Why Chicago Can’t Tax Its Way to Solvency

You may note that this post from the Illinois Policy Institute echoes what I’ve been saying here for some times:

“To get a sense of the magnitude of the property tax increases necessary to move to full funding of annual pension payments, Nuveen Asset Management analyzed the 2013 property tax levies, pension payments and Annual Pension Costs (APC) for Chicago and its overlapping taxing districts as reported in their respective audited financial statements. We analyzed the tax bill of a theoretical $400,000 home in Chicago under current tax requirements and a scenario under which the city and its overlapping taxing districts all make full annual pension payments. The analysis does not include the impact of any specialized property tax exemptions like the homeowner’s exemption or the senior freeze exemption. All tax figures are from each entity’s 2013 fiscal year – the most recent fiscal year in common for all issuers.

“Based on our review of each government’s fiscal 2013 audited financial statements, the owner of a $400,000 home would have paid approximately $6,873 in property taxes. As was the case for Chicago, most of these government entities didn’t fully fund their pension payments, therefore maintaining property taxes at levels below where they otherwise should be. Chicago would need to increase its portion of the property tax levy 155.6% to make a full pension contribution and Cook County would need to increase its portion of the levy by 60.8%.

“Altogether, the owner of a $400,000 home in Chicago would need to pay $3,355 in additional property taxes to support full annual pension contributions – increasing the tax bill to $10,228 for a single year jump of nearly 49%. While home rule entities in Illinois, including the City of Chicago, are not subject to state imposed property tax caps, some overlapping tax districts such as Chicago Public Schools are limited to an increase of the lesser of 5% or the change in inflation.”

There are any number of things to note about his. First, such a strategy would be incredibly regressive. Second, that analysis is static and arithmetic. The real problem is even worse. It ignores the run-on effects. Some property owners would simply default rather than pay the tax. Rents would rise, in some cases throwing people into the streets. To increase tax rates is not necessarily to realize more revenue.

And such a strategy, as mentioned in the cited portions, is beyond the CPS’s or the city’s powers.

It’s hard for me to see a solution other than bankruptcy for Chicago’s public pension problems. Even a reprieve from the state will only postpone the crisis.