Emanuel's proposed property tax increase and the question of limited options
Last week, Chicagoans learned that Mayor Rahm Emanuel was planning to raise the city's property tax levy by $500 Million. Well, technically, the city's property tax levy would only increase by $450 million - the remaining $50 million would be raised by Chicago Public Schools district. Since the Chicago mayor appoints the CPS school board, the distinction is really kind of academic.
As Crain's Chicago Business explained, this would mean that property owners would see their property taxes increase from 6.81 percent to 7.60. Chicago Sun-Times put it in more concrete terms, estimating that the increase "will cost the owner of a home valued at $250,000 roughly $500 more each year."
However, it should be pointed out that just because CPS sets its tax levy at $50 million doesn't necessarily mean it will actually collect $50 million in taxes. Like all other Cook County school districts, the amount CPS collects in taxes is capped based on a complex formula that includes property values and how many new buildings get built in Chicago, among other factors. What the levy does is sets the maximum amount of money CPS can collect. If the cap is lower than $50 million, it will collect whatever the cap happens to be. If the cap is higher than $50 million, it will only collect $50 million.
(If you are woindering why CPS can't just set the cap based on property values and other factors - the short answer is because the property values get determined months after school districts are legally required to approve their budgets)
Emanuel is planning to raise revenue in other ways. The plan calls for new tax on e-cigarettes and other smokeless tobacco products, and a $1 surcharge every time someone uses Uber and other ride-sharing services. Plus, there is the new garbage collection fee for houme owners, who (for the most part) currently get their garbage picked up for free. But those things are paltry compared to the property tax increase.
The big reason for such a large tax increase has to do with Chicago Police and Fire pension funds. To make a long, complicated story as short as I can, the city has been putting off making required pension contributions for years and years, and, just like getting a deferment on a loan doesn't make the loan go away, all the money that the city didn't pay just kept accumulating. The city could've kicked the can further down the road, but that would've required Illinois General Assembly's approval, but the state legislature is currently stuck in a stalemate with Governor Bruce Rauner over this fiscal year's budget, so Chicago's requests fell by the wayside.
A recent Crain's article pointed out that, if the tax levy increase is approved, Chicago's compound tax rate (the combined levies of all taxing bodies) would still be lower than most municipalities in Cook County. If you look at the average combined tax rate for Chicago as a whole, it would have the seventh lowest tax rate in the county. The downtown tax rate would be higher than that average, but it would still have the 15th lowest tax rate in the county.
The same article also points out that the increase would still be lower than the tax levy city had in 1996, to say nothing for the 1980s. (The chart below comes from a different Crain's article, which looked at an impact of possible tax increases months before last week's news came out. But it's still a good indicator of the overall trends.)
Of course, Crain's also notes that the increase would result in the second-highest tax on commercial properties in a major American city (the highest is, of course, New York City).
The tax hike, combined with other factors such as rising construction costs and climbing land prices, likely will cause a slowdown in new construction projects, particularly apartment buildings, said Fifield, chairman and CEO of Chicago-based Fifield Cos.
Now, technically speaking, the tax increase is not a done deal. The Chicago City Council would still need to approve it during it's September 26 meeting.
Now, I don't doubt that the City Council will approve a tax increase. The only question is whether or not any aldermen would be able to make changes to soften the blow.
Aldermen have been making media rounds, offering ideas on how to make the increase sting less. Ald Proco "Joe" Moreno (1st) suggested a rebate for properly owners who earn $100,000 or less - the lower the income, the larger the rebate. Ald John Arena (45th), one of the most outspoken members of the Progressive Caucus, suggested raising the billboard fees and getting more money from the Tax Increment Financing districts. He also spoke in favor of a city income tax, but that would require state approval, and if the General Assembly hasn't been willing to listen to the city all summer, I highly doubt they will start now. Not unless the budget is somehow, miraculously passed tomorrow. Ald Joe Moore (49th) suggested "cutting waste, fraud and inefficiency" - a laudable goal that would certainly save city money, but pretty hard to implement. It would certainly take more than a month.
I'm sure a lot of people agree with Tribune Editorial Board's insistence that cutting staff and services and privatizing some government functions would, at the very least, make a dent in the city budget. I remain skeptical. Privatization doesn't necessarily reduce costs, and can adversely impact service quality - just look at CPS' privatization of janitorial services (short version: the schools complain that classrooms are dirtier than ever, and the contract wound up costing CPS the same as keeping cleaning services in-house). Privatization can have adverse consequences in other ways - just look at how much the parking rates have gone up since the city leased its parking meters.
As for reducing staff... Some reduction may make sense (for example, I'm not convinced city garbage trucks really need two workers riding along with the driver). But at the same time, given how many employees have already been cut, I'm not sure there is much you can cut without severely reducing quality of services. We've already seen this happen with Chicago Police Department. Over the past few years, the city has been reluctant to hire more officers, because that would require it to pay more in benefits. Paying officers already on staff to work overtime would cost less. Problem is, of course, that it lead to overworked, tired officers, and the backlash was enough to force the city to start hiring.
