Screwing up the sales tax | Neighborhood News | Chicago Reader

Screwing up the sales tax 

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Like all great legislative maneuvers, it happened quietly and fast, when almost no one was looking. At the end of last year's legislative session, Jim McPike, a Democratic state representative from Alton, amended the sales-tax reform bill so that the General Assembly and the governor could control which municipality would get what portion of the annual sales-tax yield.

It was a radical change for which there was almost no support. It allows state legislators or the governor--if they choose--to use all of the sales tax generated in, say, Schaumburg, to build low-income housing on the south side of Chicago, or, of course, to spend Chicago's sales-tax money in Schaumburg.

Apparently, few legislators read the final bill that contained McPike's change. Those who did read the bill must have overlooked it. And who can blame them? The amendment consisted of ten or so words hidden in 337 pages of mind-numbing legalese. The bill passed with overwhelming bipartisan support, was signed into law by Governor James Thompson, and won accolades from business and municipal leaders who proclaimed that at long last the state's complicated sales-tax law made sense.

Then last fall folks got around to reading the new legislation, and all hell broke loose. "Under the old system the state taxed five cents on the dollar, and the local municipality taxed up to one penny for most transactions," explains Dawn Clark Netsch, the state senator from Lincoln Park who sponsored the original sales-tax legislation. "The state collected the tax and automatically returned a municipality's share to that municipality. In a sense, the state was nothing more than a conduit. Under the new law the local portion of the sales tax is part of our annual budget process. That means the General Assembly must approve the sales-tax appropriation. This is not what the municipalities wanted out of sales-tax reform, to say the least."

"We were tricked," is how Charles Esler, a member of suburban Glenview's board of trustees, puts it. "The great tyrant is a clever man. He tricked us again."

The great tyrant is House Speaker Michael Madigan. As many disgruntled observers see it, McPike--who is the House majority leader--amended the bill at Madigan's bidding to allow the speaker even more control than he already has over state politics. Cut off or diminish their sales-tax yield, and a lot of municipalities cannot pay their bills. It's a powerful threat to hold over their heads--enough of a threat, perhaps, to make a lot more legislators vote Madigan's way.

"We're not pointing the finger at anyone," says Roger Huebner, staff attorney for the Illinois Municipal League, an association of 1,000 municipalities. "The House leadership has expressed to us that they intend to distribute the money back to where it came from this year. What we don't know is what will come in three or four or five years. Anything is possible under the framework, and we just want things to go back to the way they were."

McPike was out of town and not available for comment. Steve Brown--Madigan's chief spokesman--denies that the speaker had a hand in the maneuver. "There was no sinister plot," says Brown. "Jim [McPike] believes that since this money is raised by the state, it should be appropriated by the General Assembly. He has no intention of denying money to any municipality. All those accusations are a bunch of heated rhetoric cooked up by a lot of people to overcome their embarrassment at not having read the bill."

The issue began quite innocently about two years ago with requests from various retail associations to reform the sales tax. "The single worst tax in terms of its complexity is the sales tax," says Netsch. "As long as different counties and municipalities have the right to assign different rates, it can be confusing as to how much you have to pay and who you have to pay it to."

For example, a corporation with branches in Schaumburg and Evanston must compute two different rates. For larger corporations with outlets all over the state the result is what Brown calls "a bookkeeping nightmare."

"The retailers came to us with the request to reform the tax," says Netsch, who is chairman of the senate revenue committee. "They didn't want us to tamper with the formula or appropriations. They wanted a more uniform system."

From the start, however, there have been conflicts. Many suburbs lower their sales-tax rates to lure businesses. Making the sales tax uniform denies them one of the many advantages they have in their heated competition with Chicago for commerce.

Then there's the debate over whether the sale of food, medicine, and farm equipment should be taxed. Some municipalities tax these items, others do not. "If a municipality depends on a sales tax on farm equipment, and you tell them they can't tax farm equipment, then you are denying them money they are depending on," says one state official familiar with the issues. "We had to come up with money to satisfy them."

