New ordinance will reduce building downtown, raise rents in Chicago

New ordinance will reduce building downtown, raise rents in Chicago

If Chicago wants to alleviate poverty and economic inequality, the city needs to reform its zoning laws to allow more building – not institute a new tax on development.

A new ordinance passed by Chicago City Council May 18 establishes what will effectively be an annual tax worth millions of dollars on new developments in the downtown Chicago area. Developers will pay the tax – and then pass along the costs to renters. The tax means developers will put up fewer buildings and at a higher cost, which will result in less supply and increased rents for Chicagoans. And the costs of this ordinance will spread beyond downtown businesses and residents: Less housing supply downtown means some would-be downtown renters will either leave the city or move into cheaper city neighborhoods – where the increased demand will push up prices.

Starting June 1, downtown developers must pay into a new mayoral discretionary fund. So, despite already having some of the highest property taxes in the nation, Chicago will levy a new multimillion-dollar tax on new properties. None of this revenue will go toward reducing property taxes or Chicago’s burgeoning public debt. Emanuel has stated his intention to use the fund to help develop economically depressed areas of the city. But the ordinance imposes few limits on how the money can be spent. The mayor can, and might, allocate the money where needs are greatest, but the ordinance’s broadly worded provisions give the mayor significant leeway in his ability to determine how to spend the funds.

Emanuel has claimed that his new downtown zoning rules benefit developers, who will be allowed to pay to exceed strict zoning limits. But developers have long been able to exceed those limits by adding features such as public plazas or additional parking to buildings. Those “zoning bonuses” will be abolished by the new law as a way of forcing developers to pay the tax. That may be indicative of how, by creating a financial benefit to the city from making zoning more restrictive, the new law has created bad incentives that make it harder to fix the underlying problem of overly restrictive zoning.

In fact, the strict zoning limits serve little purpose but to allow the city to extract concessions from developers who want to use scarce downtown land to its full potential. Much of Chicago’s iconic skyline could not have been built had developers not received exemptions from the zoning limits on the books. The mayor does not want developers to follow the rules; he wants them to pay for the privilege of putting up buildings the city needs.

But because of the new tax some developers will follow the rules to avoid paying. That effect is already apparent in other parts of Chicago that are zoned only for single-family homes. The rules exist not because it makes sense to zone so much of America’s third-largest city that way but so aldermen can extract concessions for waiving zoning rules, according to City Observatory Senior Fellow Daniel Kay Hertz. Yet many developers cannot afford to deal with the political process, so they build expensive mansions instead of apartment blocks that could be more profitable for the developers and simultaneously provide more affordable housing for low- and middle-income residents.

Giving developers incentives to build mansions across Lincoln Park prices less wealthy people out of the neighborhood and forces them into less affluent parts of the city – where they displace others. Similarly, the downtown zoning tax will drive downtown renters to cheaper parts of the city, which will drive up rents in those neighborhoods.

The new development tax is unlikely to have a significant positive impact on the city’s poorest residents. A rising cost of living caused by more expensive development and rents will make it harder for poor residents to move up. And if the fund were to actually succeed in creating prosperity in depressed areas, Chicagoans displaced from the city’s more affluent neighborhoods would probably move to the newly prosperous areas and thereby displace the residents of those neighborhoods.

If Chicago wants to alleviate poverty and economic inequality, the city needs to reform its zoning laws to allow more building – not try to tax its way out of the problem.

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