Vallas: Call Johnson’s real estate transfer tax what it really is: a commercial property tax

Brandon Johnson’s ‘Bring Chicago Home’ transaction tax is primarily a tax on the already overburdened and depressed commercial property owners.

“Bring Chicago Home,” a proposal supported by Chicago Mayor Brandon Johnson, says it aims to restructure the Real Estate Transfer Tax so it can dedicate revenue to providing affordable housing for people experiencing homelessness.

In reality, it’s a tax increase to finance a program that has yet to be clearly defined. This makes it largely a blank check. Chicago’s downtown and commercial districts don’t deserve this.

While the tax is being sold in City Hall as a “mansion tax,” it will fall disproportionately on hard-pressed commercial property owners whose property values are already plummeting. Meanwhile, there is an absence of detail about how the money will be spent.

The first problem with this tax is it will fall far short of its revenue projections. Commercial property sales are already few as owners find it hard to dump largely vacant and 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 owners. Commercial property sales have already plummeted by 51% in the first half of this year. “Bring Chicago Home” fails to recognize this revenue source is dwindling.

For further proof this isn’t a “mansion tax,” take Crain Chicago Business’s analysis of property sales over $1 million from April 2021 to April 2022. It showed more commercial property sales than residential property sales by a rate of 9 to 1 or $7.5 billion to $841.8 million. If this isn’t about hitting commercial property tax owners, why not remove them from the proposal in City Hall?

Chicago has the second-highest commercial property taxes in the nation at 3.78%, according to a study by the Lincoln Institute of Land Policy and Minnesota Center for Fiscal Excellence. That’s more than double the U.S. average for the largest cities in each state. Only Detroit has higher commercial property taxes at 4.21%.

Unlike Detroit, which dealt with low property values post-bankruptcy in 2013, Chicago’s high property tax rate is because of high local government spending. Chicago’s commercial property taxes have been rapidly rising in recent years, increasing by 93% from taxes payable in 2012 to taxes payable in 2022.

Retailers in the Loop have suffered tremendously since the pandemic, and many have shuttered or are close to failing. Office vacancy escalated to 22.6% in 2023, nearly double the 13.8% pre-pandemic. This is not a time to add to businesses’ tax burdens via higher rents and consumer prices.

It is no coincidence Chicago has the worst rate among major cities of distressed commercial real estate loans with the rate of delinquent or specifically service mortgage-backed securities at a mind boggling 22.7%. This is almost four times the rising national rate of 6.8%.

A vibrant business district would be an absolute windfall for the city of Chicago. But instead, excessive taxation and failure to address the escalating public safety crisis prevent that.

Another problem is “Bring Chicago Home” hasn’t shared any concrete plans. Will new revenue be set aside for future programs, or will it be absorbed into the general budget with a commitment that it will used for housing? Will it add to the city’s homeless expenditures or, like the lottery funds for education, merely displace them?

Chicago’s affordable housing crisis can be addressed without raising taxes by unleashing the potential of the housing market and by removing obstacles. Solutions include: converting unimproved spaces to garden units, securing the tens of thousands of unoccupied homes and apartments, and streamlining the process for securing permits and zoning approval for new housing.

If passed, the Real Estate Transfer Tax will just be the first of many to come. As commercial property values fall, the tax burden will inevitably shift to homeowners.

The truth is clear for those who can see through the propaganda: this is a commercial tax hike on businesses already struggling, and for an undefined program. Homeowners will be next.

There is a better way.