Legislators agreed that the state would impose a 6.25 percent sales tax and return 1.25 percent to the municipalities. Municipalities were denied the right to tax food, medicine, or farm equipment. To make up for revenues lost to any municipality, the state created a "use tax"--which was, in effect, a tax on goods purchased out of state through mail-order catalogs. "This was a very complicated matter," says Netsch. "I spent hours on this with municipalities screaming at me. This took up the better part of my last legislative year."

As legislators tampered with the sales tax, they created unforeseen problems as they tried to minimize revenue losses caused by reforms. At one point, for example, the state intended to pay for federally mandated waste-water facilities with some of the new use tax. To make up for that loss to the municipalities, the state decided to divert to them a portion of a newly created tax on photo processing. "It got more and more complicated," says the state official. "Other issues kept being dragged in. For a while, the bill got beyond the idea of sales-tax reform, which in its genesis was aimed at simplification."

The final bill--passed on July 2 with little press attention--was extremely complex and unlikely to have been read by most legislators who voted on it. Except, perhaps, McPike.

"This is a matter of principle that Jim [McPike] has long believed in," says Brown. According to all observers, McPike has long contended that routinely sending sales taxes to municipalities--without subjecting them to a formal vote by the General Assembly--violates a legislator's constitutionally mandated obligation to appropriate funds. McPike had raised the issue before, although not in relation to Netsch's sales-tax reform bill.

"We recognize that McPike has his philosophy," says Huebner. "But you should note that throughout all the negotiations--and there were many sessions over sales-tax reform--he never raised this issue. No one did. And McPike was party to those negotiations."

Word first surfaced of McPike's amendment in August, when lawyers for the state's revenue department read the bill. Huebner's group learned of the change in early November. Chicago Tribune reporter David Ibata broke the story locally with a November 22 article that quoted several angry municipal officials. "They've just discovered it because they didn't bother to read the bill," McPike was quoted as saying. "If this was an issue, they should have raised it before."

The day after Ibata's article Springfield buzzed with activity, as lobbyists, retailers, mayors, and other officials phoned their legislators to complain. In a November 23 follow-up article, Ibata quoted Madigan's chief of staff, Gary LaPaille, who characterized McPike's changes as an "honest mistake."

"In defense of Madigan and McPike," Ibata wrote, "LaPaille said that while drafting the sales-tax act, a staff member may have inadvertently copied from other revenue-related legislation the language that the mayors now find offensive."

"What you saw there was LaPaille trying to cover for Madigan," says one Springfield insider. "He [Madigan] never expected the kind of heat he took from the Municipal League and all those mayors."

To appease the officials LaPaille told Ibata he hoped to have the matter resolved within a week. But as of yet, there has been no resolution. McPike's change remains law, a fact that could turn the process of appropriating the sales tax upside down.

About 10 percent of Chicago's annual budget--or $280 million--comes from its sales tax. In many suburbs the sales tax covers up to a third of their budgets. Many municipalities--like Chicago--borrow money to finance construction projects with the expectation that future sales taxes will be used to repay the bonds. If this money is withheld or delayed, the bonds cannot be paid.

On the other hand, McPike may have done Chicago a favor by unintentionally exposing long-overlooked inequities in the way the sales tax works. The sales tax provides many suburbs with a comfortable standard of living. As more and more stores follow their middle-class clientele from the city, the growing sales tax enables the suburbs to keep their property taxes low. The result is that relatively well-to-do suburbanites pay a smaller portion of their income on local taxes than poorer city folk do, and yet the suburbanites have better schools, parks, and services.

Someday Chicago's politicians may stop bickering long enough to study and understand the issue. They might even sue or push for legislation that would force the suburbs to share a greater portion of their sales-tax yield with the city. After all, Chicago might as well reap some rewards from those suburbs that benefit greatly from the exodus of the city's middle class.

Unfortunately for Chicago, this scenario is still a long way off. "Believe me, no one in Springfield is talking about restructuring the formula by which we appropriate the sales tax," says Netsch. "Quite frankly, that is an issue I don't expect to see raised. Right now we're trying to bring back the original sales-tax reform legislation--the one we thought we had already passed."

Art accompanying story in printed newspaper (not available in this archive): photo/Bruce Powell.

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