How Property Taxes Work

And how to think about how high they are in Chicago

To be a bit frank, today’s post might be a bit dull compared to some of our recent ones. I’m writing it anyways, though, because I think it’s important to understand the nuances of the primary mechanism with which our municipal governments finance themselves. I’m talking, of course, about property taxes.

Property taxes are kind of weird compared to most other taxes you pay. In most forms of taxation, there’s a set rate, and when you do something that gets taxed - like buying a good, or selling an investment, or earning income - that rate gets applied to that activity. If you buy cigarettes in Chicago, you pay $1.18 in taxes per pack¹. If you sell a share of stock you’ve owned for more than a year, you pay up to 20% of the gain to the federal government in long term capital gains taxes. If you earn an income, you pay the IRS income tax based on a set of rates which is specific and well-defined enough that they can put together a booklet on how much you need to pay down to the dollar. Property taxes don’t do that!

Instead, there are two elements that go into your tax bill that take place at time same time. On the one hand, we have an Assessor’s office whose job it is to value every property in Cook County. That’s a really hard job. They come under a lot of scrutiny - and justifiably so - but to be honest I think on the whole they do a pretty decent job of it². In Cook County, the county map is divided into three sections - north suburbs, south suburbs, and Chicago - and each section is reassessed in depth once every three years. These assessed values come together to form the aggregate taxable base of Cook County.

The second element is the kinda wonky part of property taxes compared to other taxes. For most taxes, you have a defined set of rates, and the amount of revenue a government gets is variable based on what activity actually happens. Property taxes go the other way. A government decides how much revenue they want to raise in property taxes, and then that amount gets assessed to the tax base as a whole. The allocation of that assessment is done based on the values the assessor’s office come up with - so if you have a property worth 0.0001% of the total taxable property base, you should owe 0.0001% of total taxes.³ In this way, the “tax rate” for property taxes is just a backsolved number that governments come up with to make the math work so they get the revenue they want. You don’t start with a fixed rate and end up with variable revenue, you start with a fixed revenue and end up with a variable rate. Kinda weird!

More than one form of government can tax the same property. In an odd bit of transparency and helpfulness for a Chicago municipal service, the Cook County treasurer’s office has a cool tool that lets you see exactly where your taxes are going. Where I live in West Town, for example, my taxes go towards nine different governmental entities, with the biggest being the Chicago Board of Education (CPS), the City of Chicago, Cook County, the Metropolitan Water Reclamation District of Greater Chicago, and the Chicago Park District. Each of these entities can determine for themselves how much to levy in taxes each year. It’s not entirely up to them; there are guardrails around how much they can raise - under state law⁴, governments are only allowed to increase their tax levy by either the change in CPI or 5% (whichever is lower); any increases beyond that are subject to a referendum vote. Notably, while this applies to entities like CPS, the Park District and the Forest Preserve, state law actually doesn’t apply to the City of Chicago itself, though the City does have a similar self-imposed ordinance requiring the same.

How high are Chicago’s property taxes?

Despite a pretty clear reputation, the real answer to this question really hinges on my favorite question from undergraduate economics class: compared to what?

If we’re talking about a national context, they’re really high. Illinois as a whole has famously high property taxes, and that translates to Chicago as well. A recent Civic Federation post covered the latest annual report from the Lincoln Institute of Land Policy and the Minnesota center for Fiscal Excellence, which looked at effective property tax rates in the largest city in each state, plus DC⁵. Of the five largest cities in the U.S., Chicago’s residential taxes are about on par with Houston’s (1.52% effective rate in Chicago compared to 1.56% in Houston). New York, Los Angeles, and Philadelphia are all 20-30% lower, with effective tax rates in the 1.01 to 1.22% range. Our commercial taxes compare significantly less favorably; the other four cities have effective tax rates that are 50 to 75% lower than Chicago’s 4.01% effective commercial tax rate. This doesn’t really change if I expand to the full set of 53 cities they looked at; Chicago has the 14th highest residential tax rates and the highest commercial property taxes rates of any city they looked at.

The part where it gets more interesting is looking at Chicago in a more local context. First, regional: those 13 cities in the Lincoln Institute’s report which have higher residential tax rates than Chicago include Detroit, Milwaukee, Omaha, Des Moines, and Columbus. Those are the big cities in most of our major neighboring states (though Indianapolis, Louisville, and Kansas City do fare better). I linked above to a study from WalletHub which ranked Illinois 50th in the nation for property taxes; much of the Midwest isn’t much better, with Pennsylvania (40th), Ohio (41st), Iowa (42nd), Nebraska (43rd), and Wisconsin (44th) all in the 40s. But the really interesting comparison is when we look at Chicago compared to the rest of Illinois. A report last year from the Civic Federation compared taxes in Chicago to taxes in the rest of Cook County and a variety of other nearby municipalities (Wheaton, Naperville, Lake Forest, Joliet, etc). Here for example is Cook County:

By this standard, Chicago looks really good! This holds up when looking at non-Cook municipalities too, with Wheaton, Naperville, Geneva, Aurora, Joliet, Romeoville and others all coming in above 2.00% for their effective tax rates. Of the cities they looked at, only Oak Brook, at 1.14%, had a lower effective tax rate than Chicago’s residential rate. The primary reason for this is simple: Chicago has a huge commercial tax base which Wheaton and Naperville and Geneva and every other city in Illinois do not. We also charge a higher effective tax rate on this commercial base⁶, which further helps out city residents. Our ability to raise significant amounts of revenue on this base is what keeps taxes on city residents relatively low compared to our neighbors in the suburbs. I’ve talked about this before, but it bears mentioning again that this is why it’s so important for the city to keep that commercial base as strong as possible.

