What does Chicago’s mayor need to impose his revised ‘mansion tax’?

What does Chicago’s mayor need to impose his revised ‘mansion tax’?

Chicago Mayor Brandon Johnson has reportedly compromised on his proposed mansion tax in favor of a graduated real estate tax. What needs to happen before he can start collecting the extra taxes?

When Brandon Johnson took office, he laid out an aggressive agenda to raise revenues for the city, including plans to raise $400 million from a real estate transfer tax on properties worth over $1 million. It would have more than tripled the transfer tax rate from 0.75% to 2.65%.

Supporters dubbed this a “mansion tax,” but not every building worth $1 million is a mansion. The tax would likely hurt both the middle class and renters as much, if not more, than the wealthy. Pushback may have spurred Johnson to revise his plan, which now calls for a graduated tax scheme.

What are the changes?

According to reporting by the Chicago Sun-Times, instead of a single rate increase for transfers over $1 million, Johnson now plans to propose a three-tier transfer rate. Transfers below $1 million would see the tax cut from 0.75% to 0.6%. Transfers between $1 million and $1.5 million would see their taxes raised to over 2.5 times the current rate, from 0.75% to 2%. Transfers of $1.5 million and above would see taxes quadrupled to 3% of the transfer value. That translates to roughly 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.

Does a graduated tax like this violate the Illinois Constitution?

Probably not.

While the Illinois Constitution Article IX, Section 3, requires a flat tax on income, real estate transfer taxes are covered in Section 2, which deals with non-property taxes generally. Section 2 has no requirement that taxes be at a non-graduated rate. It does require subjects of taxation be taxed uniformly, but classifications need only be “based on a real and substantial difference between the people taxed and those not taxed, and (2) bear some reasonable relationship to the object of the legislation or to public policy…”

Since the tax applies the same to transfers of the same value, it would likely pass constitutional muster.

What happens next?

Johnson is pitching the plan to the Chicago City Council. If he has enough votes, the council could pass a resolution proposing the tax hike. However, state law requires any real estate transfer tax passed by the city go to a referendum before becoming law. Before adopting any resolution to put the question to a public vote, the city council would need to give public notice and hold a public hearing on the referendum.

Johnson would need the General Assembly to amend state law to pass the tax ordinance without a referendum. It would not be the first time: in 2008 the General Assembly passed a law giving Chicago a six-month window to hike real estate transfer taxes by 0.3% without a referendum.

While lower-value transfers would see some relief, Johnson’s tax hike is just another reason for companies to reconsider doing business in the city. Boeing, Citadel and Tyson, among others, have already packed up and gone. With more pension debt than 44 states, 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.

Correction: An earlier version of this article and graphic contained an incorrect figure for the tax on a $2 million property sale.

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