Three “finalist” proposals for fixing Chicago’s pension mess

image credit: Artistmac

We have an article from Crains  reporting on the winning proposal for solving the disaster that is the City of Chicago’s pension plans.  Of course a new fee is involved, being a toll on DLSD.  Article doesn’t disclose how much this toll would be, nor its likely impact on traffic.  I suspect that parallel arterials would see increased congestion, while DLSD itself might flow a lot better with reduced traffic volumes.

The two runners-up proposed income tax increases.  One would be a 1% income tax on the remaining Chicagoans, to be termed a “public safety tax” and used to fund police and fire departments, freeing up municipal funds to go to pensions. The other proposed raising the State income tax to 6%.

There were originally eight proposals, and perhaps one of the losing five made the logical proposal– a tax on whoever controls on-street parking. Like any real estate tax, this would be based on the value of the control, and should be set such that LAZ Parking can retain just enough profit to operate the system.  .The Sun-Times’ Fran Spielman said LAZ grossed $136.2 million in 2021).

A tax collecting most of that annually could make a significant dent in $35.4 billion shortfall recently estimated for the City’s pension funds, tho it couldn’t cover the entire need. And that doesn’t include Chicago Public Schools, Cook County, State of Illinois, and other government pension funds which are in difficulty.

All these proposals come from students at UChicago’s Harris School of Public Policy.  Which somehow reminds me of the remark decades ago from Mike Royko, observing that Hyde Park isn’t really part of Chicago, but rather a sixth boro of New York.

Are Cook County property taxes actually paid? Some data from Maria Pappas

A street in Ford Heights (Google)

Georgists like to say that one of the many advantages of a real estate tax over other taxes is that, if the owner does not pay it, eventually s/he’ll lose the property, which can be sold to pay the arrears. But “eventually” is an important word here.

Now Cook County Treasurer Maria Pappas has compiled data showing the extent to which taxes don’t get paid.  For this purpose, “not paid” means “not paid within a month of the due date.”  I suspect that in most cases, these taxes are eventually paid, with a penalty (9% interest, recently reduced from 18%) included.  But years might elapse, and various games can be payed by “investors” regarding these properties. (Some detail is on pages 23-26 of this pdf.)

The reports are broken out by property class, by ward, by municipal area, and by taxing agency, showing amount billed and amount paid, and can be downloaded to spreadsheets.

Countywide, 96% of all taxes billed were collected within a month of the deadline. In the impoverished Village of Ford Heights, only 28.55% of taxes got paid, but no other community had less than 50%.  The six lowest percentages are all in the south suburbs, followed by the Chicago community areas of Englewood and West Garfield Park.

For parcels coded as “vacant,” only 71% of taxes were collected; all the other categories were above 95%.  Total taxes billed to vacant parcels was $121,810,594, of which $86,873,652 was paid, implying that, were vacant parcels taxed at the same rate as commercial and industrial land, government revenue would increase by something like  $130 million to $183 million — not counting the development which such a tax increase would encourage.

 

Property tax can’t be equitable, Kaegi asserts

former Schulze bakery
Disused Chicago bread factory to become data center. Image credit: Emily CC BY-NC 2.0

In a new article (archived copy, also included in this pdf) for the Chicago Council on Global Affairs, Cook County Assessor Fritz Kaegi asks “In a digital economy, how can cities create a more equitable property tax system?” Of course he does not try to define “equitable,” but one infers from the article that it means “funded more by those benefiting from the digitalization of the economy, and less by those who actually perform useful work.”  A desirable result, to be sure, but how does he propose to accomplish it?  He also seems to assume that government-funded schools are a good thing, or at least that parents shouldn’t be held individually responsible for arranging their own children’s education.

He proposes to get more revenue from the big infotech companies, specifying Apple, Microsoft, Alphabet/Google, Amazon, and Facebook, but by implication the numerous other organizations who have prospered by taking advantage of the internet (as well as their lobbying capabilities to stifle competitors). He doesn’t think that local or state government is equipped to collect much of this revenue.  Further, he assumes that a real estate tax to fund “education” can only be implemented at the school district level, and couldn’t be countywide, regionwide, statewide, or in any respect subnational.  He concludes that the U S government needs to send large quantities of money to America’s cities, particularly including Chicago and the rest of Cook County.