There are also broader consequences. Previous staff cuts have had adverse consequences on neighborhoods like Calumet Heights, Park Manor and Chatham, where a pretty decent chunk of the population worked for the city in some capacity of another. People who aren't working can't spend their money in local businesses, they may have trouble paying their mortgages. The collapse of the housing bubble led to a wave of foreclosures through pretty large chunks of the city's South and West sides, and the firings only made the situation worse.
And then there's something that a lot of people are forgetting about. For better or for worse, municipal pension systems were designed with an assumption that when people retire, the same number of people will replace them. While the staff cuts over the last few decades is just one of many, many reasons why pension funds in Chicago and elsewhere in Illinois are underfunded, the fact remains that, while cutting staff might save the city money on the short term, its going to make the pension debt worse on the long run.
I would argue that some kind of property tax increase is inevitable. But I do think the city could've done more to reduce the increase. Ald Arena and some other progressive aldermen have a point about TIFs. At the moment, the TIF funds contain a total of $7,677,316,150. That's more than $7.6 BILLION. Enough to cover the entire property tax increase and still have more than $7 billion left over.
Chicago can't use all of that money. Some of it is committed to projects. The city hasn't made it easy to figure out the specific costs (the info that is available requires you to basically have several tabs open in your browser as you cross-reference projects with expenditures, and even that doesn't paint the full picture), but I don't doubt that there is some grain of truth to Emanuel's assertion that he couldn't use all of the TIF money to cover the budget shortfall even if he wanted to. But the city should have been looking at what it can get out of its TIF funds.
As it is... There has been a lot of talk about how the tax increase would drive residents away. But I wonder just how widespread that would really be. As Crain's points out, in 1985, the City Council approved what wound up approving what, up until now, was the largest tax hike in recent history. I wonder why nobody thought to look back at what happened next - and what Chicago can learn from that.
(In a bit of historical irony, during the last mayoral race, Emanuel lambasted Chuy Garcia for voting for that tax increase)
If the past record is any indication, Emanuel would probably be willing to make a few concessions. Not enough to alter the most fundamental aspects of the budget, but enough to let a few aldermen say they were able to help the taxpayers with more or less straight(ish) face. Maybe he'd agree to something along the lines of a rebate Ald. Moreno is proposing.
But I would be legitimately shocked if the tax increase won't wind up being the largest in recent Chicago history.
As Crain's Chicago Business explained, this would mean that property owners would see their property taxes increase from 6.81 percent to 7.60. Chicago Sun-Times put it in more concrete terms, estimating that the increase "will cost the owner of a home valued at $250,000 roughly $500 more each year."
However, it should be pointed out that just because CPS sets its tax levy at $50 million doesn't necessarily mean it will actually collect $50 million in taxes. Like all other Cook County school districts, the amount CPS collects in taxes is capped based on a complex formula that includes property values and how many new buildings get built in Chicago, among other factors. What the levy does is sets the maximum amount of money CPS can collect. If the cap is lower than $50 million, it will collect whatever the cap happens to be. If the cap is higher than $50 million, it will only collect $50 million.
(If you are woindering why CPS can't just set the cap based on property values and other factors - the short answer is because the property values get determined months after school districts are legally required to approve their budgets)
Emanuel is planning to raise revenue in other ways. The plan calls for new tax on e-cigarettes and other smokeless tobacco products, and a $1 surcharge every time someone uses Uber and other ride-sharing services. Plus, there is the new garbage collection fee for houme owners, who (for the most part) currently get their garbage picked up for free. But those things are paltry compared to the property tax increase.
The big reason for such a large tax increase has to do with Chicago Police and Fire pension funds. To make a long, complicated story as short as I can, the city has been putting off making required pension contributions for years and years, and, just like getting a deferment on a loan doesn't make the loan go away, all the money that the city didn't pay just kept accumulating. The city could've kicked the can further down the road, but that would've required Illinois General Assembly's approval, but the state legislature is currently stuck in a stalemate with Governor Bruce Rauner over this fiscal year's budget, so Chicago's requests fell by the wayside.
A recent Crain's article pointed out that, if the tax levy increase is approved, Chicago's compound tax rate (the combined levies of all taxing bodies) would still be lower than most municipalities in Cook County. If you look at the average combined tax rate for Chicago as a whole, it would have the seventh lowest tax rate in the county. The downtown tax rate would be higher than that average, but it would still have the 15th lowest tax rate in the county.
The same article also points out that the increase would still be lower than the tax levy city had in 1996, to say nothing for the 1980s. (The chart below comes from a different Crain's article, which looked at an impact of possible tax increases months before last week's news came out. But it's still a good indicator of the overall trends.)