It’s all about the base

So the “easiest” way a city can raise revenue is by increasing their property tax lien for the year, but that doesn’t make it the best way. Realistically there are limits to how much a populace can bear in taxes, and if you raise property taxes too high (and again - in a national context, it certainly seems like we’ve pushed those rates pretty far already!) then you start to incentivize both residents and businesses to leave the area, causing an economic decline which can be hard to reverse.

In contrast, the better - but harder - way to raise revenue is for a city to increase the value of its property tax base. There are a lot of different forms those increases can take, and they’re all things we should be encouraging. As an obvious example, there’s property development - vacant lots are less valuable than homes, or storefronts, or really anything. I just recently wrote about density and the desirability of building more housing, and that’s a good example here. If you replace a single family home with a three-flat, the total value of those three units is almost certainly higher than the value of that one home, meaning the city can raise more revenue per dwelling even while individuals’ rents end up lower. The real underlying theme here is growth. You want to do things that attract people and businesses to your city; doing that makes your city more valuable. A lot of those “things” to do aren’t particularly novel; they’re about making the city a nice place to live, work, or visit - things like safe streets, good schools, and creating spaces where people want to spend time.

In a very different vein, the one other place to highlight potential base broadening is with respect to TIF districts. Tax Increment Financing (or TIF) is a tool many municipalities have used for a long time to foster growth in underdeveloped neighborhoods. This is done by freezing the assessed property tax base within the district, with the incremental revenue from any property value gains above the frozen values getting diverted into the TIF District’s fund. These funds are then used for funding development projects in the neighborhood. While this sounds good in theory - who doesn’t want to help underdeveloped areas grow? - my view is that TIF is a widely overused tool in Chicago. There are currently 127 TIFs in the City of Chicago, including active TIFs in areas I wouldn’t exactly call blighted today, like River West, the Near-North Side, and, in a particularly odd case, exactly one block in River North which contains the Medinah Temple (and the temporary site of the Chicago casino). Here’s a nice look (via Cityscapes) at exactly how much of Chicago - roughly one-third of the city! - is located within a TIF district:

Per the Cook County Clerk’s office, in the City of Chicago TIFs account for around 16% of total property taxes collected. Importantly, that doesn’t mean that other government entities are forfeiting 16% of revenues they’d otherwise be receiving - instead, it means that in order for those entities to raise the revenues they want, they need to charge a higher tax rate than they otherwise would to make up the difference⁷. As our property tax rates creep increasingly higher, this is increasingly unpalatable for taxpayers to bear. I’ll have more to say on TIFs in the future - coming soon! - but to the extent we can recapture revenues that are otherwise devoted towards TIF funds, particularly when those TIFs are supporting areas of dubious need, that strikes me as a very good idea, and provides us with an opportunity to raise higher revenue without raising rates. Notably, we often do this already somewhat arbitrarily in the budget process - the mayor is able to declare a TIF surplus and claw back some funds into general revenue - but formalizing the process seems like a far, far better process than leaving it as an ad hoc action every year. If done correctly - and in a manner which doesn’t jeopardize actual development of blighted areas - TIF reform strikes me as a huge opportunity to improve our public finances without burdening taxpayers further.

The Bottom Line

• This isn’t news, but Chicago property taxes are high (though we still have a nice advantage over the rest of Illinois)

• We can’t just keep increasing rates to raise more revenue - we need to prioritize growth to grow our tax base

• TIF Reform really merits some thought. We’re siphoning off too much tax revenue into side pockets instead of our general fund.

1. That’s just the tax to the city, to be clear.

2. At least under current management; I have very little confidence in prior management and my impression is that they gave big buildings a sweetheart deal at the expense of ordinary Chicagoans.

3. This ignores the distinction between rates for commercial and residential, but bear with me for a minute.

4. Specifically the Property Tax Extension Limitation Law, or PTELL.

5. While helpful, that regrettably means I can compare Chicago to Los Angeles or Houston or Jacksonville, but not to, say, San Francisco, Dallas, Miami or San Antonio - all of which are comparisons I’d like to make, too.

6. Commercial properties are taxed based on 25% of their assessed values, while residential properties are taxed based on 10% of their assessed values.

7. Intuitively, I think this means our property taxes are roughly 19% higher than they otherwise would be in the absence of any TIF districts, because we’re raising the same amount of tax revenue from a tax base which is 16% smaller (back of the envelope math: 1.00 / 0.84 = 1.19), but I’m only pretty sure that that’s the math I’m supposed to do. Please feel free to write in with a correction if that’s wrong.