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A Project of The Annenberg Public Policy Center

Rahm’s Plan: Tax Cut or ‘Largest’ Hike in History?

Rahm Emanuel and his leading opponent are airing less-than-truthful TV ads about taxes in the closing days of Chicago's Feb. 22 mayoral election.

In dueling ads, Emanuel and fellow Democrat Gery Chico spar over sales taxes. Emanuel says his plan will "lower taxes," and leave "more money in your pocket." But it will not lower taxes. The plan will lower the sales tax rate, but broaden the tax base to include as-yet undefined "luxury services." The campaign says the plan will be revenue neutral at first and then generate additional revenue once the economy picks up. That means it will take more money from some pockets and leave more in others. Exactly whose pockets isn't known because the plan is subject to state approval and Emanuel is leaving details for future negotiations with state legislators.

Nevertheless, Chico falsely accuses Emanuel of proposing "the largest sales tax in the city’s history" — a claim that nobody can make without more information.

Chicago's 'Largest Sales Tax'?

The tax dispute erupted when Emanuel, the feisty former chief of staff to President Barack Obama, offered a one-page proposal on Jan. 19 to revamp the city's sales tax. The idea is relatively simple: cut the city's rate from 1.25 percent to 1 percent, but broaden the base to tax more items — specifically, "luxury services." Since the city would need state legislative approval to change the tax rate, Emanuel said in his proposal he will work with "state legislators to expand the tax base by closing the loopholes that allow luxury services to go untaxed," listing examples such as "private club memberships, pet grooming, limo services, tanning parlors and interior design services."

The Chicago Sun-Times, which has endorsed similar efforts in the past, wrote an editorial saying such change is long overdue because the sales tax relies too heavily on goods and not enough on services.

Sun-Times, Jan. 21: Focusing our sales tax on goods may have made sense in the 1960s, when the sale of goods represented 32 percent of economic activity in Illinois, but that has dropped to just 12 percent, according to the Center for Tax and Budget Accountability.

Emanuel's plan, though, got a less welcoming response, as you can imagine, from his opponents. It's a plan that Chico derisively calls, "The Rahm Tax," which is the title of a TV ad that began airing Feb. 4.

In his ad, Chico calls the proposal "the largest sales tax in the city’s history." But that's impossible to claim, since nobody knows exactly which "luxury services" would be taxed and how much revenue would be generated.

The plan's lack of specifics doesn't stop Chico from speculating. Chico's ad falsely says: "Rahm’s tax would hit families on everything including pet care to car repair to taxi cabs to bowling alleys." But the plan wouldn't tax "everything," as Chico claims. It's clear that Emanuel wants to limit the tax to certain items.

Chico's ad is playing on the fears of tax-weary Chicagoans. Until last year, Chicago had the nation's highest combined sales tax rate – that is, state, county and local sales tax, according to the Tax Foundation. But Cook County reduced its rate by one-half of 1 percentage point, so now it is at 9.75 percent – including a 1.25 percent city sales tax.

The ad ends with Chico addressing a group of voters at a bowling alley (not a country club, of course). "This tax is gonna hit families, when they don’t have one more ounce to give," Chico says.

Rahm's Response: What Tax Hike?

Shortly after Chico went on the air, Emanuel's campaign responded with a TV ad called "Your Pocket." The ad says Chico's ad is "false," and then goes on to apply the same erroneous logic as Chico did; it fails to clearly explain that the plan would broaden the tax base.

The ad starts by saying: "Desperate and running out of time, Gery Chico is making false attacks on Rahm’s plan to lower taxes." But Emanuel's plan doesn't lower taxes — it just lowers the tax rate. Ben LaBolt, Emanuel's spokesman, told us the idea is to make the plan revenue neutral. He said cutting the sales tax rate would reduce the city's revenues by $46 million and expanding the tax base would raise revenues by $46 million. In a second interview, LaBolt said the plan could generate additional revenue. "If the economy recovers and we see a big uptick in luxury services, then you could see some additional revenue," he said. How much? That's not clear.

On the day he announced his sales tax plan, Emanuel met with the editorial board of Crain's ChicagoBusiness and spoke to the paper's political reporter, Greg Hinz, about the tax plan. Hinz wrote that Emanuel's plan in "several years" would start to generate "about $20 million more a year." LaBolt would not confirm that. He acknowledged Emanuel said the plan could eventually generate up to $20 million in additional revenue, but he said the candidate never said $20 million a year. OK, but over what period of time would the city see the additional $20 million? LaBolt wouldn't say. Other Chicago media reports — as reflected in this Feb. 8 Chicago Tribune article — also used the $20 million figure, but omitted over what period of time. We e-mailed Hinz and asked about the discrepancy and he responded: "The interpretation I got out of the conversation [with Emanuel] was $20 million a year; otherwise, it's kinda silly cause $20 million over a decade or two doesn't mean anything. But Ben may be right that Emanuel may not have been precise but merely left an impression."

Regardless of when and how much additional revenue Emanuel's plan may generate, one thing is clear: it will not "lower taxes." What Emanuel's ad really means, of course, is that the plan will save money for some families, but not others. Who would save and how much would they save? It's not really known, but that doesn't stop the Emanuel campaign from coming up with an estimate.

Emanuel's ad says the plan would save "working families up to $200 a year." We asked how the campaign arrived at the figure and got a response that didn't even add up to $200. By the campaign's own math, the combined savings from changes in the sales and natural gas taxes would amount to $182 — not $200 — for a family earning $46,000 a year that spends about "a quarter of their household incomes on sales tax eligible items." But that assumes these "working families" would pay no additional taxes on any "luxury services" that are currently not subject to the sales tax. LaBolt said the campaign made that assumption "because the luxury services tax would not affect them; these are not families that are taking charter flights or maintaining exclusive private club memberships." It's not known, however, whether those families have a gym membership and whether that would be taxed if and when the Legislature approves such a bill.  

Emanuel's ad makes only a vague reference to the fact that his plan would expand the tax base when it says, "Chico would protect tax loopholes for the wealthy, while forcing you to pay hundreds more each year." Of course, Chicagoans won't be paying "hundreds more each year" if Emanuel isn't elected or if his plan is never implemented. They will merely continue to pay the existing tax.   

In a Feb. 1 editorial, the Chicago Tribune said Emanuel "might have a good idea for tax reform," but no one really knows.

Chicago Tribune, Feb. 1: The problem is, Emanuel can't seem to spell out a bright line for what would be taxed and what wouldn't. This has turned into a parlor game.

It's a game that may leave voters confused, and these TV ads don't help to clear up the confusion.

Update, Feb. 11: Our original post said Emanuel's tax plan "would generate an additional $20 million a year, a figure that LaBolt confirmed." LaBolt called us to say he had confirmed the $20 million figure, but not that it was over one year. We updated the post to accurately reflect LaBolt's statement and to provide more context regarding how much additional revenue the tax would generate and when.