Countywide income tax could provide ‘revenue that grows with the real economy’

Unlike the one-time solutions Mayor Lori Lightfoot offered in her budget proposal, a local income tax could help stabilize Chicago’s finances long-term.

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Mayor Lori Lightfoot’s budget proposal, introduced last week, “could be a lot worse, especially given the scope of the problem,” said Robert Ginsburg, director of the Center on Work and Community Development. He’s looking at it as a budget expert, and focusing on the huge gap between revenue and expenditures that needs to be filled.

“There are some one-time solutions, but that’s probably not unreasonable, given how little time they had to pull this together. But will it fundamentally change the city? No.”

By one-time solutions, he’s talking in particular about $200 million in savings from refinancing general obligation debt over the next 20 years, all going to this year’s budget. That leaves a $200 million gap to be filled next year — with savings from lower interest rates on bonds already spent.

Lightfoot’s $300 million TIF surplus is also not renewable. Once that money is spent, it’s not there to tap next year.

I’ve been hearing from budget analysts who say that, with steadily growing pension payments and a plethora of unmet needs across Chicago, sooner or later the city is going to have to turn to an income tax to stabilize its finances and support healthy growth. 

One major problem is that many of the people making the most money in downtown Chicago live outside the city limits. A couple decades ago, economist Joe Persky at University of Illinois at Chicago studied the question and concluded that more than half of income earned in the city went to people living in the suburbs. The proportion may have dropped since then, with young tech workers and suburban empty nesters moving to the growing “zone of affluence,” but it still represents a lot of money earned by people who depend on city services but pay taxes somewhere else.

Ginsburg has been thinking about the same problem and come up with a possible solution, which is part of a much larger “transformation” of how we run our public services here.

I first ran across Ginsburg in the early 1980s, when he was working to improve public transportation. Twenty years later he was analyzing Mayor Richard M. Daley’s budgets on behalf of progressive unions. He held a variety of positions in county government, including interim chief financial officer, and advised Jesus García during his 2015 mayoral run and after his election to Congress.

Along the way, Ginsburg started thinking about how outmoded our local government structure is. Unlike other major cities, Chicago has independent agencies running schools, parks, and City Colleges, while the public hospital system and jail are run by the county.

For one thing, it creates a significant amount of inefficiency, with separate agencies running their own administrative and maintenance functions — not to mention totally independent budgets. But it also skews debates over larger policy problems.

“It doesn’t make sense to look at mental health in the city alone, when you have the county health system and the jail” providing similar services, he said. Or take housing: “People are being pushed into the south suburbs, and they have the same housing issues there.”

“We split up health care between the city and county, we split up transportation planning, we split up public safety,” Ginsburg said. “It impedes bigger solutions.” In New York City, where the schools are part of the city budget, you wouldn’t have a mayor saying the city isn’t going to bail out the schools, as Lightfoot (and Harold Washington before her) has said.

As a step toward fixing this disconnect, Ginsburg developed a proposal for a county-wide income tax, originally sketching it out during García’s mayoral campaign. It wasn’t used by the candidate at the time, although he did discuss the need for better city-county coordination. Now Ginsburg is reviving it.

The idea is a Cook County income tax surcharge of 4.95%, applied to the amount of federal tax paid by individuals with an adjusted gross income of $100,000 (or perhaps $150,000), and to corporations with federal tax bills over $1 million. It’s designed to meet the current state constitution’s limitation on graduated taxes by giving an earned income tax surcharge credit to most taxpayers.

Ginsburg argues that a city income tax alone would leave out many of the high earners who work in the Loop and live outside the city. A county tax would include more of them.

The money could be used to reduce city and county property tax levies by 25% – about $300 million for the city and $200 million for the county – which is a strong selling point. The remaining revenue could be split between the city and the county based on population. Ginsburg estimated a few years ago that after property tax rebates, the city could take in about $600 million and the county about $265 million. And it would be “revenue that grows with the real economy,” he said.

The plan would require approval by the state legislature, but it would reduce pressure on state government to help out the city and county. Nonetheless, it would require strong political leadership.

Both the city and the county have structural deficits —revenue sources are insufficient to fund current service levels and don’t keep up with cost increases. It’s a problem every year, and every year it gets worse. A local income tax like this probably won’t happen in the next couple years, but sooner or later it may be inevitable.