An idea to address Chicago's tax risk premium

Construction on the Thompson Center in Downtown Chicago. In the first quarter of 2025, this was site one of only two active tower cranes in the City. Source: J E Koonce via flickr

Right after Mayor Johnson was elected, the CEO of the Chicago Mercantile Exchange (CME) made an eyebrow-raising announcement. The CME had already sold all of its real estate in Chicago, and had language in its lease agreements that would allow for termination if the City of Chicago were to impose a financial transaction tax on the CME’s operations. In effect, if Chicago raised taxes on the CME, it could walk to another jurisdiction without worrying about its real estate footprint.

You can imagine why this would be attractive for the CME. It effectively hedged against the downside risk that the city would raise taxes in a manner that could seriously jeopardize its business. In the process, it also probably lowered the probability that a financial transaction tax would be applied in the first place – if the CME has a credible option¹ to leave town, the tax looks like a worse idea.

But most of Chicago’s tax revenue don’t come from one-off corporate taxes. Our single biggest revenue source is property taxes. While there are plenty of reasons to hate them,² they do have some useful characteristics:

1. Property taxes are generally more stable than other types of taxes during recessions. That makes it possible to deliver more stable public services without harsh cuts at the worst possible time for a local economy.

2. When you tax something you generally get less of it, whether that something is employment, groceries, cloud computing, or anything else. But since a tax on property is a tax on an asset instead of an activity, those distortions are more limited. Property taxes are paid regardless of whether a building is generating income – so owners are still incented to keep buildings full and productive.

3. Most of those other categories are mobile – jobs, people and companies can leave the city. But property is by definition fixed in place, which makes for less of a negative economic impact.

So from the perspective of a city’s existing economic assets, it makes a fair bit of sense to rely on property taxes. And proposals to shift away from property taxes to more distortionary taxes (like income taxes) are generally a pretty bad idea.

The Chicago Risk Premium

That’s all well and good. But it comes with a big catch: what happens if you’re considering building something new?

If your property taxes rise, you can’t move your building outside the city. Because you’re locked in, you don’t just care about the property tax rate you’d pay the year after a building is built. You have to make a bet on what future property taxes could look like. That means that the threat of higher property taxes in the future is a deterrent to new development today.³

According to developers in the city today, that threat is real. Here’s Crain’s in October:

In addition to their own balance sheets, Chicago developers — and the financial institutions they need to back their projects — also have local governments’ financial challenges to worry about. Cook County’s real estate taxes are seen as high and unpredictable among real estate investors and developers, and the city’s projected budget shortfall is also a concern.

“It’s a zero-sum game: The municipalities have budgets — it’s got to come from somewhere. Last I checked, the budgets never go down. The taxes are going to continue to go up,” Lev said.

I’m not inclined to take developers at their word.⁴ But the basic logic is sound – if you’re making a big, no-take-backs investment, future tax rates are a big deal. We’ve seen this play out more recently with President Trump’s tariffs – the uncertainty and general chaos is awful for investment decisions. And research on financial direct investment shows the same thing – companies are much less likely to make major, hard-to-reverse investments in countries with unpredictable and chaotic policy environments.⁵

We could certainly use some more big-ticket, hard-to-reverse investments. Last year, Chicago permitted just 127 homes per 10,000 residents, That’s dead last among our big city peers. In the first quarter of this year, there were only two cranes in the sky over Chicago. Forget growing sunbelt markets like Dallas or Phoenix – we’re getting lapped by blue cities in blue states. Denver had ten cranes in the air at the beginning of this year. Portland, a city not exactly known for its size, business-friendly policies, or downtown quality of life, had 5. In 2025 we’re expected to see fewer than 300 new apartments added downtown. That means rents will continue to rise.

The problem extends beyond residential units. There are some pretty big headwinds to new office space construction right now that probably go well beyond anything you can fix with the city’s tax code. But more commercial, industrial and retail development would be really helpful for the city’s economic vitality and tax base.

In some ways, right now we’re in the worst of all worlds. We’re not collecting enough tax revenue to close the city’s structural budget deficit, avoid credit downgrades, or generally inspire confidence that taxes won’t rise in the future. But because we’re also not balancing the books today, we’ve created a Chicago risk premium that’s discouraging new investment as well. Without those projects and their attendant tax revenue, the threat of future tax hikes grows.

