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What Would A Graduated Income Tax Mean For Chicago?

The potential for extra revenues at the state level doesn’t make a significant dent in the city deficit, and isn’t a silver bullet for fully funding items Lightfoot campaigned on last year.

Mayor Lori Lightfoot speaks at a press conference on the updates about COVID-19 in Illinois on Friday, March 20, 2020 in Chicago.
Colin Boyle/Block Club Chicago
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CITY HALL — After largely avoiding painful cuts and new taxes to fill a sizable budget hole for the city of Chicago last year, Mayor Lori Lightfoot is staring down a $1.2 billion gap for 2021 with no easy solutions on the horizon, made all the worse by a global pandemic and an accompanying economic recession.

While a series of hard choices is made on the Fifth Floor of City Hall, televisions all across the state are blasting opposing advertisements claiming that Gov. JB Pritzker’s signature campaign promise — changing Illinois’ constitution to allow for a graduated income tax — is either the revenue panacea that Illinois needs, or will hasten its financial implosion.

But what the fate of Pritzker’s so-called Fair Tax will mean for Chicago’s financial future is less clear cut. The potential for extra revenues at the state level doesn’t make a significant dent in the city deficit, and isn’t a silver bullet for fully funding items Lightfoot campaigned on last year.

The mayor has been far less vocal than the governor about where she stands on the graduated income tax, endorsing it when prompted, but not leading on the issue.

“I’m a for,” Lightfoot told reporters last week when asked about her position on the tax change. “I’ve been fortunate enough in my life to make a substantial amount over time. And I think people recognize the need for everyone to pay their fair share, but I think we have to do it in an equitable way and I think that’s what the Fair Tax, as it’s known, seeks to accomplish.”

Will local governments benefit?

Pritzker’s administration estimates that when fully implemented, the graduated income tax could bring in an extra $3.4 billion to state coffers annually. However, local governments across Illinois — including Chicago — would only see a $100 million slice of that new revenue, according to a 2019 analysis from the Civic Federation.

That estimated $100 million in new revenues derived from the graduated income tax would be shared among thousands of municipalities in Illinois through the state’s Local Government Distributive Fund.

In the legislative sausage-making that went on in the spring of 2019 to ultimately pass both the constitutional amendment for the November ballot and the actual graduated tax rates to go along with the tax change, the proposal was altered, lowering the original $237 million increase to local governments to just $100 million, according to the Civic Federation.

Since 2010, Chicago’s share of the Local Government Distributive Fund derived from state income tax revenue has bounced between $200 million and $286.5 million, according to the city’s budget office. But in the last decade, state funding to the fund was cut from its historical 10 percent of income tax revenues to rates hovering in the 5 percent to 6 percent range.

It’s a sore spot for the Illinois Municipal League — the group that lobbies Springfield on behalf of local governments in Illinois. Earlier this year, the league called for the Local Government Distributive Fund’s full restoration to 10 percent of state tax revenues. A few weeks later in his February budget address, Pritzker proposed holding 5 percent of income tax revenues meant for the fund in reserves contingent on voters approving his graduated tax plan.

RELATED: Give cities their share of state income tax, local officials tell lawmakers

Of course, both proposals were blown up by COVID-19, and the Illinois Municipal League settled for not seeing the fund get yet another haircut in a post-COVID state budget.

It’s a sore spot for Lightfoot, too. In her budget forecast speech in late August, she called for a return to fully funding the Local Government Distributive Fund and asking lawmakers to help her in this endeavor.

“Yes, I am painfully aware of the state’s own fiscal challenges,” Lightfoot said. “Even so, tax dollars from Chicagoans fund Springfield, just like tax dollars from other municipalities across the state. And just like our fellow Illinoisans, we all want the same thing: fairness. And fairness in this context means getting our fair share of funding.”

The Illinois Municipal League, which counts Lightfoot as a board member, has no official position on the graduated income tax plan.

Chicago’s fiscal cliff and the city-state divide

For decades, there’s been a pervasive notion that Cook County’s and Chicago’s unstable finances are a drain on the state. This idea is personified in a group of conservative lawmakers — mostly from Southern Illinois — who have made headlines with their proposals to secede Illinois from Chicago. Although the legislation landed with a thud in Springfield, the sentiment behind it is popular with a certain segment of Illinois voters.

Studies have shown the opposite is true: tax revenues from Chicago and Chicagoland subsidize the rest of the state. But Professor David Merriman of the University of Illinois’ Institute of Government and Public Affairs said it was probably best for graduated income tax proponents to stay away from any hint of regionalism that might sink the tax referendum at the ballot box.

“Part of the calculation might be that it’s not in the interest of people who support the referendum for the mayor to be out front, or the mayor and Cook County executives to be out front,” Merriman said, emphasizing that he’s not privy to any strategy. “Laying low on that might make it more likely to get support downstate or have less opposition downstate. I think you probably don’t want this to be a ‘city versus the rest of the state’ kind of issue.”

