- Posted by Jeff Carter on September 4th, 2015 at 8:21 am
“I do not believe that the solution to our problem is simply to elect the right people. The important thing is to establish a political climate of opinion which will make it politically profitable for the wrong people to do the right thing. Unless it is politically profitable for the wrong people to do the right thing, the right people will not do the right thing either, or if they try, they will shortly be out of office.”–Milton Friedman
Yesterday, the city of Chicago announced it was raising property taxes. Not by a smidge. No, instead they are raising them more than any time in city history. $500M. It works out to $83.33 per month on $250,000 in real estate value. That doesn’t sound like a lot to many people. The state of Illinois, and city of Chicago has had a political climate for over half a century that makes it easy for the wrong and right people to do the wrong thing.
Here is the problem. The tax increase won’t make a dent in the city fiscal problems. The liberal columnists at the city’s newspapers are all crowing about how the city is finally doing something, anything. My friend Mark Glennon at Wirepoints shows you the numbers.
In other words, it would take a $1.34 billion tax increase, not $500 million, just to start funding Chicago’s pensions adequately.
That’s just to get to “adequate”. Adequate is the gentleman’s C. They only covered 26% of the cost. This is swabbing a Q tip on a spurting artery. Next year, the police and fire pensions have over a $500M hole in them. There are plenty of other government pensions too, and we haven’t even talked about the Chicago Public School system. They are in the hole for $10B. We also haven’t talked about the county, or the state. As Mark says, virtually every county in the state of Illinois is insolvent. Broke.
There were limited spending cuts. They were illusions, not real cuts. There was no change in pensions like Mitch Daniels did to solve them in Indiana. There were no elimination of any government programs.
The other big problem is the entire tax increase is going to pensions-not to government services or to improve infrastructure or to make the city more livable. Most people don’t mind paying taxes when it goes to improve their quality of life, but any tax increase now won’t even do anything for that. This is the bill for the Democratic Machine and big government.
Here will be the result. People will continue to leave. The trickle that has turned into a stream will turn into a river. Businesses that employ middle class people are leaving at a strong clip. People are leaving for better opportunity. Chicago and the state of Illinois has lost millions in taxable income since 2010. At the same time, costs have gone up and they haven’t cut any government spending. This is tough on me and my wife because this is home.
It’s time to think out of the box. It’s time to sell off assets. It’s time to shutter government programs. It’s time to privatize a lot of the things government does. It’s time to become a right to work state and change workman’s comp laws to be competitive and realistic. Yesterday was the 103rd anniversary of Milton Friedman’s birth. He said, “Nothing is so permanent as a temporary government program.”
I am empathetic to the politicians at some level. They are damned if they do and damned if they don’t. But, they are the ones that made this bed for themselves. The numbers that you generally see cited, the $1.788B in annual pension cost the government has to pay is not the real number. It’s much bigger than that. They don’t account for their rate of return correctly, and they don’t account for the amount they need to pay in correctly.
Chicago is not Detroit. But, Chicago is taking the same path that Detroit took to solve it’s city financial problems. Raising taxes doesn’t work.
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Jeffrey Carter is an angel investor and independent trader. He specializes in turning concepts into profits. He co-founded Hyde Park Angels one of the most active angel groups in the United States in April of 2007. He previously served on the Chicago Mercantile Exchange Board of Directors. He has done market commentary for (More...)