'Bring Chicago Home' is a Bad Idea

Now is not the time to push commercial properties even further.

Along with Mayor Johnson’s budget, perhaps the most prominent fiscal issue coming up this month has been his Bring Chicago Home proposal. It’s been a popular idea among progressive activists in Chicago for some time, and City Council has now voted to send the measure to a binding ballot referendum in March.¹

Some context: Chicago currently has a real estate transfer tax of 0.75% on all properties.² The broad strokes of this proposal were to replace that flat rate with a series of progressive rates based on sale price: 0.60% on the first $1 million, 2% on the next half million, and then 3% on all sale proceeds above $1.5 million. The revenues from this tax hike - which supporters have ballparked at around $100 million annually - would be specifically earmarked for programs to support Chicago’s homeless population.

I’ll cut to the chase - it’s a bad idea.

Tying New Revenues to Specific Spending Programs is Bad

I’ll start with that last bit first. Supporters of the new tax have made it clear that these revenues would be going only towards new spending to address homelessness in Chicago. Let’s set aside the fact that Chicago is already failing to sufficiently spend the millions in federal funding we’ve received dedicated for homeless programs, according to investigative reporters the Illinois Answers Project. Is it a good idea to tie any specific revenue streams to any specific spending programs?

To be clear, this isn’t a super uncommon thing for the city to do. In my post on where the city spends its money, I highlighted the fact that Special Revenue Funds (instances where specific taxes or revenues are allocated to finance specific spending) make up about 10% of all city spending. Some of these are kind of intuitive - library fees go towards the library, garbage collection fees help cover garbage collection, et cetera - but many aren’t. Chicago has a 2% hotel tax on vacation rental properties that only goes into the Domestic Violence Fund. They have a houseshare (AirBnB/VRBO) surcharge that goes towards Homeless Services. They have an Adopt-a-Landmark Fund that only receives revenue from Certain revenues from construction developer fees (via the Neighborhood Opportunity Fund). In many instances, these programs also receive revenue from the general Corporate Fund; the special revenue sources only serve to act as a floor for the programs’ budgets for the year. That acts as a needless limit on our budget flexibility (what if we decide the money we’re spending to preserve landmarks would be better spent on, say, helping our homeless population?). It’s also just less efficient - revenues need to be siphoned off and accounted for upstream instead of having everything go into the Corporate Fund and get allocated however our elected officials see fit.

There’s also a question of what happens when revenues deviate from what’s projected - which already happens quite a bit, as the Tribune recently highlighted:

The pace of real estate sales isn’t super stable; as you might expect it’s pretty cyclical with broader real estate trends. In a year with lots of sales, when we have an uncharacteristically good year of tax revenue, wouldn’t we want to allocate that excess revenue to other programs too? In a down year, will we still spend $100 million on homelessness by clawing revenue from other sources, or will we have to scale down these programs? It strikes me as far more efficient to fund programs from our general fund - where the stability of any given funding source isn’t an issue, given our overall diversity of funding sources - instead of earmarking each specific source to specific programs.

This is all to say that these are two separate issues we should be considering. If we want to allocate more funding to address homelessness in Chicago, we should do that. But we shouldn’t tie doing so to one specific new stream of revenue, which needlessly complicates things.

By the same token, if we want to raise more revenue for the city, and we think this tax is the best place to do so, we should just do that! Don’t commit to tying the revenue to one specific new spending program. Doing so comes off to me as an attempt to raise more public support for a new tax by appealing to people’s sympathies for the homelessness problem in Chicago, rather than evaluating the merits of the tax proposal on its own. Instead, we should be considering whether this tax is a good way for us to raise more revenue.

Also, this tax is not a good way for us to raise more revenue.

Who would actually be paying this tax?

The new tax proposal is often being referred to as a “Mansion Tax,” but that’s not really an accurate picture of where the extra revenue would come from.

Given the rates under the new plan, total taxes would go up for any property sold for over $1.12 million.³ I took a look on Zillow⁴ to get a sense for how many sales we’re talking about, and as of today I see just over 1300 homes sold in the city of Chicago the past 12 months for at least that much. Nearly 1,000 of those are homes in the $1.12 to $2 million range, which would only generate something like $5 million in aggregate new tax revenue. Another 300 or so are in the $2 to $5 million range and would generate another $10-12 million in new revenue, bringing us up to $15-17 million in total. I then count only about 20 or so single family properties which sold for over $5 million in the past year.⁵ That’s another $3-4 million in revenue on those 20 properties, so we’re up to $18-21 million.

I’ll be honest - I don’t really care that much about whether we’re raising taxes on these particular homeowners. By and large if you own a multi-million dollar residence in Chicago, you’re doing well enough in life that you can afford it. I don’t particularly like paying taxes myself, and I’d like them to be as low as possible for everyone, but I’m not going to feel particularly bad for this particular group of people. With or without this new tax, you’re gonna do just fine.

But the proposal is expected to bring in $100 million per year, and we’ve only come up with $20 million or so from this group. We’ve also gotta come up with extra revenue to account for the revenue we’re losing by cutting the tax rate from 0.75% to 0.60% on all properties selling for under $1 million, too. Where’s that other $80+ million coming from?

Commercial properties. As you can imagine, the prices of office buildings, hotels, and apartment buildings dramatically exceeds the top end prices of our residential real estate market, and that translates to more transaction volume as well. In 2022, the Chicago area had $11.4 billion in commercial property transactions; that’s about four times as much property value as on those 1300 homes I outlined above. When you impose higher marginal transfer taxes on high-end real estate, this is really what you’re taxing - not a few Lincoln Park mansions or Gold Coast condos.

