Lightfoot’s only option to ease perpetual budget deficits may be city income tax

To win support from voters and the City Council, the mayor will have to address budget shortfalls while reducing regressive taxation and responding to demands for better services and economic development in long-neglected communities.

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Photo by Marc Monaghan

Mayor Lori Lightfoot speaks with Corporation Counsel Mark Flessner during a Chicago City Council meeting on May 29, 2019.

Mayor Lori Lightfoot has to address the city’s $838 million deficit in Wednesday’s budget address, and she has to do much more than that, too.

She has to lay the groundwork for solutions to budget shortfalls that are only going to get worse over the next few years. And if she hopes to win support from voters and the City Council, she has to do so in a way that reduces the city’s reliance on regressive taxation while responding to needs for better services and economic development in communities that have been neglected by previous administrations.

About a third of the gap is caused by this year’s increase in pension payments, with about $270 million yet to be funded. Roughly another third represents increased labor costs, particularly expired contracts for police and fire that have yet to be renegotiated.

And that’s just this year’s tab. Pension costs are projected to go up by a total of $917 million by 2023, according to the Center for Tax and Budget Accountability.

There are two sides to both spending and raising revenue: what to cut back on and what to increase.

As dire as the budget picture is, there are many demands for restoring cuts and addressing unmet needs. This month, community groups and aldermen called on Lightfoot to boost anti-violence spending to $50 million, about ten times the current level. There are calls to reinstate the city’s Department of Environment, abolished by former Mayor Rahm Emanuel eight years ago, after an inspector general’s report found the health department had failed to enforce air pollution standards.

There are calls to reopen the mental health clinics closed by Emanuel in 2012. Aldermen recently held up confirmation of Dr. Allison Arwady as Lightfoot’s health commissioner when she wouldn’t commit to reopening the clinics. Earlier this year, the City Council voted unanimously to establish a task force to plan for reopening the clinics. Arwady did express the city’s commitment to existing clinics, and promised the city would invest in improving them, which is something of an improvement.

In August, housing commissioner Marisa Novara expressed disappointment that “the realities of our fiscal situation” meant that funds from a proposed graduated real estate transfer tax, projected to take in over $100 million, would go to close the budget gap — not for affordable housing and homeless services, as advocates have urged. Lightfoot backed the housing proposal as a candidate, as have a majority of aldermen.

Some increase in housing spending is certainly called for, especially with federal support for the city’s youth homeless programs at risk. Chicago ranks near the bottom of spending on homelessness among comparable cities, according to the Chicago Coalition for the Homeless.

To begin closing the budget gap, Lightfoot has said she plans to save as much as $200 million by eliminating vacancies in the city budget. She also needs to get a handle on police overtime, which has persisted — amounting to $67 million in the first six months of 2019 — despite a hiring surge.

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Administrative streamlining is expected to free up some officers from desk duty, and the Chicago Police Department is conducting a staffing and deployment study, a spokesperson for the mayor’s office said. A plan to adjust shift times in order to reduce overtime and minimize wasted time was put on hold after objections from the Fraternal Order of Police, but it’s expected to go forward after legal issues are resolved, the Sun-Times reported.

Lightfoot has hired a risk management officer who is charged with lowering the cost of lawsuits, and Corporation Counsel Mark Flessner has called spending on private lawyers to defend police misconduct lawsuits “scandalous” — it totaled $30 million last year — and vowed to rein it in by using in-house lawyers.

On the revenue side, there are “cuts” too: Lightfoot has already moved to reduce reliance on regressive fees and fines. Last month, the City Council approved her plan to reduce city sticker fines, end automatic driver’s license suspensions for non-moving violations, and offer more accessible debt relief, at an estimated cost of $15 million. She also announced an end to water shutoffs for homeowners who can’t pay their bills.

Raising money is not as easy. The city has only a handful of revenue options it can employ without approval from the state legislature. The most substantial, of course, is the property tax, and some increase is inevitable. When the city is reassessed next year, some of that burden will be shifted to commercial property, and some of the residential burden will shift to wealthier neighborhoods — though this may hurt long-term residents in gentrifying areas.

Lightfoot is also increasing fees on solo ride-share trips to discourage single-passenger travel, particularly in the downtown area. This is expected to raise about $40 million.

The mayor has rejected restoring the corporate head tax, which was phased out by Emanuel. At $4 per employee charged to companies with 50 or more workers, it raised $23 million a year in 2012. Progressive aldermen have proposed a $16 a month charge, with a carveout for hiring residents of high-crime areas, saying it would raise about $100 million.

Of course corporations have squealed, but the fact is that Denver’s economy has boomed while it’s collected a head tax of about $10 a month for many years (workers earning more than $500 monthly pay $5.75 and their employers pay $4 each month). A $16-a-month tax would add about ten cents to an average employee’s hourly cost.

In the coming legislative veto session, Lightfoot is seeking to get a casino deal that will work and to pass the real estate transfer tax hike, each of which is going to be challenging.

Larger revenue measures requiring state approval won’t fly as long as passing the Fair Tax constitutional amendment is pending — but here, the city should join other municipalities in pressing for restoring the local government distributive fund, which directs income tax revenue to municipalities. Its dollar amount was frozen when the income tax rate was raised in 2011; restoring it to 10% of the total of a Fair Tax would bring Chicago about $170 million, said Ralph Martire of CTBA.

A financial transaction tax is a longstanding proposal by progressives, and it’s eminently reasonable — a small tax on futures exchanges capable of raising big bucks — but it probably works better on the federal level. Locally, “it’s distortive and it’s easy to evade,” said Martire. “The less time we waste talking about it, the better.”

But with financial burdens only growing, progressives should be looking down the road at the possibility of a city income tax — a commuter tax would be much harder to pass in Springfield. Thousands of local governments have such taxes, most of them in Pennsylvania, Ohio, Kansas, Iowa, Kentucky, and Indiana. In 2011, the inspector general estimated a flat 1% income tax could generate $500 million a year. In fact, it could generate much more if it taxed higher earners at higher rates, it could exempt low-income workers, and it could be structured to include both residents and nonresidents working in Chicago, perhaps with a lower rate for nonresidents.

It could relieve some of the pressure of high property taxes. And it could steer the city away from perpetual fiscal crisis and the austerity measures that result.

Without something major, we’ll just keep circling the drain — and every mayor’s options for moving the city forward will be tightly constrained.