Of course, Crain's also notes that the increase would result in the second-highest tax on commercial properties in a major American city (the highest is, of course, New York City).
The tax hike, combined with other factors such as rising construction costs and climbing land prices, likely will cause a slowdown in new construction projects, particularly apartment buildings, said Fifield, chairman and CEO of Chicago-based Fifield Cos.
Now, technically speaking, the tax increase is not a done deal. The Chicago City Council would still need to approve it during it's September 26 meeting.
Now, I don't doubt that the City Council will approve a tax increase. The only question is whether or not any aldermen would be able to make changes to soften the blow.
Aldermen have been making media rounds, offering ideas on how to make the increase sting less. Ald Proco "Joe" Moreno (1st) suggested a rebate for properly owners who earn $100,000 or less - the lower the income, the larger the rebate. Ald John Arena (45th), one of the most outspoken members of the Progressive Caucus, suggested raising the billboard fees and getting more money from the Tax Increment Financing districts. He also spoke in favor of a city income tax, but that would require state approval, and if the General Assembly hasn't been willing to listen to the city all summer, I highly doubt they will start now. Not unless the budget is somehow, miraculously passed tomorrow. Ald Joe Moore (49th) suggested "cutting waste, fraud and inefficiency" - a laudable goal that would certainly save city money, but pretty hard to implement. It would certainly take more than a month.
I'm sure a lot of people agree with Tribune Editorial Board's insistence that cutting staff and services and privatizing some government functions would, at the very least, make a dent in the city budget. I remain skeptical. Privatization doesn't necessarily reduce costs, and can adversely impact service quality - just look at CPS' privatization of janitorial services (short version: the schools complain that classrooms are dirtier than ever, and the contract wound up costing CPS the same as keeping cleaning services in-house). Privatization can have adverse consequences in other ways - just look at how much the parking rates have gone up since the city leased its parking meters.
As for reducing staff... Some reduction may make sense (for example, I'm not convinced city garbage trucks really need two workers riding along with the driver). But at the same time, given how many employees have already been cut, I'm not sure there is much you can cut without severely reducing quality of services. We've already seen this happen with Chicago Police Department. Over the past few years, the city has been reluctant to hire more officers, because that would require it to pay more in benefits. Paying officers already on staff to work overtime would cost less. Problem is, of course, that it lead to overworked, tired officers, and the backlash was enough to force the city to start hiring.
There are also broader consequences. Previous staff cuts have had adverse consequences on neighborhoods like Calumet Heights, Park Manor and Chatham, where a pretty decent chunk of the population worked for the city in some capacity of another. People who aren't working can't spend their money in local businesses, they may have trouble paying their mortgages. The collapse of the housing bubble led to a wave of foreclosures through pretty large chunks of the city's South and West sides, and the firings only made the situation worse.
And then there's something that a lot of people are forgetting about. For better or for worse, municipal pension systems were designed with an assumption that when people retire, the same number of people will replace them. While the staff cuts over the last few decades is just one of many, many reasons why pension funds in Chicago and elsewhere in Illinois are underfunded, the fact remains that, while cutting staff might save the city money on the short term, its going to make the pension debt worse on the long run.
I would argue that some kind of property tax increase is inevitable. But I do think the city could've done more to reduce the increase. Ald Arena and some other progressive aldermen have a point about TIFs. At the moment, the TIF funds contain a total of $7,677,316,150. That's more than $7.6 BILLION. Enough to cover the entire property tax increase and still have more than $7 billion left over.
Chicago can't use all of that money. Some of it is committed to projects. The city hasn't made it easy to figure out the specific costs (the info that is available requires you to basically have several tabs open in your browser as you cross-reference projects with expenditures, and even that doesn't paint the full picture), but I don't doubt that there is some grain of truth to Emanuel's assertion that he couldn't use all of the TIF money to cover the budget shortfall even if he wanted to. But the city should have been looking at what it can get out of its TIF funds.
As it is... There has been a lot of talk about how the tax increase would drive residents away. But I wonder just how widespread that would really be. As Crain's points out, in 1985, the City Council approved what wound up approving what, up until now, was the largest tax hike in recent history. I wonder why nobody thought to look back at what happened next - and what Chicago can learn from that.
(In a bit of historical irony, during the last mayoral race, Emanuel lambasted Chuy Garcia for voting for that tax increase)
If the past record is any indication, Emanuel would probably be willing to make a few concessions. Not enough to alter the most fundamental aspects of the budget, but enough to let a few aldermen say they were able to help the taxpayers with more or less straight(ish) face. Maybe he'd agree to something along the lines of a rebate Ald. Moreno is proposing.
But I would be legitimately shocked if the tax increase won't wind up being the largest in recent Chicago history.