“The federal government … is best situated to tax incomes generated by activity like digital commerce, virtual meetings, and footloose service providers [and]…will need to build fiscal mechanisms for a digital world that separates economic activity from physical space. ”  (Presumably these wealthy and influential companies won’t use their influence to deflect the tax burden to others. )

OK, so Cook County local governments don’t get revenue from this digital economy?  What about the 11 (soon to be 12) data centers in Elk Grove Village (archived copy), paying real estate taxes and utility taxes, as well as taxes imposed on persons working to construct and operate them. This report (archived copy) counts 52 data centers regionwide as of February 2021.  Both reports note that several kinds of tax favors are provided, without indicating that they’re necessary since the digital economy requires facilities in appropriate locations.

And Amazon and other on-line retailers don’t generate taxes?  Those of us who’ve bought something on line in the past couple years have noticed that the e-commerce giants collect and remit state and local sales taxes, typically in excess of 10% here.  Last year the BGA counted (archived copy) 36 warehouses in the Chicago area built for Amazon since 2015 (and noted “at least $741 million in taxpayer-funded incentives”).  This of course doesn’t count warehouses used by non-Amazon sellers such as Walmart and Target.  Again, it’s likely that most or all of these facilities would have been built without subsidies, since warehouses have to be located appropriately with respect to markets, labor supply, transportation, etc.

Kaegi is legitimately concerned about the fragmentation of Cook County’s tax base, noting that “The lower the value of real estate in a community, the higher the effective rate to provide a comparable level of school services. This results in
great disparities.”  But that problem isn’t inherent in the real estate tax; it’s inherent in the fragmentary structure of finance, funded largely by local real estate tax. A statewide real estate tax, such as Illinois had until it was replaced by a sales tax in 1933, could reduce or eliminate the disparities.  A number of states retain statewide real estate taxes, but the problem of disparities can also be addressed by a tax-base sharing arrangement, as has operated for half a century in Minnesota.

“[W]e must continue to push for local-school funding that is not rooted in local land values,” writes Kaegi.  Actually, if an effective disparity-reduction arrangement is in place, the opposite might be true.  I have previously posted a table and map illustrating that, if taxes were based on land value rather than land+improvement value, the burden on homeowners in communities of low income and color would be lessened.  And of course if the burden of sales taxes could be replaced by a tax on land value, the benefit to moderate-income households would be enhanced.

So we have an Assessor, running for re-election, who doesn’t believe the taxes he helps calculate are a good way to fund local services.  I had hoped for better (but didn’t really expect it), as the quality of assessment seems to have improved during his tenure. He does have one announced primary opponent.

2020 Cook County Property Tax Analysis — sort of

image credit: Andy Arthur CC BY 2.0

We have a new report from Cook County Treasurer Maria Pappas, subtitled “2020 Cook County property tax analysis: A heavier burden for businesses, Black and Latino suburban property owners.”   It’s got more detail than I recall seeing published before, including two decades of total real estate tax revenue countywide and by triad, and (for the past two years only) median taxes per parcel for residential and commercial, by municipality and township (and limited data for Chicago wards)  as well as a fun list of the ten highest residential and commercial tax bills for each township. The extra load Cook County’s current classification system places on commercial property is noted.

All of this data for individual parcels has been available on the Treasurer’s web site for some time, but it wasn’t assembled for convenient use.

It’s likely impossible to discuss the real estate tax system (let alone the complete scope of public revenue) in a way which can hold the attention even of people who find themselves heavily burdened by the way government is funded and operated.  And Pappas’ office got this information out quickly, as the taxes have only recently been calculated and won’t be due until October 1.  All the same, there are problems which one hopes will be fixed next time this is done (and one certainly hopes there will be a next time, soon.)