This leads to a pretty clear followup question - how is our commercial property base doing right now?

Our Commercial Property Base is not doing well right now

For starters, this property base is already heavily taxed. The latest annual report from the Lincoln Institute of Land Policy and the Minnesota Center for Fiscal Excellence showed Chicago to have the highest commercial property taxes of any large U.S. city, at an effective tax rate of 4.01%. Only Detroit, with an effective rate of 3.91%, was particularly close. If we limit our comparison to the five largest cities in the U.S., we’re nearly twice the rate of the second highest city, Houston. This isn’t a tax base we can just keep pushing on - we’ve already pushed it pretty damn far already.

And this is a tax base we absolutely need to keep. It is only because we have such a robust commercial property base to draw from that Chicago is able to keep residential property taxes as low as they do. You might not think of your property taxes as low, but Chicago does have the lowest residential property taxes in Cook County, and some of the lowest residential property taxes of any municipality in northern Illinois. The commercial tax base is the only reason why that’s possible - if that goes away, residential taxes have to go up to compensate.

Meanwhile, between high interest rates making refinancing difficult and the post-COVID work from home boom leaving more office space vacant, our commercial real estate sector isn’t doing very well right now. A September report from bond ratings agency Kroll showed Chicago had the highest rate of troubled commercial real estate loans of any major market, with 22.7% of loans in distress (compare that to 7.2% for the top 20 markets as a whole). This is happening on a lot of prominent buildings - from the Civic Opera House a few years ago to the Board of Trade earlier this year and other prominent buildings in the heart of the Loop more recently.

This isn’t a theoretical concern; our downtown office buildings are seeing real and huge stresses right now. Figuring out how to fix the downtown commercial sector should be one of City Hall’s top concerns - like keeping momentum going on projects like the Revitalize Lasalle initiative, so we can redevelop these distressed buildings into successful residential projects which will continue to serve as a robust source of tax revenue. Instead, as the Tribune argues, it’s not at all clear whether our current mayor even supports Lasalle Street redevelopment.

Simply put: the best way to generate more tax revenue for the city is to increase the value of our downtown, not to scrape out whatever revenue we can as its value plummets.

To be fair, it could be worse

All of the above notwithstanding, I should acknowledge the ways in which this could still be worse.

As one example, it’s my understanding that the tax hike wasn’t originally formatted as marginal increases. Instead, if a property were to be for more than $1 million, the entire sale price would get taxed at the higher rate. That strikes me as pretty absurd, given the tax cliffs it would create. Moving from a sale of $999,999 to a sale of $1,000,001 would incur an extra $14,000 in taxes for an extra $2 in sales proceeds, for example.⁶ I am quite glad that proposal is not what they are putting forward.

Secondly, if the only alternatives in the world were this or increasing the commercial property tax levy outright, this is better. Property taxes impact the property owner every year - they become an ongoing cost that a property owner expects to incur on an annual basis. It’s pretty clear that’d have a more detrimental impact on the real estate (and commercial property) market than a one-off cost an owner only incurs when they sell a property. If I wanted to really play devil’s advocate, I can envision a scenario where a lot of those one-off sales costs are partially passed on in some form to the other parties to a property sale.⁷ Again, I am quite glad we're not just raising commercial property taxes.

There are also portions of the real estate market in Chicago that appear to be doing quite well. As housing policy expert Daniel Kay Hertz has pointed out a few times times, the apartment rental market in downtown Chicago remains remarkably hot, and hotels are also seeing pretty strong demand. It’s specifically office buildings that are struggling post-COVID. Maybe that’s a permanent thing already, the camel’s back is already broken, so we might as well increase the tax rate on those properties since there's no further downside coming. I’m not really convinced that’s true - but I am very worried about adding any additional straws which threaten to exacerbate a concerning trend.

The overall point here is that there are ways in which this proposal could be even worse for commercial properties, and there are ways in which our current commercial real estate market could be faring worse right now, too. My argument is simply that now is not the time to make Chicago a less friendly place for commercial development in any aspect.

The Bottom Line

The Bring Chicago Home proposal is a bad idea. When you see it on your ballot this March, vote no.

1. As I understand it, because this involves a graduated or progressive tax, the City can’t pass the measure directly; they are required to send it to a referendum where a majority of Chicago voters could approve it.

2. An example to make this explicit - if you buy a house for $100,000, you pay $750 in transfer taxes to the City of Chicago.

3. At 0.75%, a $1.12 million property sale results in $8,400 in taxes. Under the new system, that same property sale results in $6,000 on the first $1,000,000 in value plus 2% on the next $120,000, which is $2,400. Any properties above $1.12 million are seeing an increase in total taxes, and any properties under $1.12 million get a net tax cut.

4. I am sure there is a better way for me to have done this math, but it struck me as the easiest approach. If you have a better approach, I am available as always at citythatworksnewsletter@gmail.com.

5. As a fun note, the most expensive I could find was Ken Griffin’s Michigan Avenue penthouse condo, which sold for $11.2 million in January 2023.

6. The math, assuming 0.60% on properties under $1MM and 2% on properties above $1MM: (A) a sale of $999,999 results in $5,999.99 in transfer taxes at a rate of 0.60%, while (B) a sale of $1,000,001 results in $20,000.02 in taxes at a rate of 2.00%. (A) minus (B) comes to a net $14,000.03 increase.

7. For example, with commercial realtors taking a lower commission rate to offset some of the increased tax cost, thus reducing the all-in fees paid by a seller.