The Policy Shop: New jobs solve poverty faster than new taxes

This edition of The Policy Shop is by Head of Policy Josh Bandoch.

Chicago Mayor Brandon Johnson wants to help the homeless, but his plan for doing so likely involves creating more homeless people who will need help.

More people to help requires more government. That requires more taxes. More taxes mean fewer businesses and less job creation. Fewer jobs mean more homeless.

Problem… anything but solved.

Misnomer x 2. The Chicago City Council approved Johnson’s “Bring Chicago Home” plan to put a real estate transfer tax increase on the March ballot. Johnson has called it a “mansion tax.” Neither name is accurate or honest. It’s actually a “business and renter’s tax.”

First, it really isn’t a tax on rich people’s houses worth $1 million or more. Crain’s Chicago Business’ analysis showed a 9 to 1 count of commercial property sales over $1 million compared to residential from April 2021 to April 2022. There aren’t that many mansions to tax, but there are plenty of commercial properties. And when you tax businesses, there’s always a cost: consumer prices, jobs or the number of businesses still around to pay taxes.

This tax hike will lead to more problems for the city’s struggling business core. If Johnson isn’t intending to hit businesses with his tax, he could simply remove them from the proposal.

Second, how is Johnson going to bring homeless Chicagoans home by taxing job creators? He’s done nothing to say how the tax will be used: tax first, figure out details later?

The best way to permanently get people off the streets is through a job. Making it more expensive to start a business in Chicago, which this higher tax on real estate sales will do, is not how you encourage businesses that could give homeless residents the means and the dignity to support themselves.

Steven Blake was homeless until another homeless man taught him to sell fruit in downtown Chicago. It got him off the street and gave him a business he uses to get others off the streets.

“This work doesn’t bring in big bucks, but I do it to serve those around me and to provide independence and sustainability. This fruit stand provided the income for me to get off the streets. But this is not work. I love what I’m doing, so I don’t consider this ‘work.’”

What’s the plan? If voters are expected to give Johnson the OK for his higher transfer tax, he needs to prove it will collect what he says it will. He initially said $160 million, but now says $100 million. He needs to say how much relief can be provided for that amount. He needs to say how the money will help.

Otherwise, the money is likely to evaporate into the morass of city finances. Chicago city politicians have a long history of tax plans failing to meet their promises. Problems remain, as do the new methods of extracting taxes.

There is significant reason to believe Johnson’s tax will fall far short of its revenue projections. Commercial property sales are already few as owners find it hard to dump largely vacant and already overtaxed properties. For example, Menashe’s recent Loop office tower purchase was the first commercial property sold downtown in almost a year. It sold at a 63% discount.

“Bring Chicago Home” would further depress the commercial real estate market by increasing the real estate transfer tax on commercial property buyers. Those buyers can choose to just stop buying or stop buying within the city limits. Commercial property sales have already plummeted by 51% in the first half of this year. “Bring Chicago Home” doesn’t factor that into its revenue projections.

Biting business. Chicago’s commercial property taxes have increased by 93% from 2012 to 2022. The city now has the second-highest commercial property tax rate in the nation at 3.78%. That’s more than double the U.S. average for the largest cities in each state. Only Detroit has a higher commercial property tax rate at 4.21%.

Unlike Detroit’s high rate, which results from struggling with low property values, Chicago’s high property tax rate is from high local government spending.

Chicago also has one of the highest sales taxes in the nation.

And remember the pandemic? Chicago businesses do. They live with it daily as they continue struggling to recover or simply to survive. Office vacancy escalated to 23.7% in 2023, nearly double the 13.8% pre-pandemic rate. Chicago has the worst rate among major cities of distressed commercial real estate loans, with the rate of delinquent or specially serviced commercial mortgage-backed securities at 22.7%. That is over three times the escalating national rate of 6.8%.

All those problems, and Johnson wants to add to their tax burden.

Harming renters. When people buy multi-family properties hit by this new tax, they’re going to cover the costs the only way that makes any economic sense: by passing them along. Because apartment buildings will often fall into Johnson’s $1 million and up tax bracket, that means landlords will pass those costs along to renters – including people trying to get off the streets.

Jobs end homelessness. There is a healthier alternative to the “mansion tax.” Create an environment that spurs business creation and lets those businesses add employees. Nothing fixes poverty like a full-time job, as Steven Blake proved.

Small businesses are vital to job creation in Illinois. Businesses with fewer than 50 employees created 45% of new net jobs in the state during 2022, or over 51,000, according to data from the U.S. Census Bureau. Not only does Illinois rely heavily on small businesses for job creation, but they produced the bulk of jobs recovered from the COVID-19 pandemic.

If you want to “Bring Chicago Home,” then don’t do something to make small businesses leave, reduce jobs and raise rents. Johnson’s tax hike is another way for Chicago to tax more for an ill-defined program with potential to hurt homeless residents rather than help.