October 16, 2019


The iconic Benjamin Franklin, an American inventor, philosopher and politician, whose visage appears on $100 bills famously wrote that "a penny saved is a two pence cleared" in Poor Richard's Almanack in 1737. How about a penny taxed is a deficit cured? According to a Chicago City Hall insider, a possible penny tax on every city commercial transaction would solve the city's projected $843 million shortfall in the $11.8 billion 2020 budget.

That would not be a sales tax hike, as Chicago imposes a 3.75 percent tax on every purchase of any item bought within the municipal boundaries, and a higher amount on liquor and cigarettes, or sin taxes. This "penny" tax would be slapped on EVERY COMMERCIAL TRANSACTION, or purchase, atop existing sales taxes.

"There is a lot of resistance" among aldermen to that idea, said Aldermen Nick Sposato (38th).
There's also going to be a lot of resistance to raising property taxes - especially if, as Alderman Anthony Beale (9th) predicts, they are "massive." That means in the realm of $400 million to $500 million, and will be reflected on 2019's second installment tax bill, issued in August of 2020. That could be a 25 to 30 percent hike on every tax bill

In a city with a population of 2.7 million, with the average person buying something at least three times a day, including online, a penny tax on six million transactions could generate annual revenue of $80 million to $90 million but NOT solve the projected deficit real quick. Of course, there could be an across-the-board 10 percent cut in every city agency's 2019 spending level, which would save upwards of $1.1 billion. "That won't happen," said Sposato. In short, spending cuts are not on the table. The 2019 budget was $10.3 billion, up by $1.7 billion over 2018. And 2020's will be up by another $1.5 billion over 2019.

Back in Franklin's day, or even back in Reagan's day, budgeting was a less complex proposition. First, government didn't spend what it didn't have. That's now a rather quaint anachronism. Why worry about a "balanced budget"? Just load up on debt and bonds, get immediate popularity by satisfying critical current needs, pacify enough of the voters' self-interests to stay in office for a few more years, and pay those bills over the next 20 years. It's called kicking the can down the road. And don't waste time talking about "sacrifice" - another anachronism. Just "tax the rich." Unfortunately, that scenario does not work well when the money is needed RIGHT NOW, and property and/or sales taxes have to be raised significantly.

And second, there is no zero-based budgeting. That would mean every governmental unit has to justify every projected expenditure for the next fiscal year, starting with zero, rather than just add-ons to the current spending level.

State law mandates that all four city pension funds be 90 percent funded by 2048, which is 28 years away. Mayor Rahm Emanuel's $8.6 billion 2018 budget imposed $1.1 billion in property tax hikes for police, fire and teacher pensions, a 29.5 percent tax on water and sewer bills for municipal pensions, and a telephone tax hike for laborers pensions. Police and fire pensions will rise by $300 million in 2020.

The state legislature's veto session commences Oct. 28, but Mayor Lori Lightfoot has promised to unveil her 2020 budget before that date. The only "Springfield solutions" would either be a delay in the 90 percent full-funding date into the 2050s or 2060s, or some kind of structured bailout. Neither is likely. Likewise, "efficiencies and economies" and hiring freezes won't save more than $75 million to $100 million.

"Massive" is defined as large, imposing and impressive, of considerable magnitude, larger or greater than normal. That succinctly encapsulates what Chicago's unfolding 2020 budget crisis and projected $848 million deficit will do to next year's city property tax bills. "The city needs money," as in revenue, "now", said Sposato. It cannot wait for such other ideas as casino gambling, which will require 5 years to develop and to generate a profitable revenue stream.

More lucrative would be a "head tax" on every Chicago-based business with more than 250 employees, which was previously imposed and then repealed by the Emanuel administration. The idea is deemed to be a detriment to attracting new corporate business, or keeping existing, but is being pushed by council "progressives." Or a tax or fee on professional services, as performed by an attorney, accountant or medical practitioner, all deemed independent contractors. Or a stock/commodities transaction tax, perhaps a .025 cents per trade. Or a citywide income tax on those who earn over $250,000. All these ideas would have serious pushback, would have to be debated and would take time to be implemented. But all have the potential to generate a permanent revenue stream of $1 billion annually.

According to the 2018 tax bill, 52.5 percent of city property tax revenue collected goes to the Chicago Board of Education, and 23 percent to the City of Chicago, of which 66 percent is allocated for city pensions. On her recent city budget tour Lightfoot distributed a budget overview flyer noting that $1.474 billion in 2019 revenue came from property taxes, or 14.2 percent, and $1.095 billion from water and sewer fees, or 10.5 percent. That meant 24.8 percent of the projected 2019 budget was borne by property owners, be they commercial, residential or multi-unit landlords. The trickle-down effect means higher consumer prices and higher rents, but higher taxes on residences cannot be passed along or defrayed.

Of the 2019 expenditures, $1.358 billion were for city pensions, or13.2 percent, and $1.917 billion for debt service, or 19.1 percent, which is the interest being paid now on money borrowed to fund past budget deficits dating back to the glory days of the Daley administration, which sold off every city asset not nailed down to avoid a property tax hike, and borrowed to the hilt. There was also $939 million for general finance, which includes lawsuit settlements, plus $2.556 billion for public safety (police and fire), $2.032 billion for infrastructure (streets and sanitation) and payroll, and $890 million for "community development."

If Beale's forecast is correct, then property tax revenue will jump from 2019's $1.474 billion to close to $2 billion in 2020, or 35.6 percent. That means every property owner's 2020 tax bill will INCREASE by that amount in 2020.

"It will be a hard choice" for the council, said Sposato, if property taxpayers bear the brunt of the $843 million deficit. "But the pensions have to be honored and paid, " he said. Beale predicts that Lightfoot might not get the 26 votes needed for a tax-hiking budget.

Virtually everybody at the mayor's meetings clamored for more spending, not less, and for more entitlements. At the Copernicus Center meeting, which I attended, never once was the word "sacrifice" heard. The dialogue was all about getting more money or keeping money for "me or my special interest." A tax hike will not be good for the real estate market, but luckily for Lightfoot, the city's 40,000 workers have to continue to reside in the city.

Realtors like to brag that sales are all about location, location, location. Buyers may soon be responding "Not Chicago, Not Chicago, Not Chicago."

Send an e-mail to russ@russstew art.com or visit his Web site at www.russstewart.com.