Noting the continuing rise in revenues, the report asserts that “[t]he bigger tax burden is not being shared equally.”  What could this mean?  What would be equal?  Should we fund government by a poll tax, which is the only way to get everyone to pay the same amount? Perhaps the writer means “equitably,”  a desirable thing tho difficult to agree on. It’s then observed that “Property owners in many south suburbs continue to pay far more in taxes than landowners in other parts of the county.”  I will set aside the fact that “property” and “land” aren’t the same thing, and assume that the writer may have meant “real estate taxes are higher in many south suburbs than in other parts of the county,” which is sufficiently cautious that it must be true.

But in fact the amount of real estate tax paid by a median homeowner is much lower, less than $4,000/year in Bloom and Thornton townships (page 49 of the statistics section of the report), less than any of the north suburban townships (page 56).

That doesn’t mean that the taxes in Bloom and Thornton aren’t a burden for many, because taxes imposed on struggling people are always a burden. And the very high tax rates reduce market values, while increasing the extra burden on renters (who cannot benefit from the “homeowner exemption.”)

The report makes no attempt to separate the value of land from the value of improvements, even tho the assessments provide this breakout for each parcel.  There’s no distinction between owner-occupied and renter-occupied homes. The only mention of vacant land is to say that it’s been ignored, as has mixed-use (residential+commercial) property.  There’s no mention at all of exempt government-owned land.

It would be helpful to include reference maps, especially of townships. And in an ideal world, the tables would be offered in spreadsheet format.

 

Sun-Times report inadvertently helps show the benefits of simple LVT as a revenue source

Image credit: Purple Wyrm CC BY-NC-SA 2.0

According to a Sun-Times report, Cook County Assessor Fritz Kaegi acknowledges that his “Senior Freeze” program, under which old property owners claiming household income under $65,000 can get a big break on property taxes, is “riddled with errors.” Highlighted is a multi-million dollar condo in Water Tower Place, whose owners pay only $2502/year.  While it’s certainly possible that these folks might have income under $65,000/year, that seems unlikely, as they also own a Florida condo valued at over $1 million. Their Chicago property apparently also benefits from the temporary removal of toilets during a 2017 remodeling.   It seems that the Assessor never noted that the toilets were replaced (or perhaps they were not?)

While the WTP property is clearly an extreme case, the senior freeze program transferred $250 million from owners of 144,904 properties who participate in it to the remainder of the 1.77 million taxable properties (of which 1.6 million are residential) in the County.  With the total property tax revenue at $15.6 billion, this amounts to about 1.6 % of total taxes collected.  The Sun-Times article provides several other examples of affluent old people who benefit from the program.

Clearly this is a problem of bad policies ((discriminating against renters, the nonelderly, and people who find it difficult to complete simple bureaucratic forms), and taxing improvements), combined with governmental malfunction (Kaegi hasn’t been able to get the program under control, partly because there is no mechanism for the County to verify incomes).

It should not be necessary to mention, but I will mention anyway, that the Sun-Times report relied on property tax data being, for the most part, publicly available.  While far worse scandals likely could be found regarding income tax, many of these can’t be documented unless taxpayers “voluntarily” release their information, or it is (probably unlawfully) liberated.

Clobbering fairness more accurately

Where fairness comes from: Cook County Board Pres. Toni Preckwinkle; Illinois House Speaker Michael Madigan (credit: WBEZ CC BY-NC 2.0 and Wikipedia)

We have a new North Suburban Reassessment Report from Assessor Fritz Kaegi. As a “reformer,” this Assessor publishes a lot more information than his predecessors.  In fact, he publishes all the code for his assessment models.

Accurate assessments are said to be important because assessing a property too high can “destroy wealth by diminishing the market value of the property.”  Which is true, but do not taxes based on accurate assessments also destroy wealth?  What the Assessor seems to mean by a “fair” assessment is an assessment that is calculated in accordance with applicable laws and ordinances.  This definition of “fair” comes mainly from our friends in the Legislature and County Board, with some role for other government officials. “Fair” in Cook County means that owners of houses or vacant land should pay taxes at 40% of the rate applied to ordinary industrial or commercial property, unless special favors have been bestowed.  In the rest of the State, “fairness” requires rates in the absence of special favors to be uniform. In all areas, “fairness” requires that religious and most nonprofit educational facilities are entirely exempt from tax. Continue reading Clobbering fairness more accurately

Not the first daylight robbery, but a good one

I’ve long considered Dominic Frisby, perhaps the only working comic who’s also a financial writer, to be a Georgist.  Several years ago he posted a nice video explaining the land value tax.  Now he’s gone deep into a history of taxation and its effects, in  Daylight Robbery: How Tax Shaped Our Past and Will Change Our Future   Readable and succinct, but somehow by the end Frisby has forgot about his video.

