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Following the Money

The League of Women Voters takes aim at our increasingly regressive tax system.


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By Ben Joravsky

To hear national politicians talk of budget surpluses and tax refunds, you'd think the system of financing government was sturdy, sound, and fair.

Guess again. According to A Guide Through Chicago's Tax Maze, a pamphlet on finances recently published by the League of Women Voters of Chicago, it's an increasingly unfair system that's on the precipice of disaster.

In short it's far too regressive, making government dependent on taxing people who can least afford to pay. Locally the crisis is best reflected by the steady rise in utility taxes, which are imposed at the same rate on all consumers, rich or poor. According to the report, the poorest 20 percent of Illinois taxpayers pay almost 14 percent of their income in sales, property, and income taxes. The richest 1 percent pay about 6 percent, and middle-income residents about 10 percent.

"For the last two decades we've been moving away from a fair form of taxation and it's not getting any better," says Edna Pardo, the league's veteran budget watcher, who wrote the pamphlet with Priscilla Kersten. "People need to understand the process to see the direction their government's taking."

This is the third edition of the tax guide, which serves as Pardo's legacy after more than 30 years of budget crunching. "I joined the league in the early 60s, when I was raising three children," says Pardo, who lives in Austin. "In those days I was busy with school issues because I was viewing the situation as a parent--we were forever fighting for adequate revenue for the schools. Sad to say, it seems school funding's been a problem in Chicago for as long as I can remember."

In 1983 the league published its first guide for Chicago taxpayers, written by Elinor Elam (who died last year) and Pardo. (A second edition was published in 1987.) Then as now the document was short and easy to read, a primer on city finances. The covers show a man lost in a maze; the pages inside try to cut through the jargon of finance by explaining how much money is raised from which kind of taxes, how much the state and feds send to the city, and how Chicago spends the money it gets.

In all three pamphlets it's been clear that the authors favor a more progressive form of taxation. "We ask the questions early in the pamphlet. What services would you cut--police, fire, schools?" says Pardo. "Let's face it, no one wants taxes but we need them. You want an adequate, flexible, and equitable form of taxation. It has to be adequate to provide enough money to run government, a flexible enough mix to remain stable as the economy changes, and fair. By fair we mean based on one's ability to pay."

The fairest tax, Pardo says, is a graduated national income tax. But in the last two decades the feds have been cutting the highest tax rates and sending less money to the cities (about 13 percent of Chicago's budget is financed by federal dollars, down from about 27 percent in 1981, according to the report).

Local politicians are hard-pressed to find new money to replace federal dollars. "Local governments are under constant pressure to stretch the dollar, eliminate waste, come up with enough money to keep expected services going, and to hang on to their tax base," Pardo and Kersten write. "No [politician] wants to risk responsibility for tax increases, even when they are needed. As a result, we have developed a never-never-land kind of tax system, generally patchwork and more and more unfair and inadequate."

In addition to an 8.75 percent sales tax (one of the highest in the country), Chicago has slapped a tax on electricity, telephone, and gas use, as well as on soft drinks, liquor, parking, and real estate property transfers. Almost 20 percent of city revenues comes from utility taxes; another 17 percent comes from a variety of sales taxes, according to the league report.

If politicians are less reluctant to tax utilities it's because utility taxes are relatively hidden, passed on to consumers in their bills. Many consumers might not even be aware that these taxes exist, assuming that their higher bills are due only to rising utility costs. They won't think to hold Mayor Daley, Governor Edgar, or any alderman or state legislator accountable.

The trend is not limited to Chicago. According to a recent Sun-Times story by Cam Simpson and Jon Schmid, "Three new levies will boost state utility taxes to at least $93.43 per person in 1998." Lost in the fine print of a Chicagoan's monthly gas bill are three tax levies (two from the state, one from the city) hiking the total bill by almost 15 percent.

"Between 1988 and 1997 the utility tax receipts in Chicago increased 40 percent while the sales tax receipts increased 27.6 percent," Pardo and Kersten write. "As utility costs rise, utility tax receipts grow even though the city tax rate remains the same. These consumption taxes place a disproportionate burden on low and moderate income families."

Making matters worse is that much of the state's public school costs are paid by locally raised property taxes, an uneven source of revenue that varies according to a municipality's tax base. For instance, a suburb like Oak Brook with a healthy industrial or commercial base can afford to keep property taxes relatively low and still spend a lot of money on its schools.

"We've been sounding this alarm for years," says Pardo. "Education is the key to our future. We must find a fairer system for funding it."

In Chicago, the schools' share of the property tax is siphoned off by a scheme known as Tax Incremental Financing. Within a TIF district, the city borrows money to complete some sort of public improvement project, such as an office building; the bonds are then repaid with the excess property taxes the new project generates.

The TIFs are supposed to replenish the tax base eventually, but no one, or at least not the city, seems to know when. As more and more TIFs are added more property taxes get diverted; even as the first few projects are paid off, there are new TIF bonds to repay.

"In Chicago alone, diverted TIF taxes came to $43.6 million in 1995," according to the pamphlet. "The share of the city's property tax base included in existing or pending TIF districts has almost tripled since June 1995 to $2.05 billion or 6.7 percent of Chicago's total 1995 equalized assessed valuation."

Pardo says the fairest solution is for the state to institute a graduated income tax in place of the current flat tax. Or perhaps the feds should bring back a few of the upper brackets eliminated in the last few years.

But just the opposite is happening. Governor Edgar was soundly defeated by his Republican legislative allies last year when he attempted to hike the state income tax in order to spend more money on education.

Eventually Edgar was forced to find the money by raising the tax on phone use, gambling, and cigarettes. "We wound up with a more regressive form of taxation," says Pardo. "We tell the kids 'don't gamble,' but we're depending on school funding from gambling. We tell the kids 'don't smoke,' but we're going to rely on cigarette taxes. And we're dependent on utility taxes, even though there are some poor families who can't pay their heating bill. It's true Governor Edgar had a better plan that was defeated. But we wound up going backwards, not forward."

There doesn't seem to be any help coming from Washington. With the feds facing a budget surplus thanks to the booming economy, President Clinton and House Speaker Gingrich have floated proposals to cut federal income taxes. In a sense they want to give voters the illusion that government pays for itself, when in fact any federal tax cut requires utility and user fee hikes on the local level.

"It's just more demagoguery and game playing," says Pardo. "They're pretending they can run the government on nothing."

Nonetheless, Pardo remains hopeful that user fees and utility taxes and property taxes might one day be replaced with a more progressive income tax. "One reason we did this pamphlet is to educate people," says Pardo. "If people understand how government works, how it's financed, they might not vote for politicians who make sweet sounds that don't make sense."

Art accompanying story in printed newspaper (not available in this archive): Edna Pardo photo by Cynthia Howe.

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