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Chicago Is Using a 20th-Century Tax System

We haven’t been a city that makes things since the 1980s, but our sales tax still applies only to things. Meanwhile, we aren’t taxing a growing pool of retirement income.

Photo: Erin Saunder/Chicago Tribune

At Wednesday’s public hearing on Mayor Lori Lightfoot’s $9.9 billion budget, every Chicagoan who turned up to speak was allowed exactly three minutes to testify. The seconds ticked down on a digital clock with big red numbers, installed in the City Council chambers to ensure that the public doesn’t overstep its right to speak in Council meetings, a right finally won in 2017.

Only one man was allowed to go over his allotted time: Laurence Msall, president of fiscal watchdog group the Civic Federation. All the other speakers wanted something: more affordable housing, more mental health clinics. Msall, on the other hand, told the aldermen how to get something: more tax money.

Politicians love to hear about how to get more tax money. They let Msall talk as long as he wanted. Then they asked him questions about how to collect these taxes of which he spoke.

As Msall summarized the Federation’s 103-page analysis of Lightfoot’s budget, his basic message was this: you’re trying to fund a 21st-century city with a 20th-century tax system. Remember when Chicago was hog butcher to the world? Tool Maker, Stacker of Wheat, etc., etc. When Chicago made things? Chicago hasn’t been that city since the 1980s, but we still have a sales tax that applies only to… things.

“We have more service-oriented business, and fewer business that deal in goods,” Msall told the aldermen. “We don’t capture, as many other states do, services.”

This is true. Check out this map


Screenshot: © Avalara Rev 090415

Illinois is one of only 12 states that does not tax services at all. (The city itself does tax a few stray services, like ground transportation and hotel admission.) Consequently, we have a narrower sales tax base than most places, which may help explain why Chicago’s 10.25 percent sales tax is tied for the highest in the nation. And unless the sales tax is expanded to services, the base is only going to get narrower. Consumers can evade sales taxes on goods by buying stuff online. They can’t do the same with a hair cut or a shiatsu massage.

The aldermen seemed to like this idea.

“We need to expand the tax base because people in the downtown area provide services to other areas,” said Ald. George Cardenas of the 12th Ward, on the Southwest Side.

That’s one big problem with our tax system, Msall said. The other is that we don’t tax retirement income. It may seem only fair not to touch the pensions of senior citizens on fixed incomes, but in fact, Illinois is one of only three states that grants what Msall called “an obscene exemption.” People are living longer these days. Some people live so long they spend more of their life retired than they spent working. Yet Illinois only taxes their income when they’re working. If Illinois followed the federal model, the first $50,000 of retirement income would be tax exempt, and the state would still collect an extra $2.5 billion a year in revenue.

“We have a population that’s aging,” Msall said. “More and more of their retirement income is not being taxed for the services they need.”

The aldermen liked that idea, too.

“Millionaires are not paying taxes,” said Ald. Harry Osterman of the 48th Ward. “There are those in our city who have done well, and we’re not taxing them. It’s not about taxing the little old lady who lives down the street.” 

Both of these changes would require permission from the state legislature. And to be fair, Msall is not one of those guys who never met a tax he didn’t like. He doesn’t like the corporate head tax that many progressives are pushing for, because companies could avoid it by allowing workers to telecommute from the suburbs. He doesn’t think Chicago should adopt a city income tax. And he pissed all over the idea of relying on taxes from gambling and marijuana. Lightfoot is counting on the public’s appetites for those vices to help close the $838 million budget deficit she inherited from Rahm Emanuel, but Msall called them “unreliable sources of income.”

(In a press conference after the Council meeting, Lightfoot pushed back on the contention that weed can’t fund the city: “This is a new market. We don’t really have a track record of what the revenue is going to be. There’s an element of speculation.”)

This City Council does not see cutting municipal services as its mandate. Six of the aldermen are socialists. The size of the Progressive Reform Caucus, which includes all the socialists, nearly doubled after the April elections. They see their mandate as restoring the social services cut by the neoliberal Mayor Emanuel, and also ensuring that the wealthy professionals replacing the working class in Chicago pay their fair share of taxes.

The mayor’s budget includes millions of dollars in new investment in homelessness, violence prevention, mental health, and neighborhoods. Even the aldermen who don’t have a socialist agenda want to climb out of the nearly billion-dollar budget hole. Give them ideas for new taxes, and they’ll listen for as long as you want to talk.

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