March 10, 2009

Taxing prosperity

Tax increases threaten Chicago’s urban revival—and the 2016 Olympic bid.

Like most other cities around the country, Chicago is in the middle of a fiscal crisis. This year alone, the city is facing a $50.1 million budget deficit. Major Richard Daley has already proposed strong action, such as a slowdown in police hiring, cutting upwards of 400 city jobs, and raising taxes. These drastic measures are necessary, we are told, because of declining revenues.

But why is tax revenue declining? Some of the deficit is undoubtedly due to the effects of the national economic crisis: More people are unemployed, those who aren’t are earning less, and the property values of homes are plummeting. However, the larger economic crisis may only mask a separate disturbing trend. For years, the tax base has been shrinking as individuals move away from the city center, businesses relocate elsewhere, and more people opt for renting rather than owning a home. One cause for these shifts is the gigantic tax burden placed on businesses and individuals who operate and live in the city. Chicago has one of the highest sales tax rates in the nation, accounting for 10.25 percent of every non-food item sold.

The flight from Chicago has been both subtle and dramatic. For example, retail property vacancies have quietly risen to 10.3 percent, the highest since 2003. Vacancies in industrial real estate also hit 10.3 percent in the fourth quarter of 2008, a 15-year high. Yet the flight from the city has perhaps been most visible in the relocations of major corporations away from the high tax zones of the Loop. Household names such as McDonald’s, Walgreens, Kraft Foods, and All State have all moved their headquarters outside of the city limits and beyond the reach of city taxes. Even the Jerry Springer Show—which had taped all of its 18 seasons in the NBC building downtown—has moved out, opting to relocate to Connecticut to take advantage of tax incentives.

In other words, one reason the tax base is shrinking is precisely because of tax increases. This vicious cycle of rising taxes, fleeing consumers and businesses, and shrinking revenues leaves the city government with only two choices. It can either downsize the amount of city spending or it can continue to increase taxes, hoping that citizens will be tolerant enough to pay them and not vote with by relocating. Consider this: Daley just signed a $5 million public relations contract for the city of Chicago, which swells the total public relations budget of the city to $55 million. This is larger than the current budget deficit. While Daley did respond to public pressure by placing a freeze on all PR spending fewer than 24 hours after signing the new contract, the timing seems to indicate that Daley was more concerned with funding his new YouTube channel than reducing the burden on Chicago citizens already saturated with taxes.

At this point you are probably thinking, “Why should I care? I’m a U of C student, not some wealthy corporation or a downtown socialite shopping on the Magnificent Mile.” Well, look at it this way: You probably pay or help to pay city taxes three to four times in a typical day. Let’s say you go to the gym and buy a bottle of water. The city has a tax on bottled water, so five cents of the price goes to taxes. Then let’s say you text your friends to set up dinner—if you bought your phone in the city, the vendor has to pay a special telecommunications retail tax that they in turn pass on to you, the consumer. When you go to dinner, you order a steak and a rum and coke. You are taxed separately on the food, the rum, and the coke: There is a restaurant tax, a liquor tax, and a soft drink syrup tax.

So let’s say you try to go downtown and at least enjoy the public goods created with your tax dollars, such as the beautiful Millennium Park or the perfectly manicured lakefront. Well, if you take a taxi to get there, there’s a tax that’s just for taxis. If you drive down there with a friend, you’ll pay a tax on the gasoline to get there and you’ll indirectly pay a tax to park the car: Every parking garage has to pay a fee just to operate as a parking garage. Once you get there, everything you would want to do gets hit with an “amusement tax”—a tax on every show, concert, movie, and sporting event held downtown.

So what is to be done? The recession has left Chicago at a crossroads. Shortly after Barack Obama’s election last year, The New York Times wrote a piece on the “renaissance” of Chicago. They pointed out that with the revival of the Loop, Obama’s election, and a shot at the Olympics in 2016, Chicago was ascendant as America’s hottest city. Contrast this image to an article posted on Forbes.com just a few months later, which ranked Chicago as the third most miserable city in the nation. Forbes cited the weather, the dismal state of public schools, the culture of corruption in city politics, and, of course, sky-high taxes as the prime justifications for the dubious honor.So which will it be: Chicago Renaissance or Les Miserables? Keep an eye on your bottled water prices to find out.

Jennifer Tanaka is an M.A. student in the Committee on International Relations.