Chicago cannot tax its way to a solution for its debt problem.
Chicago cannot tax its way to a solution for its debt problem.
H ow much does a “mansion” cost in a major U.S. city?
Chicago mayor Brandon Johnson’s answer: $1 million. Never mind that $1 million will barely get you a single-family home, retail space, or three-flat walkup in a decent neighborhood in Chicago. Johnson believes people who own properties worth $1 million in the third-largest city in the U.S. are “rich.” If they sell those properties, they need to pay.
That’s why the new mayor, a former leader of the radical Chicago Teachers Union, has proposed a new real-estate-transfer tax. It’s a “compromise” from his previous plan, which would have more than tripled the transfer-tax rate from 0.75 percent to 2.65 percent for transfers over $1 million. Now, instead of a single-rate increase, Johnson plans to propose a three-tier progressive-transfer rate. Transfers below $1 million would see the tax cut from 0.75 percent to 0.6 percent. Transfers between $1 million and $1.5 million would see marginal tax rates increased over 2.5 times the current rate, from 0.75 percent to 2 percent. Transfers of $1.5 million and above would see a top marginal rate quadrupled to 3 percent of the transfer amount above that threshold. That translates to a $1,500 savings on a property selling for $1 million, an additional $4,750 tax on a $1.5 million property, and an extra $16,000 for a property selling for $2 million.
There’s precedent for what happens when cities pass these kinds of tax hikes. Johnson claims Chicago’s mansion tax would generate $100 million, but Los Angeles, which passed its own mansion tax on homes worth over $5 million, shows that expectations don’t meet reality when it comes to hiking taxes on home sales. Reports indicate that homeowners were scrambling to get inventory off their hands in the weeks and months leading up to the new tax. The $55 million collected from the tax so far is well short of the pace needed to reach the $672 million to $900 million in promised revenue. The first month the tax took effect, only two properties in that bracket were sold — a sign many homeowners were either refusing to sell or searching for loopholes. Los Angeles property records also indicate numerous institutional lenders had not issued a single construction loan for a multifamily or commercial project in the first few months. A smaller number of available lenders means it is more difficult for potential borrowers to get favorable terms to proceed with projects, placing further strain on the supply of housing and driving up rent prices.
And while it’s helpful to look at what’s happening in other cities, it’s important to be realistic about the housing market in Chicago. High-end home sales are already declining. From April 2022 to April 2023, 2,391 Chicago homes sold for $1 million or more, down 14.5 percent from the previous twelve months, according to Midwest Real Estate Data. Meanwhile, commercial real-estate sales have been down 51 percent through the first six months of 2023.
A sluggish real-estate market combined with a tax that will presumably put a damper on property sales in the city are a recipe for failure.
But the scariest part of Johnson’s mansion tax is that it is just one of 17 ways the mayor and his proxies have proposed generating revenue — meaning “raise taxes” — to feed the city’s insatiable appetite for cash. A member of his transition team even pushed a citywide income tax on households earning $100,000 and up in a report aptly named “First We Get the Money.” Despite claims from proponents, taxing those with incomes above $100,000 wouldn’t only affect “high earners.” One-third of all households, and nearly 42 percent of families in Chicago, earn $100,000 or more annually.
On top of affecting a large share of the population, data show that a $100,000 income doesn’t go as far in Chicago as it does in most other U.S. cities. Chicago ranks 58th out of 76 U.S. cities for cost-of-living-adjusted take-home pay from an income of $100,000, with Chicagoans taking home the equivalent of just $59,505 under current tax conditions. A city income tax would further erode take-home pay and make a $100,000 income in Chicago worth even less than it already is in other cities. Nearby cities such as St. Louis, Indianapolis, Lexington, and Milwaukee all see $100,000 incomes go much farther in terms of purchasing power.
The real reason the city is constantly scrambling for more tax revenue (e.g., other people’s hard-earned money) is that Chicago is sitting on a sinkhole of public debt, thanks to its $48 billion public-pension crisis. In fact, Chicago’s four city-sponsored pension systems — municipal, laborers, police, and fire — plus the Chicago Teachers’ Pension Fund hold more debt than 44 states. Maybe Johnson’s allies should focus on authoring a report titled “First We Fix the Pensions” before coming after more of Chicagoans’ hard-earned money.
If the mansion tax follows current law, it would apply to sales of apartments, commercial buildings, and industrial complexes — giving just another reason for people and businesses to reconsider doing business in the city. Boeing, Citadel, and Tyson, among others, have already packed up and gone.
Chicago cannot tax its way to a solution. If the city is going to attract new businesses and convince existing ones to stay in the city, it needs real, lasting pension reform. Former mayors Rahm Emanuel and Lori Lightfoot acknowledged as much just before leaving office. If Johnson wants to leave a lasting positive impact on the city and its residents, he needs to lead on this issue — and not as he’s heading out the door.
Joe Tabor is the director of research at the Illinois Policy Institute. Bryce Hill is the director of fiscal and economic research at the Illinois Policy Institute.