The title is appropriate, so good that over a dozen older books already carry it, but the subtitle may be unique.  Frisby asserts quite a few facts new to me, and for the most part provides references (altho some are a bit summary, showing only the domain name such as cbs.com, or time.com, where one might need to search around a bit).

The book starts with the story of Hong Kong, a British colony which prospered thru free markets and lower taxes (The point stands, even tho in recent years external demand pushed housing costs to obscene levels, and in recent months political and governmental interference made conditions even more difficult.) Going thru tax history, Frisby of course discusses the effects of the window tax (“daylight robbery”), and explains why it was considered to be fairer and easier to administer than its predecessor. He tells us about tax revolts and England’s first income tax, all records of which were apparently destroyed (source citation is a two-volume history that I can find only in Latin).  He explains the cause of the U S War between the States (which Lincoln waged more for revenue purposes than in any opposition to slavery.)  He notes that Hitler was tax-exempt, and the Guardian used a Cayman Islands entity to (apparently legally) avoid taxes.

After lots more stories about taxation and its role in history, moving to modern times, Frisby explains (as if any of us need to know) the burden that taxation of productive activity places on people trying to, well, be productive. He talks about the digital nomads and crypto currencies which make collection of production tax more difficult, and about digital transactions which make the collection easier.

Finally he proposes a Utopian tax system.  Is it collection of all economic rent as the sole source of public revenue?  Not really.  He wants VAT (not to exceed 15%, and including narcotics) and income tax (also not to exceed 15%).  So the record-keeping burdens and complexities of those will remain, tho perhaps a bit reduced because the impact of error is less.  To these he wants to add L U T (Location Usage Tax), which is basically LVT but with perhaps a clearer name, and which would be set at some percentage of the land rental value.  He wants voters to choose the percentage, apparently a single rate nationwide. And since he aims to keep governmental expenditures below 15% of GDP, it’s unclear that there would be any L U T at all.

“The location usage tax does not apply just to land, but to any asset granted by nature — the airspace the mineral wealth, and even the broadcast spectrums.”  He doesn’t seem to have any problem with private collection of rent for “intellectual property,” even tho I P is a privilege granted and protected by the government, thus straightforward to track and assess– if there’s any justification for I P at all.

It seems that much of the land in Britain is “unregistered,” in that the owner isn’t known, and in Utopia this will be remedied by identifying every  owner.  I’m not sure why that’s necessary.  A tax bill could be posted for each parcel, and a copy mailed to the owner should s/he request it.  After due and repeated notice, If the bill isn’t paid, the land could be taken over by the Crown (or whatever they call it over there), and auctioned to somebody willing to pay the tax. (If nobody’s willing to pay the tax, it needs to be reduced.)

Would I like to live in Frisby’s Utopia? Well, of course here in the U S we have no VAT, and the retail sales tax is generally less than 15%. But income tax can be higher, and we have various other taxes which Frisby proposes to eliminate.  And LVT has other benefits in addition to the revenue it generates.  So on the whole, it’s a better deal, a step in the right direction. But Utopia? Go back and watch the video.

(Note: This review is of the 2019 edition of the book.  The Publisher’s web site indicates that a new edition will be released later in 2020.)

