When Lori Lightfoot declared that Chicago will face a $1.2 billion budget deficit next year due to the “catastrophic collapse” of the economy, she wasn’t the only the mayor making that announcement. COVID-19 is wreaking havoc on municipal budgets all over the country. Chicago, though, is in worse shape than most cities, because of the sources from which we collect revenue.
A recent New York Times story ranked 41 cities based on how likely they are to suffer severe revenue shortfalls as a result of COVID-19. Using projections from National Tax Journal, Chicago ranked 11th, with an estimated decline of 11 percent. In last place (which is really first place) was Boston, with 4 percent.
“What matters more in this pandemic moment is how a city generates money: Those highly dependent on tourism, on direct state aid or on volatile sales taxes will hurt the most,” the story read. “Cities like Boston, which rely heavily on the most stable revenue, property taxes, are in the strongest position – for now.”
The reason? Boston derives 71 percent of its revenue from property taxes. That’s a necessity in Massachusetts, which does not allow local governments to set sales tax rates, or levy income taxes. Everyone in Boston pays 6.25 percent sales tax, compared to 10.25 percent in Chicago. Meanwhile, Boston property is worth nearly twice as much as Chicago property: according to Zillow, the average Boston home sells for $629,000, while the average Chicago home sells for $329,000.
According to Chicago’s 2020 budget summary, the city took in $1.51 billion in property taxes while spending $11.65 billion, meaning property taxes funded 12.9 percent of the budget, compared to 71 percent in Boston. A larger source of revenue in Chicago was “Local Tax,” which included a public utility tax, sales tax, transaction taxes and transportation taxes.
Massachusetts is sometimes derided as “Taxachusetts,” but Bostonians’ reliance on property taxes has turned out to be a smart move in the age of COVID. So far, property values have been stable, while sales and incomes are declining, due to business slowdowns during the pandemic. But property taxes have always been recognized as the most stable source of local revenue.
“Stability and reliability have long been thought of as requirements for creating a sound local tax system,” wrote the authors of “The Property Tax: Its Role and Significance in Funding State and Local Government Service,” a study by the George Washington Institute of Public Policy. “Local governments rely on the tax because, unlike all other local option taxes, the base of the tax cannot, for all intents and purposes, be moved. The revenue from such a ‘captive’ tax base can be relied upon to a greater extent than either wage or sales taxes – both of which have highly mobile tax bases.”
Despite its virtues, Lightfoot declared that a property tax increase “is at the very bottom of our list of options” for balancing the city’s budget. If the property tax is such an effective tool for municipal funding, why don’t municipalities use it more?
Because voters hate property taxes. In 2005, Gallup conducted a poll on “The Least-Fair Tax.” The property tax was the landslide winner, at 42 percent, despite arguments that property taxes are less regressive than sales or income taxes. University of Chicago economist Milton Friedman, who hated property taxes less than most other taxes, theorized it was because “[i]t’s the only tax left on the books for which people have to write a big check.” Property taxes are paid in big chunks, twice a year, while income taxes are deducted a few dollars at a time from weekly paychecks, and sales taxes are paid a few pennies at a time, with every purchase.
Instead of a property tax increase, Lightfoot called for a new casino in Chicago. That’s not the most sensible solution: as the Times reported, “[i]n Detroit, one-fifth of the municipal budget typically comes from casino revenue. And casinos have just reopened, at reduced capacity.” Detroit ranks 4th among cities whose budgets are vulnerable to the COVID-19 recession.
What’s most sensible, though, is not always what’s politically possible, as elected officials have learned over and over again when they’ve tried to raise property taxes.