Seeing the Invisible Hand

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The New York Sun

Lucky Chicago: It has for a moment the power to see the unseen.

In case you were wondering, the unseen looks like a full parking lot outside a Best Buy just over the Indiana line, where sales-tax refugees go.

Chicago already has some of the highest sales taxes in the country. On July 1, it will be at the top of the heap with a combined rate of 10.25%. Some of that is because of Cook County, which contains the city and many of its suburbs. Its board voted during the wee hours of February 29 to raise its sales tax by a percentage point, a doubling.

This was utterly necessary, say officials. Heck, insufficient: The county, which reckons it’ll take in $426 million more a year with the tax increase, can’t stop its costs from rising 5% a year, says its fiscal director, Donna Dunnings, whose own pay lately rose 12%.

Ms. Dunnings warns about the county’s “structural deficit” — the excess of future wishes and promises over expected revenue. She says the “structural deficit is living and breathing,” and a higher sales tax won’t suffice. This living, breathing creation will require still higher taxes soon, she told business leaders this week.

So warned, Chicagoans already have learned how to shop in lower-tax areas. Patti Jo Mitchel, in search of a laptop computer, drove 40 miles to that Indiana Best Buy, saving $32 in sales taxes. “On a big-ticket item like this, I figure it’s worth it,” she told a newspaper. Another woman, who buys bottled water by the pallet to sell at gymnastics meets, tells how she switched to the Costco in suburban Lake County. Even before July 1, that saves her 2 percentage points in tax.

This all shows that people respond to incentives. You knew that, though. It illuminates as well a rare exception to a truth the French economist Frederic Bastiat wrote about: People tend not to see things that might have been.

He was writing in 1848 about taxes. Even then, people would call them investments and enthuse over what governments could do with the money. “The advantages that government officials enjoy in drawing their salaries are what is seen,” he wrote. “The benefits that result for their suppliers are also what is seen. They are right under your nose.

“But the disadvantage that the taxpayers try to free themselves from is what is not seen,” he wrote, “and the distress that results from it for the merchants who supply them is something further that is not seen.”

The magic of this moment for Chicago is that, in the first shock of a tax increase, people see.

It’s all very classic. Some are talking about how useful the revenue will be. A different sales tax increase on April 1 is meant to fund transit. “When it began to dawn on people that we had a new revenue source, my phone started ringing,” one suburban official told a newspaper. “I heard a lot of ‘I want, I want, I want.'” Where Chicago is lucky is that the other half of Bastiat’s equation is visible. When laptop buyers head for Indiana, the press is waiting. There’s the red flag that is Palatine, just inside Cook County: Its stores will have to collect a 10% sales tax while stores across Lake-Cook Road will charge 7%. Village officials have proposed seceding from Cook County, maybe joining with neighboring towns to form a proposed Reagan County.

In short, people are seeing exactly how much money they won’t have for their priorities because officials have appropriated it for their own. People see for a moment through the sleight-of-mind.

It’s important to seize these moments. Soon enough, high taxes vanish into terrain. In New York state, the nonprofit Tax Foundation says state and local governments skim off 13.8% of personal income, three points more than Illinois, six more than New Hampshire. The state reached this altitude decade by decade, so at no point did people in Buffalo exclaim, “You want 14% of me? No deal!” Instead, the place simply became a steadily worse value and ceased to thrive.

So Chicago is blessed: While in the future, its 10.25% sales tax — along with its amusement tax and restaurant tax and parking tax and soda tax — will invisibly repel growth and hinder the economy, for now the shock is making the repulsion visible.

Other places might take a lesson. Some 22 states nationwide have budget deficits and will likely turn to taxes. State and local governments nationwide face enormous retirement costs — as much as $700 billion. In New York, the talk is of some other inevitable tax that takes the place of the now-dead congestion pricing, while there are occasional outbursts like the “millionaire’s tax” briefly floated in the Assembly last month.

Around the country, other states talk of coordinating sales taxes to snare Internet commerce, now that anyone can do virtually what Bostonians have been doing for years — crossing the border to New Hampshire. Everywhere, governments look for new revenue and salivate at the possibilities.

They’ve got lots to spend it on. Then again, so would taxpayers. Maybe even things more useful than the hundreds of new patronage jobs that Cook County added to its payroll last year. Maybe more useful than thousands of other things local governments spend money on. But you’ll usually never know because lost opportunities are unseen.

In Chicago, they’ve been given a great gift, the kind of George Bailey-meets-the-angel insight into what might have been. Because of borders, differing tax rates and a sudden lurch, people see the scope of their loss, at least for a moment. Maybe they’ll do something before their vision fades.

Mr. McIlheran is a columnist for the Milwaukee Journal-Sentinel.


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