By: Mark Glennon*
Let’s start with the fundamental silliness in the numbers supporters are citing on Chicago’s proposed “mansion tax” hike on real estate transfers, with proceeds to go toward affordable housing: “Supporters of the proposal say the change will help the nearly 66,000 Chicagoans who are unhoused by generating approximately $160 million annually….” That’s a pretty good summary, from WTTW, of a main point that came out of Thursday’s Chicago City Council hearing on the proposal.
But $160 million of new revenue would be enough for only about 320 units of new housing – at best.
Costs for the city’s affordable housing projects in some of the city’s poorest neighborhoods exceed $600,000 and even $700,000 per unit, as Crain’s reported last month. Costs typically average $450,000 to $500,000 per unit for the ritziest high-rises under construction in and around downtown, Crain’s said. It’s therefore generous to assume the city would get would somehow get cost down to $500,000 per unit, which would get the 320 new units.
Pick a different cost number if you want, but you’ll still find that $160 million gets you peanuts in new housing.
But there’s far more to it than that. Nearly all reporting on the tax proposal has focused only on that tax revenue from residential sales. It now turns out that the proposal is intended to cover commercial property sales — a matter supporters have been hiding from.
Until Thursday, both Mayor Brandon Johnson and Bring Home Chicago, the coalition of activist supporters, have said nothing about commercial property. Crain’s, among others, now confirms that the proposal would cover commercial property, and Crain’s has been among the few publications covering the commercial property aspect. Tax hike supporters, however, have provided no estimates whatsoever on revenue from the tax on commercial property and effects on that sector.
Adding commercial property to the debate changes everything because the numbers there dwarf residential sales. Crain’s found that, in a recent year, Chicago property sales at over $1 million totaled $7.5 billion for commercial real estate but just $841.8 million for residential real estate.
And the additional tax for commercial property would be a hammer blow to the commercial sector, which is already struggling. A coalition of brokers, builders, owners and developers saw that coming and already formed an “all hands on deck” effort, as The Real Deal put it, to oppose the tax increase. The coalition’s website is here.
They are right to be frightened. The proposed tax increase would triple the transfer tax payable to the city for buyers on properties worth over a million dollars. It would be imposed immediately upon purchase. An example cited by Crain’s is a 50-story office tower that sold $415 million. City transfer taxes on it would jump by $7.9 million to $11 million.
That’s the last thing the commercial property market needs. It’s already on life support, creating a frightening problem for all Chicagoans, as we explained here. As in many major cities, empty offices are driving values down 30% to 40%. Property taxes on those buildings will have to drop to match the reduced valuations, and the reduction in tax revenues will have to be made up in residential property taxes or other taxes.
It’s particularly inane to consider a tax increase on big residential buildings if the purpose is to make housing more affordable. Higher taxes reduce supply and push rents up. The transfer tax increase will backfire if it’s imposed on large residential properties. That concern did at least come up at Thursday’s hearing, raising the possibility that residential properties would be exempt from the tax increase when the proposal is finalized.
So, why is it that supporters deceptively call it a “mansion tax” and talk only about the tax burden on residential sales of over a million dollars, ignoring commercial real estate?
Brandon and his progressive allies presumably are confident that soaking the rich – buyers of million-dollar homes – is popular, especially when coupled with a claim about housing for the poor. And maybe they are confident that the public is too stupid to do the simple arithmetic showing that $165 million in new revenue is only enough for a few hundred housing units. Or maybe Johnson and his supporters haven’t bothered with that arithmetic, which wouldn’t be surprising. Either way, nobody has called them out on it.
As for the proposal’s effects on commercial real estate, well, let’s just say basic economics isn’t the strong suit of today’s progressives.
But the folks with enough means to buy million-dollar properties do tend to be pretty good with numbers and economics. For them, the proposed tax hike will be just another reason to leave or never come in the first place.
The good news is that Chicago will have to put the transfer tax increase up for public vote for approval. That’s assuming the state doesn’t give the city authority to do it without a vote, and the state is not now inclined to do that. The earliest that vote could take place is March, and the city would have to finalize the details of the proposal well before that, probably this fall. That leaves plenty of time to analyze the proposal and, hopefully, provide some education on it.
Props to Dennis Rodkin and Alby Galon at Crain’s who have been pretty much alone in recognizing early that the proposal is more an issue for commercial real estate than residential. Way back in April of 2022, their headline was, “Not just a ‘mansion tax’: This plan would triple the transfer tax on commercial building sales, too.”
*Mark Glennon is founder of Wirepoints.*
Expect no retraction or apology. This what they do.
The state’s existing buyout program for its own pensions is the precedent for Chicago, which should be a warning: Look out for similar exaggerated claims and shoddy analysis.
What debate?
Frankly, sounds like it’s a DONE DEAL. Folks with the “million dollar properties” aren’t part of the proposal discussion, nor the ratification fix; they’re just the suckers stuck with the bill.
You get what you vote for; for north-side homeowners who voted for Johnson, just got their first thank you “kiss-off”.
