Chicagoans: Let somebody else pay for pension mess

The headline on the story in the Chicago Sun-Times today says that voters don’t favor  Mayor Rahm Emanuel’s proposal to raise property taxes by $250 million to devote to the city’s severely underfunded pensions. But that’s not the most interesting information in the poll the story refers to,  if you ask me. What’s most startling about the poll is that Chicago voters, only one percent of whom approved of Emanuel’s idea, instead favored two other solutions, but both involve having someone else pay for the mess that Chicago and Illinois politicians, regularly reelected over the years by city residents, have wrought.

As I argued here, places like Chicago (and Detroit and Los Angeles) now experiencing pension debt stress have known about their woes for years, but politicians declined to do anything about it and voters kept voting them back into office. As the Civic Federation of Chicago was warning way back in 2000, and repeatedly after that:

The City may have a difficult time meeting the unfunded liabilities mentioned above and have to resort to a property tax increase to meet these obligations. As with many public pension funds, the liabilities of these funds are backed by the local governments through their respective property tax levys.

So how do we fix things now? The two most popular solutions, each favored by one-quarter of voters, is a tax on transactions on Chicago’s financial exchanges, which form the basis for a big chunk of the city’s economy, or a tax on commuters who work in the city but live in the suburbs.

The financial transactions tax is the kind of bad policy that’s backfired in other places, but such ideas resurface because having someone else pay off your mess is always more attractive. As the New York Times explains in this piece, a tax on Wall Street transactions in New York backfired in Gotham during the tenure of Mayor John Lindsay, who had successfully persuaded the state legislature to increase the transfer tax by 25 percent.

While the Times piece mentions that the legislature eventually lowered the tax and then essentially repealed it after the NYSE threatened to leave the city, what the Times left out is that several big financial firms decamped to New Jersey before the tax disappeared. That started a migration out of New York that didn’t then stop even after the tax went away. Over the last 20 years, while financial services employment declined by 35,000 jobs, or 7 percent, in New York City, in neighboring New Jersey the industry grew by 30,000 jobs, or 14 percent. In Chicago the latest proposal for a transaction tax is being promoted by the teachers’ union (but you could have probably guessed that). Emanuel opposes it.

The other alternative also inevitably becomes popular when cities get into trouble: namely taxing commuters. This solution usually hangs on the notion that commuters use valuable city services but don’t pay anything for them. But studies typically show that’s largely exaggerated.

In 2002 Baruch College professor E.S. Savas calculated (sorry link to his Nov. 20, 2002 NY Post feature no longer works) that commuters were probably already contributing more to the New York City economy than they were taking away. Savas noted that commuters and their employers paid a host of taxes already, didn’t use the public schools and only used public safety resources (police and fire) weekdays during regular business hours. Those factors made them net contributors to the economy, not takers.

The Chicago poll didn’t bother asking people about ways to save money on pensions by cutting benefits or asking employees to contribute more. Apparently those solutions are off the table in Chicago.







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