Chicago’s cloud tax increase will drive businesses away
Chicago’s decision to raise its cloud computing tax from 9% to 11% might seem like a simple way to plug a $1 billion budget shortfall, but the reality is far more complex. This move targets an area of business that isn’t tethered to physical locations. Unlike taxing real estate or retail luxury goods, taxing cloud computing will drive businesses somewhere else.
Cloud computing isn’t a niche tech product. It’s the core of how modern businesses function. Whether it’s running financial systems, powering eCommerce, or supporting data analytics, cloud services influence everything. Making these companies pay an 11% premium to stay in Chicago will likely make them move operations to Texas, Florida, or countless other places where cloud computing taxes don’t exist. It’s not a hard choice for them, and that’s exactly the problem Chicago faces.
The evidence is already piling up. Companies like Citadel, Boeing, Caterpillar, and Tyson Foods have left Chicago in recent years, citing unfavorable business conditions. Their departures cost the city jobs, tax revenue, and economic momentum.
Chris Deutsch from Lofty Ventures put it bluntly: “They’re just going to keep ratcheting up these taxes, and it’s going to hurt business and the entire tech community here.” And that’s a reflection of what we’ve seen in cities like Chicago, where taxing innovation doesn’t end well.
The cloud tax will trigger a harmful economic ripple effect
When businesses leave, the impact doesn’t stop at the loss of their direct tax contributions. High-paying tech jobs are often the first to go. When those jobs disappear, the ripple effects touch everything from your favorite local coffee shop to the city’s ability to fund schools and public services.
On top of that, as the demand for housing decreases, property values drop. This cuts into property tax revenues, which are a key source of funding for infrastructure like roads and public transit. The result is a city with fewer businesses, fewer jobs, lower property values, and strained public resources.
The final twist is that Chicago is competing with other cities that offer comparable services without slapping a tax on cloud computing. Places like Austin or Raleigh beat Chicago in terms of business friendliness.
Chicago’s tax policy puts local businesses at a competitive disadvantage
The cloud tax hits everyone in the tech ecosystem, from startups to SMEs. Established companies might have the resources to absorb some of the added costs or move operations elsewhere, but smaller businesses are stuck. These companies often operate on thin margins, and an 11% tax hike can be the difference between scaling successfully and shutting down entirely.
Startups thrive in environments that support innovation and growth, not ones where costs pile up faster than revenues. If Chicago becomes known as a city where doing business is expensive and complicated, it will fail to attract new startups and it will lose the ones it already has.
Enterprise clients also have to think twice. Why would a company build or maintain operations in Chicago when tax-free regions offer the same infrastructure without the financial penalty?
The tax will accelerate multicloud, hybrid cloud, and edge computing strategies
Businesses don’t like to pay unnecessary taxes, and they’re remarkably good at finding ways to avoid them. This tax increase will push more companies to adopt distributed cloud strategies, using multicloud, hybrid, and edge computing to minimize exposure to Chicago’s tax.
Multicloud setups allow businesses to distribute workloads across multiple providers and regions, dodging geographic-specific costs. Similarly, edge computing, running processes closer to where data is generated, will become more attractive.
Larger cloud providers can probably handle this adjustment without breaking a sweat. But smaller providers and startups? They’ll struggle. The result? A less competitive market and reduced innovation.
Chicago’s tax policy risks becoming a cautionary tale
The city’s decision has broader implications, serving as a warning for other cities thinking about taxing cloud services. Sure, the $128 million in projected revenue looks good on paper, but what about the cost of losing businesses, jobs, and investment? That’s a long-term loss that could far exceed any short-term gains.
In 2022, Chicago startups raised $19 billion, an impressive figure that highlights the city’s potential as a tech hub. But that potential is now at risk. Other cities, from Denver to Washington, D.C., have similar cloud taxes, and their experiences show that these policies don’t work as intended. Chicago could end up as the latest example of how taxing the engines of modern business creates more problems than it solves.
For cities considering this path, the lesson is clear: taxing innovation might fill a gap in the budget today, but it drains the lifeblood of the local economy tomorrow. If Chicago continues down this road, it risks becoming a footnote in the history of failed urban policy experiments.
