How Did We Get Here? A Play in Multiple Acts
Chapter 2: Present at the Creation–How Illinois’ Constitution Created a Fiscal System That Has Hamstrung Chicago
Our second piece in this series by Chasse Rehwinkel, currently Executive Vice President and CFO of Devon Bank and formerly the City of Chicago Comptroller, formerly Director of Banking for the State of Illinois, and formerly a senior official in the office of the Illinois State Treasurer. Chasse will ground this series in the little-discussed history that guides the current debate and shapes the policy options presently available to elected officials. If you ever wondered why Chicago mayors —no matter how hard they try not to—lean on tools like property taxes and sales taxes to raise revenue, or why the City of Chicago has to balance its budget unlike the federal government, Chasse covers some relevant historical context.
It’s now officially that time! A special time of year if you are a Chicagoan—or just a huge public finance nerd in general. The time of year when the leaves turn, the days grow shorter, and Chicago City Council debates next fiscal year’s budget. It’s exciting! After all, municipal budgets are the primary policy documents of a society. They represent the financial priorities that shape everyday lives within the city. If you own a business in Chicago, or go to school here, or want to visit, or set down roots, if you are a high member of Chicago society or homeless on the city streets, if you are a recent immigrant or represent six generations of Chicagoans, the city budget impacts you.
Furthermore, if you live in Evanston or Harvey, or Hammond, Indiana, or Racine, Wisconsin, or just live in Illinois somewhere or along the Great Lakes or on the edges of the Industrial Midwest, believe it or not, the Chicago budget impacts you too. Chicago, with an economy roughly the size of Switzerland, reaches far beyond its borders in terms of financial influence. The same is true with the State of Illinois, which is one of the few states with an annual GDP of over one trillion dollars. The fiscal policy decisions made by the leaders of Illinois and Chicago reverberate across the Midwest, the United States, North American and, yes, the world.
And yet, to the semi-serious observer, Chicago’s fall budget season and Illinois’s spring version might feel a bit predetermined or at least repetitious. Year in and year out we hear about the specific fiscal constraints that impact the City’s budget, and as fall turns to spring, a similar chorus surrounds the budget debate in Springfield. Yes, major policies are changed every year. New projects are funded, programs designed, even new agencies sprout forth, but the fundamental challenges seem unaffected. The core foundation seems immovable. And while these challenges may seem primordial due to endless repetition, the roots of Illinois’s and even Chicago’s fiscal condition aren’t yet even a lifetime in age.
Building on our last entry in this series that took a quick trip through Illinois’ constitutional history, we now turn to what that new 1972 constitution that we still have today means for Chicago’s finances.
The issues of the Sixth Illinois Constitutional Convention that affect the City of Chicago’s finances today can most easily be divided into three broad categories: fiscal reform, including changes to the personal property tax, structural reform, meaning the reworking of the mechanisms of Illinois government, and municipal government reform, including the pivotal change of instituting Home Rule authority to Chicago.
Personal property tax reform
The original 1870 constitution limited the state to three basic forms of taxation: property tax, franchise/privilege tax and occupation tax. An earlier effort to institute a graduated income tax was passed by the General Assembly in 1932, but this was overturned eight months later by the Illinois Supreme Court for violating the state constitution. In 1969, Governor Richard Ogilvie made the state’s second major push for a state income tax. This time a deal was struck to garner passage: instead of a graduated tax, the new income tax would be a flat tax of 2.5 percent on individuals and 4 percent on corporations. Again, this new tax was challenged, but this time the Illinois Supreme Court upheld the legislation.
In spite of this ruling, proponents of the new income tax were worried it was still vulnerable to repeal by some future General Assembly, and so pushed to include it in the new 1970 Constitution as well They also successfully enshrined in the new constitution new flexibility for the state to raise more than just property, privilege and occupation taxes for revenue. As outlined in the new constitution, “The General Assembly has the exclusive power to raise revenue by law except as limited or otherwise provided in this constitution.”4 This simple provision provided future state policymakers with the option to adjust revenue options to meet the current practices and technologies of their time.
This was an overall big deal and a big win for the state. A state must have revenue flexibility to avoid inequitable taxation. Absent this flexibility, Illinois’ hands would have tied even with social and economic changes compelling new taxation approaches. For example, a future technology or consumption pattern may devalue corporate property ownership or a certain type of occupational licensing. In these instances, to make sure government services keep pace with inflation, more burden would be placed on ever-decreasing revenue pools. Having the flexibility for a future government to consider things like online sales or gaming or congestion fees, for example, allows state revenue collection to adjust to reality.
But revenue collection flexibility is not perfect. It also requires policymakers to keep a consistent eye on tax burdens to not only look for new tools for revenue but also retire antiquated or even harmful existing revenue options—which can be, and often is, very difficult for any legislature to do.
