Mayor’s ‘mansion tax’ plan is a regressive tax increase in search of a program
By Paul Vallas
As the March referendum approaches on Mayor Brandon Johnson’s real estate transfer tax proposal to address the homelessness crisis, it’s important that we move beyond the rhetoric of its supporters.
Johnson’s Bring Chicago Home plan is essentially a regressive tax increase in search of a program. It’s conspicuously absent any affordable housing strategy beyond depositing revenue from the tax increase into a new fund. What the mayor is proposing would not address the homelessness crisis and would have an adverse impact on city businesses, homeowners and renters alike.
Let’s look at the facts: First, this would be a dramatic tax increase on the city’s already overtaxed commercial property.
While the tax is being sold in City Hall as a “mansion tax,” it would fall disproportionately on hard-pressed owners of commercial properties whose values are plummeting. A Crain’s Chicago Business analysis of property sales of more than $1 million from April 2021 to April 2022 showed more commercial property sales than residential property sales by a rate of 9 to 1, or $7.5 billion to $841.8 million.
Notably, Chicago’s commercial property taxes have increased over the past decade.
With commercial property taxes and Chicago’s 10.25% sales tax, the Loop is an absolute windfall for the city. Bring Chicago Home would pile on an already suffering sector. The marketing of the proposal as a mansion tax is simply spin-doctoring. The program would be more accurately called Bring Chicago Down.
Second, the tax increase would not produce the revenue predicted.
Commercial property sales are down as owners find it hard to dump vacant and overtaxed properties. Consider a Loop office tower sold in September. It the first sale of a large downtown office building in almost a year — and at a 63% discount. The sale of the KBS REIT office building for less than half of what it was bought for in 2017.
Bring Chicago Home would exacerbate this trend by increasing the real estate transfer tax on commercial property owners. The backers of this tax appear unconcerned about the downtown office tower owners who are grappling with a difficult market. A new similar tax increase enacted in Los Angeles has fallen far short of expectations in generating revenue.
Third, the tax increase would cost the city jobs and investment.
The business district has yet to adjust to the realities of the postCOVID-19 work world and is already burdened with high taxes and fees. Raising taxes on these assets simply doesn’t make sense.
This is just the latest attempt by Johnson and his supporters to advance their supposed progressive agenda by imposing even higher taxes and more unfunded mandates, such as the recently approved elimination of the subminimum tipped wage that will punish the restaurant and hospitality industry. Then there’s the doubling of mandated paid time off that will hurt all employers. The tax increase and business mandates are not based on businesses’ ability to pay. This is the very definition of regressive government.
Small businesses and businesses surviving at the margins will be affected the most. This will worsen the city’s affordable housing plight as more businesses close or exit the city, costing Chicago jobs and income.
Lastly, the real estate transaction tax increase would shift the property tax burden to homeowners and renters.
The continuing decline in commercial property values will result in lower assessed valuations for property tax purposes. Taxing bodies such as the city, the schools and county government get the amount of money that they ask, the levy, regardless of what’s happening to overall property values. This means any drop in commercial property’s share of property values shifts the tax burden to residential property, unless local governments reduce their levies, which never happens
An analysis by the Mansueto Institute for Urban Innovation and the Center for Municipal Finance at the University of Chicago estimates that if there is a 40% decline in the tax value of downtown office buildings, the average residential tax bill will go up 10%.
Voters, beware. The mayor’s Bring Home Chicago referendum is only a real estate transfer tax increase largely on commercial property with a promise that it will be spent on affordable housing. It will not generate the revenue predicted. Opponents must expose the tax for what it is.
Paul Vallas is an adviser for the Illinois Policy Institute. He ran for Chicago mayor in 2023 and in 2019 and was previously budget director for the city and CEO of Chicago Public Schools.