely what’s happened over the past two decades, courtesy of high tax rates and other financial woes (like unfunded pension liabilities). Between 1992 and 2011 (the most recent year for which IRS taxpayer data is available), Cook County alone lost $30.72 billion in net adjusted gross income – every minute, the county loses $3,245.

In an early-July interview with the Tribune, Michael Wynne, a partner in the Chicago office of the law firm Reed Smith, expressed skepticism about the new tax. He expects residents and businesses to find ways to dodge it. “Let’s say I sign up for streaming business data in the city but I have offices throughout the country,” Wynne said. “I will definitely make sure my billing goes through a different office.”

Clearly, Chicago needs to take a more comprehensive approach toward improving its economic climate. The nickel-and-dime tactics only lead to citizen dissatisfaction and serious downgrades in the city’s bond rating. Putting a tax on the cloud is particularly tone-deaf move, as the very types of people Chicago should be welcoming – entrepreneurs, young creatives, tech investors, and the like – consider affordable streaming services to be part of their quality of life.

Chicago needs to look to its own burdensome tax policies and taking action on those, rather than continually dig through its citizens’ pockets. Until that happens, workers and companies will just admire the Chicago skyline from their rear-view mirrors.