Chicago will soon have the highest sales tax of any major city in the US. Not the highest sales tax in the US -- there is a town in northeastern Alabama, Arab, which imposes sales taxes as high as 12% -- but the highest of any major city. (Alabama's sales taxes -- designed to place the maximum burden on poor people, while making life easier for upper-income residents, particularly the property-owners -- typically tax even groceries!) An AP article reports:
Among the things Chicago wants to be known for, having the highest total sales taxes of any major U.S. city is probably not one of them.
But that's what it's getting after the Cook County Board voted Saturday to double the county sales tax to 1.75 percent. When added to the city's sales tax, the county' increase has the cumulative effect of setting a 10.25 percent sales tax on goods bought in Chicago.
When the county rate increase takes effect in November, someone buying $100 worth of merchandise in Chicago would pay $110.25.
The rates in New York and Los Angeles are below 8.5 percent. The next highest rate in the country is in Memphis, Tenn., at 9.25 percent.
The tax increase is expected to add about $426 million annually to county coffers, and the money is meant to close a projected $234 million deficit. The budget is also designed to create more than 1,000 new county jobs.
A few months ago, the sales tax in the Chicago area was increased 0.25% (beginning 4/08) to fund mass transit.
In some of Chicago's northern suburbs, a town with a major "destination" mall is considering a sales tax increase of 1% to help finance their schools. The reasoning?
Gurnee's Woodland School District 50 approved the plan Wednesday, and Waukegan School District 60 did so Tuesday. "All of these nice people from Wisconsin who come and shop at Gurnee Mills [mall] will help educate our children" if voters approve it, Woodland Board President Bruce Bohren said Wednesday.
Have they considered the possibility that, particularly with gas prices on the rise, an additional 1% burden may encourage those nice people to stay home or to shop elsewhere? And that even local folks will drive far enough to avoid the sales tax, if they're buying any large-ticket item.
Sales taxes are a poor way to finance our common spending. They
burden the purchaser, who must pay more for an item than it is actually
worth. They steal from the manufacturer and his employees, by
dampening demand for their products and reducing the consumer's buying
power. They steal from the entrepreneur who has invested his money in
building a store and a distribution system. They create excess burden,
also known as deadweight loss. They reduce employment. See http://savingcommunities.org/issues/taxes/sales/destroyscommerce.html.
So what is the alternative? What should a city of smart people use as its tax base? It seems to me that there is only one satisfactory tax base, and it is a subset of what is currently taxed in most places in the property tax. The property tax is two taxes, and one of them is the tax on which we should build our tax system; the other is something we should be dropping.
The legitimate tax base is the value of land. Some sites within a municipality are far more valuable than others, and the value that the market places on each site is the most logical, most efficient, most just, and wisest tax base we could ask for. Relying on it -- and relying heavily on it -- will have a number of desirable effects, and only a few possibly undesirable ones (and those can be mitigated, if we choose to).
People flock to healthy cities. Their presence -- be it as
residents or as commuters or as occasional money-spending visitors --
raises the value of land, particularly sites close to the transit
centers in the central business district. Why on earth should
titleholders -- be they individuals, family trusts, corporations, real
estate investment trusts, pension funds, university endowments, or
shareholder-owned insurance companies -- be able to privatize all,
most, or even some of that value that the entire community together
creates? Why should that be a free lunch for some, and be funded by
others? (See the earlier blogpost on Ricardo & Clawing Back taxes
paid for another angle on this.) Why should we take a portion of wages
to support those property values? Why should we tax sales to support
those property values? For that matter, why should we tax buildings to
support land values? (I could see, on the other hand, a justification
for a local estate tax, based solely on the value of land within the
community, in the absence of an annual tax on land value; a poor
substitute, but far better than none!)
People prefer to locate within a reasonable distance of good transportation, and the land value created by public investment in transportation systems can be used to fund that public transportation, instead of burdening people who may live many miles from it AND don't use it. See http://www.hgchicago.org/rn05a.pdf for an excellent paper on this.
I referred to possible undesirable effects, at the level of the individual. We might find that neighborhoods which are, in the normal course of things, transitioning from single family residential to multi-family or commercial, might include some single family homes lived in for decades by an elderly person. I think a good case could be made for allowing such an owner-occupant to defer, with interest, a portion of the property tax, as a lien against the property, to be satisfied when the home is sold or transferred. This would avoid burdening the rest of the taxpayers; would avoid gifting the heirs; and would prevent the continuation of the "pothole" in the redeveloped neighborhood beyond the lifetime of that owner/occupant. (See Bill Batt's Property Tax Relief Measures: Answers to the "Poor Widow " Argument.)
Having said that, I think that the incentives which would get the private sector to redevelop such neighborhoods would, among other things, lead some of the developers to produce the sort of housing which would appeal to the person who had lived in the neighborhood a long time, and would be affordable to them. So the ultimate effect would be more appealing.
Sales taxes may occasionally be unavoidable. California backed itself into a miserable corner with Proposition 13, the 1978 legislation which pretty much froze assessments at the purchase price of the property and froze the property tax at 1% of whatever the assessed value is, creating a very unhealthy reliance on taxes that no smart community would want to rely on. Their school systems have declined from among the best in the country to among the worst; their homeownership rate is the 4th lowest in the US, and municipalities are CHASING retailers, offering them all sorts of subsidies to locate within their boundaries because they are hungry for the sales tax revenue. (What was the movie title a few years back, Dumb and Dumber?)
When I was a child, there was a saying I'd hear: "Plan Ahead -- You Might Need One!" States, counties and municipalities that cap the property tax or are otherwise forced into using sales taxes and wage taxes have failed to think; have failed to show any interest in understanding canons of taxation.
I wonder how long it will take Chicago to see the folly of its ways. It may have a fine University or three, and be the nominal home of the much discussed Chicago school of economics (one of whose mainstays called the tax on land values the "least bad" tax, but failed to pursue the staggering significance of his statement for his fellow human beings.) But the city of Chicago would be a lot smarter if it based its economics on the teachings of another Chicago institution, the Henry George School of Social Science. The OTHER Chicago School.
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