Monday, October 26, 2009

Why Did Chicago Hike It's Sales Tax?

The Chicago Tribune has widely publicized the fact that, as of 2008, Chicago had the highest sales tax rate in the country (10.25%), thanks to a vote in early 2008 doubling of the Cook County portion of that tax.

[In case you are not familiar with the city of Chicago, it is located in Cook County. When the Chicago sales tax hike went into effect, Memphis, TN moved into second place with its 9.25% rate.]

What pushed Chicago taxes up? Even as a recession began? Why has it not yet been reversed, even as the recession has obviously deepened?

It's easy to claim, as a number of Tribune editorials did, that the sales tax hike was a bad idea unfortunately and inexplicably hatched by Cook County Board President Todd Stroger, which would have been avoided if some combination of voters, politicians, and bureaucrats had better economic educations.

I agree that the sales tax hike was a bad idea, and believe that the citizens of Cook County would have been better off without it. [I also support mandating University of Chicago educations for Cook County Board members.] But above explanation has a glaring logical flaw: Cook County Board members' economic educations -- however good or bad they may be -- did not suddenly get worse in 2008. For some reason, President Stroger and his supporters once thought that a sales tax rate less than 10% for Chicago was OK.

Although he may not know it, Chicago Tribune correspondent Greg Burns gives a much better answer in his column today.

Like most cities, Chicago has competed for it citizens. Over the years, citizens have come thanks to its amenities -- we love our lakefront -- and have left because of crime, schools, and taxes.

But the nature of that competition dramatically changed since 2006. The Burns article explains how many fewer citizens are leaving Cook County for Will and Dupage counties, in large part because of the immobility created by falling real estate prices (Chicago real estate prices had some of their steepest drops in late 2007) and tough job market.

Did Cook County government sense in early 2008 that their tax base was more captive than usual? And that a captive tax base is ripe for heavy taxation? I think it's a big part of the story.

This story also explains why, despite a noble effort by Cook County Commissioner Tony Peraica and changes of heart by some key politicians, the Cook County sales tax hike has not yet been reversed: the Cook County tax base remains as captive as ever. Real estate prices are lower, and the job market tougher, than when the Board passed the hike. Maybe we should consider ourselves lucky that the Cook County sales tax was not hiked yet again!

That leads me to a prediction: when Cook County residents become mobile again (I guarantee that will happen eventually), Chicago will cease to be the highest sales tax locale in America. And likely Chicago will relinquish its tax leader status via a rollback of the infamous Cook County Hike of 2008.


Karl said...

I don't know. This doesn't sound like any government I've dealt with. I mean the County Commissioners are not residual claimants. Do they have an incentive to maximize profits?

It seems more likely that they were responding to falling revenue forecasts. Sales tax base should be down something like ten percent which means that they would need a ten percent higher rate to post the same revenue.

Even if that's not why they went up I'd guess it is reason they are not going down.

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