PI Original Micah Maidenberg Tuesday February 1st, 2011, 3:46pm

The Mayoral Tax Debate

Gery Chico and Rahm Emanuel are squaring off over sales taxes. What's this battle all about? We take a look below.

As Chicago's mayoral race starts to wind into the final days before February 22, Chicagoans can expect to hear quite a bit from candidate Gery Chico along these lines:

The "Rahm Emanuel tax" Chico refers to above is the Emanuel campaign's proposal to clip the city's share of the sales tax by .25 percent and broaden the revenue stream to include what a campaign press statement called "luxury services." In combination with the sales tax decrease the Preckwinkle administration has promised to pursue at Cook County, Emanuel says the local sales tax rate would be down to 9 percent by 2013. It's 9.75 percent currently.

Chico has already blasted the pitch at a Hyde Park barbershop and a West Loop gym. Today at the Fireside Bowl in Logan Square Chico criticized Emanuel on his failure to release a list of the services that would fall under a broader, but lower sales tax.

The idea of lowering the sales tax rate and then using that rate to cover more services is something at least one budget analyst told Progress Illinois he'd embrace.

"I want to be very clear on this -- all the political posturing aside by Rahm's opponents, he's completely right on this approach," said the Center for Tax and Budget Accountability's Ralph Martire. "If state and local government put their heads in the sand on sale taxes they'll never have balanced budgets going into the future."

This is an issue that has been discussed at length in Springfield. Members of the General Assembly considered broadening the sales tax to include more services in HB 174. The bill passed the state senate in 2009 before dying in the house; the tax deal struck last month focused on income and corporate taxes, but it did not expand the sales tax to cover more services.

The problem, as Martire's group and many others have explained, is that the state's 5 percent share of the sales tax does not currently cover most of the transactions that occur in Illinois' consumer economy. The Center for Tax and Budget Accountability's "Funding Our Future" report (PDF) put it this way:

The main problem with the Illinois state sales tax (known as the Retailers’ Occupation and Use Tax and the “Service Occupation and Use Tax”) is that it does not apply to most services. In fact, of the 173 categories of taxable services recognized by the North American Industry Classification System, Illinois taxes only 17 – the narrowest base of all but four other states in the country ... [S]ervices now account for more than 60% of Illinois’ state GDP. The next largest sector accounts for less than half that amount.

A chart from "Funding Our Future" compared how different states around the country and Midwest taxed -- or didn't tax -- various services. Take a look:

With so few services taxed, it is difficult for the state to achieve fiscal stability, weather economic downturns, and, by limiting revenue collection, provide needed services, according to the "Funding Our Future" report. The same principle applies to local governments like Chicago, Martire said. Local governments have "very limited revenue options" beyond user fees, regressive property taxes, and some assistance from Springfield, and so a broader but lower sales tax needs to be part of the revenue mix, he said.

But for now, with the first round of voting in the city elections just three weeks away, the focus will likely remain on the politics and image of this proposal rather than its policy implications.

"Rahm Emanuel has made a habit of not being honest with the voters of Chicago," Chico said at the Fireside Bowl today, according to a press statement. "Emanuel isn't being honest about his plan to raise taxes on a whole new litany of services that will hurt working class families. Emanuel isn't being honest about his tenure on the scandal-laden board of Freddie Mac. The last thing Chicago needs is a mayor who says one thing and does another."

Emanuel, meanwhile, has hurt himself by refusing to release a list of services that would fall under his tax plan; his campaign statement about the subject lists only "private club memberships, pet grooming, limo services, tanning parlors and interior design services" specifically as targets. That's left Chico room to "add it up" himself, as a headline in Mark Brown's column put it earlier this week and speak out on the issue at barbershops and gyms, even as the Emanuel camp says those gyms wouldn't get taxed. And there are questions about how state lawmakers could expand the tax only to luxury services and even if an Emanuel administration could get the General Assembly to sign off on this idea.

Chico has clearly found his issue -- even if advocates say he is wrong on it -- and even if he once seemed to support a similar plan.

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