High land prices as a banking problem

image credit: Ann Priestley (cc) via flickr

Here’s an (audio) interview with economist Richard Werner, who remarks on the problems high land prices have posed for the Japanese economy in recent decades, and the relevance for the U S and other nations.  Dropping interest rates supports higher land prices, as well as facilitating financial engineering, but does little for actual investment in the real economy.  Small businesses, who actually provide useful goods or services, still have trouble borrowing because big banks don’t want to deal with them. The number of small “community” banks, more likely to actually meet the needs of small businesses,  in the U S has been declining.  He suggests that having more local banks, especially co-operative banks, would be an effective way to make loans available.   This seems plausible, as ILSR says that “In 2018, community-based financial institutions made 52 percent of all small business loans, even though they controlled only 16 percent of banking assets.”  Yet it seems there’s no shortage of local banks, as least in medium and larger cities.

In this interview he never mentions the possibility of a substantial land value tax as a way to curb land speculation.  As Keizo Takagi wrote in 1989, Japan’s land value tax “has been so low that [it] has not functioned properly as a holding cost,” [p. 129] thus failing to control speculative prices.

Perhaps deliberately or perhaps ignorantly, the Bloomberg interviewers didn’t bother to bring this up in the interview. Werner’s conclusion seems to be that, rather than ZIRP, interest rates should be allowed to rise to a level where local banks could more easily find loans profitable.  I suppose that might be better than nothing.

 

Some effects of high and misconfigured real estate taxes

Delinquent taxes soaring in Cook County

Reportedly, taxes of 163,036 parcels in Cook County were not paid on time. This comprises 2018 taxes which should have been paid in 2019. and amounts to 8.7% of all parcels in the County. For a dozen south Cook County municipalities, this amounts to 20% or more of total parcels.  Counts by municipality are posted separately for south, west, and north Cook.  All sources show the percentage of parcels with unpaid taxes within the City of Chicago as 9.9%.

Separately, the reports show that only 7.8% of the delinquent taxes offered for auction in 2018 were bought by investors, which might imply that the remaining parcels are considered worth less than the taxes owed.

Unfortunately the source doesn’t tell us  how many of the parcels are vacant, residential, commercial, or other uses, and gives no historical context, so we don’t really know how any of these figures compare to prior years. But regardless, the current numbers are alarming.

Suppose that the real estate tax system was changed, so that improvements would be tax-free while the value of land as vacant would be heavily taxed to make up the difference.  For vacant parcels, construction of houses or other structures would not increase the tax.  For parcels which contain improvements, taxes likely would be lower than now, and improvements would again be tax free.  Just a thought.

Maybe expanding tax-exempt institutions raise land prices?

Crains tells us that a strikingly-designed two flat, less than 30 years old, is worthless.  Well, they didn’t say it quite that way, but it was sold for $1.9 million to a buyer who will demolish it. So the $1.9 million was for the land.  I don’t know whether any developer of housing or anything else taxable would have paid nearly that much for the site, but the buyer was tax-exempt Illinois Masonic Medical Center.  Their exempt status of course made the land more valuable to them. Which raises the interesting question of whether buying land in the path of such an institution’s expansion might be a profitable strategy.  Of course, a fair-minded community might decide to tax land used for hospitals at the same rate as land used for housing and other useful things.  But we’re not there yet.

“Taxes – De Standaard” by Stijn Felix is licensed under CC BY-NC-ND 4.0

 

Why does public policy favor homeowners over renters?

image credit: Stephen Dann CC BY-SA 2.0

It’s certainly true here, where owner-occupants (of houses or condos) pay less tax than renters occupying units of the same value, with additional discounts for old people, some military veterans, and some poor old people.  Some owners also still benefit from deductability of mortgage interest and/or property tax.  So why do renters put up with this discrimination?

I have always thought, and some data seems  to confirm, that it’s because homeowners vote, and renters don’t. But according to this interview, the problem is similar, perhaps worse, in Australia.  Voting in Australia is compulsory, which apparently means one is fined if one fails to at least show up at the polls (the fine is up to $79AU, less for their Federal elections).  They also vote on Saturday, and seem to make a party of it, according to various posts such as here and here.

Of course just showing up doesn’t mean that you vote, nor that you pay much attention to candidates and issues, but the problem of low-information voters isn’t unique to Australia. Maybe there’s something about the worldview of people who rent vs. that of people who own….? Dunno.

U S jurisdictions do often provide some protections for tenants, which can disadvantage landlords, but they wouldn’t affect the status of owner occupants.