But State Sen. Rob Martwick (D-Chicago), who championed a progressive tax for years and sponsored the graduated tax amendment in 2019, was not shy about his belief that the city’s finances would be devastated without voter approval of the tax, as it would “stabiliz[e] the state revenues that flow through to the city.”

“As bad as the state’s budget is, the city’s is immeasurably worse,” Martwick said. “If [the graduated income tax amendment] doesn’t pass, it could be catastrophic all around, especially for the City of Chicago.”

If voters reject the graduated tax, Martwick said the governor and state lawmakers will face difficult choices to cut from the state’s budget, made all the more challenging by the uncertainty of the ongoing pandemic and lack of additional federal aid.

Included in those choices is further cuts to the Local Government Distributive Fund, “which the city could not withstand at this moment,” Martwick said.

The group set up by Pritzker’s deputy campaign manager — and funded almost exclusively by the governor — to push for the graduated tax leaned on school funding as one major reason the City of Chicago would benefit from the “Fair Tax.” Illinois schools are more reliant on local property taxes than most other states, though a new school funding law passed in 2017 aimed to begin addressing that disparity.

“By asking the wealthy to finally pay their fair share, we can increase state funding for education, which will lower the property tax burden and address the inequities in the city’s schools,” Vote Yes for Fairness Chair Quentin Fulks said in a statement. “Mayor Lightfoot is a strong ally in the fight for the Fair Tax, and we appreciate her support.”

RELATED: Mayor Lori Lightfoot promised to spend more money on students in need. Could 2020 be the year?

Asked for further comment on the mayor’s plans for any future city revenues derived from the graduated income tax, a Lightfoot spokesman pointed to the mayor’s comments from last week.

Lightfoot on sidelines of tax fight

Though Lightfoot has endorsed the graduated income tax, the mayor has not been out in front banging the drum on the issue. When asked about the ballot question last week, Lightfoot said she was following the “back and forth” on the graduated income tax fight “with great interest.”

“I don’t think that having a flat tax rate really serves anybody well,” Lightfoot told reporters. “I am firmly in support of a graduated income tax, it doesn’t make sense to me and it really never has in my entirety of living in the state that people who make modest income pay the same rate as people who make more.”

While the graduated income tax is a budget and policy issue, it’s also inherently a political one. The protagonist of the graduated tax saga is Pritzker, Illinois’ billionaire governor who campaigned on the message that he and other wealthy Illinoisans like him should pay a higher proportion of their income.

Lightfoot’s political team backed up the mayor’s support of the ballot item, calling her an “outspoken supporter” of the graduated income tax, “including throughout her 2019 campaign.”

“She is actively working to support the Vote Yes for Fairness campaign in any way we can in the lead up to November 3,” Lightfoot’s political director Dave Mellet said.

Elected within five months of each other, Pritzker and Lightfoot haven’t exactly shared a close relationship despite their mutual professed progressive values.

Five weeks into her term as mayor last summer, Lightfoot floated two unpopular ideas to Crain’s Chicago Business — without first running them by Pritzker or his team. The governor was caught off guard by suggestions that the state take over Chicago’s pension funds and move to tax retirement income above $100,000.

By late summer and fall, Lightfoot was making other demands of Springfield, including altering the state’s first big gambling expansion law in a decade to include more favorable tax rates for an eventual Chicago casino, and allowing the city to tax more expensive real estate sales at a higher rate.

Always looming in the background is the possibility of a property tax hike, one of the most unpopular options in Lightfoot’s arsenal. The mayor has repeatedly said “all options” must be on the table when it comes to filling the city’s budget hole, recognizing that Chicagoans remain wary of another property tax hike less than five years after the city’s largest-ever real estate tax increase under former Mayor Rahm Emanuel in 2016.

But some read Lightfoot’s demands from Springfield as an implicit threat to Pritzker’s signature tax plan, as Chicagoans would be facing a bit of tax fatigue come election season 2020 if the mayor was forced to implement a major property tax hike to balance the city’s budget last year.

In front of the Sun-Times’ editorial board in late August 2019, Lightfoot pointed out that the “vast majority” of high-income earners in Illinois live in the city of Chicago, and hinted at that possible tax fatigue scenario.

“We have to think about the timing of that,” Lightfoot said. “We go first — this year, next year — before voters go to the polls to approve the Fair Tax.”

Opponents of the graduated income tax seized on the next words out of the mayor’s mouth:

“We can’t keep taxing the hell out of all of our people who make substantial incomes.” Lightfoot said. “That’s not right, it’s not fair and it’s not going to work.”

Lightfoot aides later walked back the comment, telling reporters the mayor still was in favor of the graduated tax.

The “Lens On Lightfoot” project is a collaboration of seven Chicago newsrooms examining the first year of Mayor Lori Lightfoot’s administration. Partners are the BGA, Block Club Chicago, Chalkbeat Chicago, The Chicago Reporter, The Daily Line, La Raza and The TRiiBE. It is managed by the Institute for Nonprofit News.