President James Monroe once said, “To impose taxes when the public exigencies require them is an obligation of the most sacred character, especially with a free people.”
I served in public office for 16 years, including eight years as mayor of Highland Park, and I know the property tax is one of the hardest taxes to pay. It is a lump sum that must be paid twice a year regardless of one’s income or employment status. I am sure Mayor Rahm Emanuel is struggling with the issue, particularly as he tries to shore up Chicago’s middle class and attract new businesses.
That said, Chicago should consider a tax increase.
The mayor is surely on the right path in seeking to expand the sales tax base to include services and bring a casino to Chicago. The property tax is antiquated, dating back to an agrarian economy, and the growth in Chicago’s economy has occurred in services. That growth needs to be captured in a prudent way — a low tax rate on a broad base of services that would not interfere or deter service transactions — to fund essential services of government and pay outstanding liabilities. Service-based businesses benefit greatly from city services such as police, fire and sanitation. They should pay their fair share.
The idea of a casino has some competitive risks. But it does build on the Chicago’s booming tourism business, and the mayor should be commended for recognizing this fact.
The problem with both of these revenue options — a broadened sales tax and a casino — is that, unlike simply raising property taxes, they require legislative approval. The Legislature should act, as Chicago is a significant engine of the state’s economy, but even if approved, these measures won’t generate revenue for some time.
What is the downside of not increasing taxes? I would contend we have seen it — continued bond rating downgrades and growing pension liabilities. The headlines regarding both could drive businesses out of the city, but more likely will impact decisions by other businesses to move into the city. Further, the bond rating downgrades are adding millions of dollars to the city’s borrowing costs, money that would be better spent on reducing the deficit and pension liabilities.
Here is what I would suggest. First, put a debt affordability plan into place. This best practice is implemented by many cities and states to look at debt relative to operations. Limits on debt are self-imposed so operating revenues and expenditures can remain in balance. In effect it is similar to setting up a household budget where large items — such as infrastructure — can be funded only if affordable within the current tax structure. I would take this one step further and include the unfunded pension liability along with the required annual contribution as debt. That is, bond debt and pension debt would be treated as equals.
This approach might defer infrastructure spending, such as on roads and sewers, but it acknowledges that both bond and pension debt must be funded within a balanced debt affordability plan. Having worked at a rating agency for 15 years, I can tell you with confidence this would be a credit-rating positive.
My second suggestion is to raise property taxes to address the underfunded pension issue. If the casino and a sales tax on services come online, the property tax could be abated or reduced. I realize the mayor has hard choices to make. I write to suggest one set of options which hopefully can stop the fiscal bleeding and the concomitant headlines.
This will get Chicago back on sound financial footing and enhance economic growth.
Michael D. Belsky is a senior fellow at the Harris School of Public Policy at the University of Chicago. He was mayor of Highland Park from 2003 to 2011, and a group managing director for Fitch Ratings from 1993 to 2009.