How to avoid a downward spiral

Obviously the best answer to this problem is to get the city’s finances in order. Conor has written extensively about this, and much of the above underscores how important that is. Deficits and downgrades don’t just make future borrowing more costly—they also raise the risk of investing in Chicago and reduce our future economic growth.

The problem is that even if Mayor Johnson were to adopt German levels of fiscal discipline this year, and pass a balanced budget that closes our structural deficient and continues advanced pension payments, he can’t solve the forward-looking tax problem. The city’s labor contracts, debt schedules, and pension obligations are enshrined in binding legal contracts. But our tax rates aren’t. A future mayor could decide to crank taxes up in the future. If not the city, then one of our other local taxing bodies, like the County or Chicago Public Schools.⁶

But our unique problem also suggests a unique solution. Instead of watching development stagnate, or throwing upfront subsidies at projects, the city should explore offering a form of property tax insurance. Essentially, the city would sign a project agreement with no upfront or guaranteed payments to support a project. But if in the years after a project was completed (and reassessed), its property taxes were to rise substantially faster than inflation, the city would be on the hook to cover the difference.

In the best-case scenario, these risks are overblown. Maybe investors and developers have an unfairly negative (or just risk averse) attitude towards Chicago. A city-backed insurance policy would help bring investment off the sidelines and put cranes back in the sky. That, along with a growing population, improving public safety, and disciplined financial management could put Chicago back on track for shared growth and prosperity. In that world, property tax insurance policies aren’t triggered, and the city never has to pay a dime.

But it’s also possible that those skittish investors are right, and five years down the line, Chicago (or the County, or CPS) faces pressure to hike taxes. In that situation, I think these project agreements might be even more useful. If some of the revenue from a property tax hike was offset by these insurance payouts, more tax hikes might not be such an appealing tool in the first place. Rather than simply reaching for the (relatively) easy tax lever, future mayors might have to be more disciplined about controlling cost growth. I don’t think that would be such a bad outcome either.

Of course, in the worst-case scenario, those tax hikes do happen, and some of these provisions are triggered. That wouldn’t be ideal but remember that these projects would still be generating far more property tax revenue than if they had never been completed. There’s a few things that could be done to limit the risk to the city in the process, including attempting to restrict this to projects that wouldn’t otherwise pencil, and scaling back the use of direct development incentives, that are likely a less efficient way to support new projects.

Finally, while it’s generally a very good thing that the city is attempting to reduce its reliance on TIF districts, property tax insurance might be one of the better applications to consider going forward. Because TIFs pull dollars from the full range of taxing bodies, they nicely align incentives– the faster Cook County or CPS raises their property tax levies, the more TIF money they put at risk via future insurance payouts.

A partial solution to a nasty problem

Chicago’s economy is vast, and economic development is a much bigger issue than just construction. The best solutions to boosting construction are ones that don’t cost anything – liberalizing rules, permitting timelines, and building codes to make it easier for projects of any size to pencil out. But if we’re building, a lot of our other problems get a lot easier. And it will probably take more than just zoning reforms to get construction back on track.

To dig ourselves out of this hole, we’re going to need to reckon with the risk premium our finances have created. And given that the city has some control over this particular risk, it might make a lot of sense for it to internalize some of the cost, rather than just suffer the consequences of less investment. There are plenty of additional details to work out. But right now, nothing’s getting built. Some risk sharing just might be in order.

1. Sorry.

2. Or at least two big ones every year, for you homeowners out there.

3. This is obviously also true if you’re building and planning to sell at completion – whoever would buy the building from you is gong to be worried about those future property taxes, which means it impacts your sale price and expected return.

4. Or almost any other interest group, to be clear.

5. I’d note that there’s at least one other source of property tax uncertainty right now: the ongoing assessment yo-yo between the Cook County Assessor’s Office and the Board of Review. It’s a topic for a different article, but I’d note that the Assessor’s Office has committed to implement solutions proposed in a report commissioned by the County, and the Board of Review hasn’t.

6. CPS is currently limited by state law to raising its levy by inflation. But given the pressures the district is under, there’s no guarantee that lawmakers wouldn’t consider changing that provision.