Chicago’s Bold Tax Moves: Are New Hotel and Short-Term Rental Taxes the End of Affordable Travel in the US?

Published on July 17, 2025

Chicago’s hospitality tax system will be implemented, impacting both short-term rental hosts and traditional hotel operators. The state’s Hotel Operators’ Occupation Tax (HOOT), which has long applied to hotels, will now also apply to short-term rentals such as those listed on Airbnb and VRBO. This move follows the trend of Chicago’s expanding tax framework to accommodate a growing and diverse lodging market.

Short-term rental hosts will be required to pay a 6% tax on 94% of their gross rental income, which will be added to existing state and local lodging taxes. This tax policy extension is part of a larger effort to standardize and regulate short-term rental properties in the city while ensuring that they contribute to the city’s revenue in the same way as traditional hotel operators.

Meanwhile, the city’s tourism board, Choose Chicago, is pushing forward with a proposed Tourism Improvement District (TID) that aims to increase the hotel tax for large downtown hotels. This proposal, if enacted, would raise the hotel tax to 18.9%, positioning Chicago among the highest tax rates for lodging in the United States.

Expanding the Hotel Operators’ Occupation Tax to Short-Term Rentals

As of July 1, 2025, Illinois law will extend the Hotel Operators’ Occupation Tax, previously applied only to traditional hotels, to all short-term rental properties. This change is expected to impact short-term rental hosts significantly, as they will now be required to remit a 6% tax on 94% of their gross income. Hosts will be responsible for remitting the tax directly to the state, although they will have the option of passing the cost along to their guests.

The new policy comes as part of an ongoing effort to ensure short-term rentals contribute equally to the city’s tourism-related taxes. Prior to this change, short-term rentals operated outside of the traditional hotel tax structure, which left them largely exempt from certain state and municipal taxes. With the new tax extension, hosts will now find themselves subject to the same financial requirements as hotels.

In addition to the new state tax, short-term rentals will continue to be subject to several existing taxes that are imposed on lodging businesses in Chicago. These include the city’s 4.5% hotel tax and a 6% surcharge, as well as the Metropolitan Pier & Exposition Authority tax and the Illinois Sports Facilities Authority levy. When combined, these taxes will significantly increase the cost burden for short-term rental hosts and may lead to higher prices for guests.

The Tourism Improvement District: A Proposed Increase in Hotel Taxes for Downtown Chicago

In a related move, the city’s tourism board, Choose Chicago, has introduced a proposal for a Tourism Improvement District (TID) that targets hotels with 100 or more rooms located within specific downtown zip codes. If approved, the TID would impose an additional 1.5 percentage points onto the current hotel tax rate of 17.4%, bringing the tax rate for large hotels in the downtown area to 18.9%. This proposed increase is aimed at generating additional revenue for the city to support its tourism-related initiatives.

The funds collected through this tax increase would be used to support a range of activities designed to enhance Chicago’s competitive edge in the tourism market. These activities include funding global media campaigns, convention bidding incentives, and event promotions. The goal is to increase Chicago’s visibility as a prime destination for tourists and convention attendees, competing with other major cities like Las Vegas and New York that benefit from much larger tourism marketing budgets.

Supporters of the TID argue that the additional revenue, estimated to generate over $50 million annually, could help Chicago’s tourism sector reach the funding levels of cities like Las Vegas, which are known for their heavy investments in tourism promotion. By bolstering marketing efforts and supporting convention attractions, they believe that the increased tax will ultimately lead to a greater return on investment for the city, creating a positive impact on the local economy.

Potential Challenges for Hotel Operators and Meeting Planners

Despite the potential benefits of the TID, there are concerns among some hotel operators and meeting planners. Some fear that the increased tax rate, when combined with other rising costs, could discourage business and reduce Chicago’s competitiveness in the highly competitive hotel and convention markets. Hotel operators may find it difficult to absorb the higher taxes without passing them along to customers in the form of higher room rates.

Meeting planners, who often book large hotel spaces for conferences and events, may be particularly sensitive to any increase in lodging costs. Higher room rates could impact the attractiveness of Chicago as a venue for conferences and conventions, especially when competing with other cities that offer lower overall costs. These concerns reflect broader anxieties within the hospitality industry about the long-term effects of continually increasing taxes on the sector.

However, proponents of the TID, including representatives from Choose Chicago, argue that the additional revenue generated by the tax increase will help maintain and enhance the city’s standing as a global leader in tourism and convention hosting. They believe that the marketing and event promotion supported by the TID will help Chicago attract new business, offsetting any negative effects that higher hotel taxes might have on room rates and bookings.

Comparing Chicago to Other Convention Cities

Currently, Chicago has one of the highest hotel tax rates among U.S. cities that are focused on convention tourism, with the current rate standing at 17.4%. This rate already positions Chicago as a leader in the industry, but with the proposed increase through the TID, the city would surpass even the highest tax rates seen in other major convention cities.

For example, Las Vegas and New York both have lower hotel tax rates compared to the proposed 18.9% tax rate in Chicago. However, these cities often allocate larger budgets for tourism marketing and events, which has allowed them to maintain their appeal as top convention destinations. In this context, the increase in Chicago’s hotel tax could help the city level the playing field, particularly by ensuring that the city has the resources needed to compete on a global scale.

The tourism sector in Chicago has long been one of the city’s most important economic drivers, with thousands of visitors coming each year to attend conventions, explore the city’s cultural attractions, and experience its world-class dining and entertainment. With increased investment in marketing and event promotion through the TID, the hope is that Chicago can attract even more visitors, further solidifying its position as a key player in the international tourism market.

Looking Ahead: Balancing Taxation and Competitiveness

As the proposal for the Tourism Improvement District moves forward, there will be an ongoing debate over the balance between raising revenue for tourism initiatives and maintaining the city’s competitiveness in the hospitality sector. The challenge for city officials will be ensuring that the higher taxes do not price out visitors or reduce the number of conventions and events that choose Chicago as their destination.

For short-term rental hosts, the extension of the Hotel Operators’ Occupation Tax presents a new set of challenges. While the tax on short-term rentals is expected to raise the cost for guests, it also aligns the sector more closely with traditional hotels, ensuring that all lodging options contribute equally to the city’s tourism revenue. The hope is that these changes will bring about a more unified and regulated approach to tourism, benefiting the city as a whole.

Navigating the Future of Chicago’s Hospitality Sector

The changes in tax policies for both traditional hotels and short-term rentals represent a new era for Chicago’s tourism and hospitality sectors. While the increase in hotel taxes and the expansion of the Hotel Operators’ Occupation Tax to include short-term rentals may lead to higher costs for visitors and businesses, the revenue generated by these taxes is intended to fund initiatives that will benefit the city’s long-term growth. The Tourism Improvement District proposal, with its focus on boosting marketing efforts and convention incentives, aims to ensure that Chicago remains a leading destination for business and leisure travelers alike.

As the city navigates these changes, it will be essential to maintain a careful balance between increasing revenue for tourism and preserving the competitiveness of the hospitality sector. The outcome of these initiatives will have a lasting impact on Chicago’s tourism industry, and the success of these measures will ultimately depend on their ability to generate positive returns for both the city and its visitors. The hospitality industry, government, and local stakeholders must work together to ensure that these changes foster a vibrant, sustainable tourism ecosystem that benefits all.