Vallas: 4 reasons why ‘mansion tax’ is bad for Chicago business
Two false labels are attached to Chicago Mayor Brandon Johnson’s push to tax high-dollar real estate sales. It’s not a “mansion tax.” It taxes mainly businesses. It won’t help “Bring Chicago Home.” It will fuel businesses moving out.
The City Council approval of Mayor Brandon Johnson’s “Bring Home Chicago” plan to put a real estate transfer tax increase on the March ballot is not the self-described “mansion tax” he and his supporters claim. It is instead a blank check for a yet-to-be-defined plan to address homelessness that will overwhelmingly hike taxes on commercial property owners.
Voters should understand the compounding impact it will have, including on the very jobs that could help homeless Chicagoans.
Here are the four ways the real estate transfer tax hike is bad for Chicago.
1. Taxes for the mayor’s “Bring Home Chicago” plan will mostly fall on commercial property.
While the “mansion tax” proposal makes a slight reduction – 20% – in property transfers of under $1 million, it gives a 166% increase on property transfers of over $1 million and 300% on transfers of $1.5 million or more. Crain’s Chicago Business’ analysis showed there were nine times more commercial property sales over $1 million from April 2021 to April 2022 than residential property sales – a sign this will overwhelmingly fall on commercial property.
This tax hike will lead to more problems for the city’s struggling business core. If the intent isn’t about hitting commercial property tax owners, why not remove them from the proposal?
2. The tax increase will not generate nearly the revenue projected.
This 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.
Case in point: Menashe’s recent Loop office tower purchase was the first commercial property sold downtown in almost a year – and at a 63% discount.
“Bring Chicago Home” would exacerbate this trend by increasing the real estate transfer tax on commercial property buyers, who can choose to just stop buying. Commercial property sales have already plummeted by 51% in the first half of this year. “Bring Chicago Home” fails to recognize this in its revenue projections.
3. The tax increase will be an added burden to the second-most heavily taxed commercial property in the country.
This real estate transfer tax will be another burden added to Chicago’s suffocating state and local taxes. 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%, which is 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.
4. The tax increase is another obstacle to the recovery of the commercial real estate market.
Retailers in the Loop and elsewhere in the city have suffered tremendously since the pandemic. Many have shuttered or are close to failing. Office vacancy escalated to 23.7% in 2023, nearly double the 13.8% pre-pandemic. This will be just the latest measure that impedes their recovery. It is no coincidence 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 a mind-boggling 22.7%. This is over three times the rising national rate of 6.8%.
Altogether, the mayor’s tax hike is just another anti-business measure that will hurt commercial property renters and owners. Hurting the way Chicago creates jobs is no way to end homelessness.