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Paras Bhayani

Paras Bhayani

Posted: October 8, 2009 04:56 PM

Todd Stroger Meets Econ 101

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Pity Todd Stroger, the embattled Cook County Board chief who, having served the machine faithfully by protecting its patronage jobs, is now being tossed under the bus as voters turn their ire on tax-happy politicians.

Crain's columnist Greg Hinz reported yesterday that Illinois' powerful House speaker, Michael Madigan, has lifted a hold on legislation that would slash Stroger's hugely unpopular one percent sales tax increase. A companion bill would reduce the number of commissioners needed to override his veto, which would allow the County Board to nix the tax itself. (Full disclosure: I spent a summer several years ago working for Commissioner Forrest Claypool, the board's leading Democratic critic of Stroger.)

Stroger has always said that he raised taxes to fund the West Side indigent care hospital named for his father, but critics like Claypool say that the tax was really motivated by Stroger's desire to maintain the machine's "patronage empire." What makes the case of repealing the tax interesting is that the main beneficiaries of the repeal are likely to be the two machine honchos who have recently soured on Stroger, Madigan and Mayor Daley. Why? Because of an economics concept -- usually loved only by far-right supply-siders -- known as the Laffer curve.

The Laffer curve posits that at some point increasing taxes will actually lower revenue because the economic activity stifled by overly onerous taxes would reduce taxes by more than would be gained from raising tax rates. While this may be true at a 75 or 80 percent income tax rate, Laffer's argument is preposterous for the level of income taxes we currently have. (Today, the Laffer curve is employed almost exclusively by Republicans claiming that tax cuts are self-financing.) Even Harvard economics professor N. Gregory Mankiw, a former Bush adviser, once called proponents of the Laffer curve "charlatans and cranks."

But what's different about Cook County is that here the taxes are stacked on top of each other. In suburban Cook County, the cumulative nine percent tax goes to the State of Illinois (6.25 percent); to Cook County (1.75 percent); and to the Chicago Transit Authority, Metra and Pace (1 percent). In Chicago, an additional 1.25 percent goes to the city -- leading to a rate of 10.25 percent -- and some business districts have extra surcharges to pay for items like Millennium Park.

The extremely high sales tax in Cook County almost certainly drives purchasing -- particularly for high-end goods -- into neighboring DuPage and Lake Counties. And this means that Stroger's tax increase has had a Laffer-like effect on the tax levies that it's piled on top of. Unsurprisingly, the lead sponsor of the legislation to repeal the sales tax, freshman Democrat Mark Walker, hails from suburban Arlington Heights, near the border of Lake County.

Though Stroger's tax has raised revenue for the county (it would be inaccurate and extreme to say that the tax hike has driven out so much economic activity that it has reduced the county's revenue), it has certainly reduced the take for Chicago and the transit agencies -- governments led by Daley, a close ally of Madigan. And to the extent that the taxes have pushed south suburban spending into Northwest Indiana, Stroger's tax hike has also reduced the haul for Madigan's state government.

These overlapping taxers all vacuuming revenue out of the same local economy leads to a set of outcomes reminiscent of another economic principle: the Tragedy of the commons. In a famous 1968 essay, biologist Garrett Hardin postulated that in a pasture, open to all, competitive behavior would impel cattlemen to overgraze their animals beyond the capacity the commons can handle. Eventually the commons would be ruined and all the cattlemen would be worse off.

The solution, Hardin argued, is to use the power of the government to set limits on how much each cattleman can graze. In Illinois, such a system is already in place: the state has the authority to void local taxes, all of which are enacted under municipal home-rule authority and governed by Illinois statute.

That means that the General Assembly has to take its job as the highest authority in the state seriously, as Madigan's caucus of Democrats, feeling the ire of disgruntled constituents, finally seems to be doing. This can come in one of two ways: either Madigan should himself keep a careful watch on the economic effects of Northeastern Illinois' cumulative tax policy, or he should simply liberate his chamber and allow up or down votes on legislation irrespective of his personal position.

Like legions of reform proposals before it, Walker's bill has been in legislative purgatory for months, despite having a clear majority in the chamber; what his effort shows is that reform and democracy in the legislature are two sides of the same coin.