There’s big debate here in the city (for those of you who don’t live here) about homeless encampments in the city’s parks. The resounding message from the alderpeople is “vote for the Bring Chicago Home” initiative because ‘more money’, which is hilarious because there are people who work at non-govt shelters who are screaming from the rooftops “We are here! We can help them” but because they have rules such as getting a job, no drugs or drinking – well….Also I was at a ward town hall where there was great pride in the alder’s panel saying they spoke to… Read more »
Per CBS, it costs Chicago taxpayers $225/day/migrant to house and shelter “newly arrived dreamers”. Probably won’t cost less to shelter the homeless presently living in the parks. Open your wallet, and let your dollars flutter out for all the progressive causes and “sanctuary city” hubris..
Filthy City Council Communists have run out of other people’s money
Real estate has enough problems without piling on a transfer tax. Working from home, inflated prices, mortgage rates, supply, inflation, all the people with low rate mortgages that are sitting tight rather than moving, etc. BJ is a Marxist one trick pony, redistribution.
“Million dollar” tax affects residential home-sales, not commercial properties.
Apparently it is intended to cover commercial properties- can’t see this helping the cause of reasonable rents
Housing units can be built considerably cheaper downstate as opposed to the mentioned 450-500 thousand per unit but go ahead and spend the outrageous sums instead of moving Chicago’s problems down here to save money.
We have enough problems of our own living in Illinois.
You forgot to mention the tax should only apply to the amount *above* $1 million dollars (like a true progressive tax) but instead applies to the *entire* amount of sales above $1 million. So now they’re in favor of a flat tax. Kinda ironic.
Honestly, if they really intend on doing this, and they will, there should be a different category for commercial properties with a threshold of like $5 million or whatever amount captures the top 5% of sales. But they know that won’t generate the revenue, even though it’s the fair and proper way to implement it.
It is right to focus on the bloated costs of city constructed or commissioned housing. The costs– at $500k or more per unit– are indefensible. But let’s not overlook the ongoing maintenance costs of properties with this class of tenant occupying them. Homeless folks moving into new housing don’t have the financial means to take care of the property, and unfortunately, often not the commitment or the skills. Look anywhere in the country where these programs have been started and they all stall out because the properties quickly fall into disrepair, with government agencies getting stuck with the expenses. And… Read more »
BJ’s going to have to pull one or the other of his taxes across the finish line here pretty quick. It’s either that, or all the stuff he promised he’d do with that money either goes undone, or goes unpaid for. That without regard to how sensible any of it actually is. BJ’s got to come up with a budget, too. In just a couple of months, as I recall. The folks who are opposed to the ‘mansion tax’ have a lot more influence in Springfield than they have with Johnson. BJ-n-the-CTU are the former Anti-Capitalist Fringe Lunatic Society, suddenly… Read more »
Dumb seems to be the prevalent theme in Chicago. Dumb to raise taxes when the economy is already struggling. Dumb to elect a rabid socialist thinking he would somehow make things better. Dumb to defund cops and install “social justice instead of real Justice. Dumb all around!
BLM BJ and his band of radicals don’t care what the sane people of Chicago think. They’ve got their voting block of morons locked in because the morons think someone else is paying for their free stuff. Wait until they get the surprise that’s every day life in Detroit, where only the morons are left to pay for their “free stuff”.
Bj will steal all the money and give to his buddies
But this will have to wait until BJ moves from his west side house to his new Bronzeville house
The tax plan is ridiculous because the tax will ultimately be passed onto renting tenants, apartment or commercial. —You could run some guest-a-mate $#s on what it would cost to provide RENT subsidies for the 66,000 unhoused at say $1,000 rent a month (probably to low) or….or for example 66,000 unhoused x $1,000 rent x 12 months = $792 mil for one year!!! $160 mil projected tax revenue / $792 mil= would only cover appox 20%. —Also, does the 66,000 unhoused include unhoused ‘new arrival’ migrants? The cities already magically handing out on limited basis, I believe, OUTRAGEOUS 3 months… Read more »
Sellers will essentially pay the tax because buyers will incorporate it into their bids. No different than a Mecum auction where the buyer has to factor in the 10% commission on his bid.
It would be good if not great for the retiree on a huge overly generous pension. Someone has to pay for the good life.
Inflation-related “rising property prices” are quickly reflected in concurrent real estate tax assessments too. But rising property-value due to inflation don’t mean genuine property-value. Those higher valuations result in higher real estate taxes, and less household spending elsewhere. Housing-price inflation causes us taxpayers a higher housing cost, while it also creates larger taxation “pot” for local government agencies to tap. Many so-called million-dollar houses in Chicago were initially constructed as blue-collar working-class housing, whether single family brick bungalows, or two-flat multi-unit buildings subsequently converted into single-occupancy houses. In ten years, majority single-family north-side single-family homes will be “million-dollar houses”. Many… Read more »
Mayor Brandon Johnson is a ‘punish yt’ kind of guy. He knows that these taxes will push people, especially higher earning yt, out of city. And he’s OK with that! He also believes in the magic dirt theory, where the magic dirt on a piece of land is what makes the resident wealthy, educated and law-abiding. He has a vision of Lincoln Park staying exactly the same except that the current residents relocate to Naperville and his cadre of elites – educators, city employees, union stewards, obviously deserve to live in the nicest part of the city. Maybe he intends… Read more »
And that’s the plan. Tax people out of desirable housing in nice neighborhoods to benefit his friends and cronies, and build brand new units funded by the taxpayers for the underserved. Very utopian, very Marxist.
See Rogers Park to read ahead in the script.
Spot on Street. Here in Bowmanville I’m currently assessed at slightly more than half a million — and it ain’t a mansion!