Article 9 of the 1970 Constitution—which is the article where changes to state revenue and taxation were placed—did provide for some limitations on taxation, however. Income-based taxation at the state level was still a new concept for Illinois residents, and the idea of a graduated-style tax got very real push back. Opponents were concerned that a graduated tax would be too challenging to administer and would incentivize wealthy Illinoisans to relocate, and their businesses, to other states. Additionally, Article 9 stipulated that the income tax placed on corporations could not exceed the rate placed on individuals by an 8 to 5 ratio—again out of fear that too high a rate on corporations would drive business out of the state.
Another reform found in Article 9 was the elimination of the personal property tax. A hated local tax for years in Illinois, the personal property tax was an ad valorem tax on personal property such as farm equipment and business inventories. The tax was difficult to enforce evenly and easy to avoid for certain types of property. It was understood that come “valuation day” companies would send their equipment elsewhere, banks would move their assets, farmers would hide away their heavy machines. In Cook County, personal property tax collected on individuals was abandoned entirely in favor of collection solely on businesses.
The elimination of the personal property tax in the 1970 Constitution settled the issue in one way, but the delegates knew a replacement would be needed for local governments and drafted a provision stipulating that there could be a future revenue stream for municipalities. In 1979, this revenue stream was identified and passed by the General Assembly. Called the “personal property replacement tax”, this new tax was levied on business income at fixed rates depending on their corporate structure—a tax that is collected by the state and distributed to local governments to this day.
Together, these major changes in personal property, impacting primarily local governments, lead us to our second major category: municipal government reform.
The creation of Home Rule
Backdropping the convention’s proceedings was the policy desires of longtime Chicago Mayor Richard J. Daley. Daley, then in his fourth term as mayor, was past his political zenith at the start of the Con-Con. Arguably the most important Democrat powerbroker in the early to mid-1960s, the chaotic 1968 Democratic Nation Convention had certainly somewhat dimmed his political star nationally. However, in Illinois Daley was still the unquestioned leader of the Democratic Party at the time of the Constitutional Convention, and the mayor had one major goal in the drafting of the new constitution: to secure Home Rule for Chicago.
Home Rule is a municipal government distinction, granted by states, that allows more local flexibility when it comes to things like fiscal and other legislative polices. Municipal governments with Home Rule must still abide by the framework of federal and state law, but as long as a policy is not enumerated already by the state or federal government s the municipality has the ability to act.
Daley pushed hard for Home Rule’s inclusion in the 1970 Constitution, and it was adopted in the eventual final draft. Daley’s success, however, reached beyond Chicago. The constitutional provision around Home Rule allowed for municipalities over 25,000 and counties over 200,000 to pass Home Rule—opening up for local governments around the state to have the ability to set their own unique polices. The Home Rule provision was not unlimited. In spite of pressure from Chicago delegates, the state restricted Home Rule for income taxes and licensing.
The re-ordering and consolidation of State of Illinois fiscal and financial power
Finally, we have structural reforms. The Orville Hodge scandal had made it clear that some fiscal offices in the state needed restructuring. A point was raised to eliminate most of the statewide offices, including the Auditor of Public Accounts, State Treasurer, Secretary of State and even State Attorney General, in favor of making those positions appointed, but ultimately that idea had no real support. Instead, the Auditor of Public Accounts position was abolished, and its responsibilities were divided into two new positions.5 First, a newly elected state officer position was created, the State Comptroller. This role would handle primarily the payment processing of the state and acted as a check on state appropriation authority. Second, the auditing function for the state would go to a new office of the Auditor General, which would be appointed by the legislature as opposed to being an elected office. Combined, this division of fiscal controls was meant to stifle future attempts at the embezzlement of state funds.
And the legacy of the 1968 Con-Con wasn’t simply the proposed new constitution. The delegates that came to Springfield in 1968 would have longstanding influence on Illinois for decades. Of course, there was Mayor Daley’s son, Richard M. Daley, who went on to serve 22 years as Chicago’s Mayor in his own right—breaking his father’s longevity record. There was James Kemp, who would go on to become president of the NAACP in the 1980s, and Dawn Clark Netsch, matriarch of Illinois progressive reform and the first woman nominated by a major party to run for Governor of Illinois. And of course, Michael Madigan, the longest serving Speaker of the Illinois House in state history and towering powerbroker in Illinois politics for decades. These titans alongside many other delegates who would go on to serve lengthy careers in state and local government—a generational class of policymakers that cut their teeth in the creation of the new state foundational document.
In 1970, the final decision was placed in front of Illinois voters, who ratified the new constitution with 57 percent of votes in favor of 100 years of rule under the 1870 Constitution ended, and a new era for Illinois governance was born.
In the next chapter, I’ll address what the 1970 constitutional reforms failed to address, and that affect us today. And what a new constitution in the future might include that could allow Chicago and other Illinois municipalities to emerge into much stronger fiscal health.
Please also stay tuned for some in-person, offline conversations at MPC about what a new public finance paradigm might be, and how we can start building it now.