Chicago is the new creative tax capital of the US.

Chicago is the new creative tax capital of the US. It is hard to see through the politics of the Chicago budget, but you have to give it to him: Mayor Rahm Emanuel has got a flair for creative ways to tax his constituents.

Chicago, like many cities across the country, has an estimated $754 million budget deficit caused partly by the economy and mostly by years of robust pension promises. Time is up as Chicago tries to battle through the budget deficit.

Politicians have three choices: roll back the promises to public organized labor, raise revenue or cut the budget to pay for the promised benefits.

In Chicago, Mayor Emanuel and the City Council are coming up with an array of new taxes that are controversial and perhaps even illegal. The backtracking and "exemptions" for certain taxes are already being negotiated. How this affects the economy and property values will transform the Chicago of the future. 

Here are a few of the mayor's tax proposals:

  • Raise property taxes as much as $225 million but with "fair and equitable" exemptions.

    The goal is to ensure that those whose homes are worth up to the city median--somewhere between $200,000 and $250,000 in market value--would pay no additional property taxes. Owners of higher-value homes would see a drastic increase in property taxes.
  • Expand the "Amusement Tax" to online services like Netflix and Amazon.

    This tax will expand the existing 9% "Amusement" levy to a wide range of online services. 
  • Chicago Soda Tax.

    The Mayor and City Council have proposed a penny-per-ounce tax on sugary drinks. The Rudd Center estimates this additional tax will generate $134 million in revenue. This appears to be in addition to the existing taxes on sugary drinks.
  • Supercharge the surge charge for Uber and Lyft.

    It it's not bad enough that a convenient ride home costs more because of the peak pricing models of the online ride-hailing apps, it gets worse, as the basic tax will now double or even triple based on the surge pricing.

These are just a few of the proposals. Neighboring towns like Naperville are discussing increasing local sales tax rates to bridge their own budget deficits.

As Chicago makes good on its pension promises, those who are currently employed are the ones to suffer. This is evident in the $634 million pension payment that was accompanied by $200 million in budget cuts, as reported in the Chicago Tribune. The fallout included 1,050 lost jobs, 350 vacant positions that will be eliminated and several education programs being cut.

Mayor Emanuel said the cuts are "a result of a political system that's sprung a leak and now it's a geyser. There's a series of political compromises and patchwork over the years that can no longer continue."

Worse yet is that the budget deficits will get even larger in the future. There will come a time when kicking the can down the road will not work anymore. The Chicago Teachers' Pension Fund chief administrator Tim Cawley noted that next year the district faces a half-billion-dollar deficit. Cawley added, "That $500 million would mean layoffs of over 3,000 teachers, class sizes of 35 or more, furlough days, problems throughout the district, really devastating cuts to our schools."

The Chicago Teachers Union Vice President Jesse Sharkey stated, "The mayor has also suggested a 7 percent cut in teacher compensation that would take the form of eliminating the pension pickup, which has been part of teachers' overall compensation since the early '80s."

"This is troubling to us because it appears to be backsliding, backtracking on commitments made at the bargaining table," Sharkey continued.

Sharkey's comments are the root of the problem. Politicians negotiating with organized labor will most likely end up with overly gratuitous compensation packages. It is the nature of the beast that politicians must reward the constituents who help fund their campaigns. Red flags raised by the number crunchers that these promises are not sustainable go ignored--until the bill comes due and someone has to pay for decades of mismanagement. 

Cities across the country are facing these same tough decisions. At some point, compromise will need to take place before current taxpayers start relocating to areas that are better managed and don't face these draconian tax increases with the double whammy of service cuts. Chicago is the canary in the coal mine in many areas.

As Mayor Emanuel pointed out, "The whole system, in my view, is inside out and upside down and it's leading to a set of decisions that are totally intolerable. Our kids and teachers deserve better from political leaders."

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