“Don’t go past the top of the curve.”
-Robert P. Inman, Professor of Business Economics and Public Policy, Wharton School
By: Mark Glennon*
Chicago’s south suburbs are in a death spiral and property taxes are central to the story. Most numbers reported to date have been spotty, though anecdotes are common about abandoned properties and underwater homeowners unable to sell because of property taxes.
This article collects the empirical data more comprehensively from a variety of sources, most of which have become available only recently. Rates, indeed, have surpassed what any rational person could defend. The numbers provide a stark warning to all communities that are heavily taxed. Other factors contributed to the decline of south suburbia, which I will touch on briefly. Unquestionably, however, crushing property taxes worked as a powerful accelerant and now are sealing the doom of most south suburbs.
For purposes here, by “south suburbs,” I mean municipalities in the four townships directly south of Chicago on the bottom right of the map to the left — Bremen, Rich, Thornton and Bloom Townships. They basically form a rectangle south of the city to the edge of Cook County, bounded by Indiana on the east and Cicero Avenue on the west.
I will focus on “effective property taxes,” which is simply the percentage annual taxes represent compared to the actual market value of a property. A $200,000 home with an annual tax bill of $10,000, for example, would have an effective rate of 5%. That’s the right way to look at taxes because it cuts through the complexity of equalization factors, nominal tax rates and other numbers that usually obfuscate property tax discussions.
The Average Rates:
“Confiscatory” is not an exaggeration of some of the rates common in many of these communities. Rates now average 5.23% per year of a the market value of homes in south suburban communities, far more than mortgage interest which today would typically be no more than four percent for a 20%-down, fixed 30-year mortgage. Those tax rates are about 3.3 times higher than the national average effective property tax rate for homes (about 1.5%, in urban areas), as reported in this year’s annual report of Lincoln Institute of Land Policy and Minnesota Center for Fiscal Excellence. (Rural areas have lower rates.)
Commercial effective rates average 12.7% in the south suburbs, which is 5.7 times the national average for commercial properties, which is just under 2.3% in urban areas according to the Lincoln Institute study.
The chart on the right shows those rates by municipality in the south suburbs. They are drawn from a database recently prepared by the Chicago Tribune.
Those rates are far higher than most in Illinois, though Illinois itself has the second highest residential rates in the nation, averaging 2.32%, according to the Tax Foundation. For Cook County as a whole, median effective rates are 3.5% for residential and 8.6% for commercial.
In Chicago, average rates are 1.86% and 4.74%, respectively, for residential and commercial, according to the Chicago Tribune’s data. With the new increases proposed, those rates would be 2.10% and 5.26%, according to the Tribune data.
All those rates may be low, however, because they rely on the tax assessor’s indication of true market value of properties. And, unquestionably, the variance even within individual towns is staggering. Browse through actual sales and tax history on properties in those communities yourself. That information is easy to find on Zillow and similar online sites. I have looked at dozens of them. Within a single community, it’s not hard to find some homes bearing an effective tax rate under 3% and others over 9%. That seeming arbitrariness is a different subject I won’t try to tackle here. Suffice it to say that how properties are assessed infuriates owners throughout the county. Unfairness and uncertainty about who will pay how much is an entirely different problem, and it’s severe.
What happens when property taxes rise to those levels? The answers should be obvious, but let’s look at some data.
First, property values have been ravaged. The Institute for Housing Studies at DePaul University, in August, published a study of regional home price performance. It’s particularly good because it focuses on same-home, matched pair data, so it avoids distortions in simple average sale prices.
The study’s conclusions are on the right. Highlighted in red are the two regions defined in the study that most closely match the south suburban definition I’m using here. Particularly striking is price performance since 2000. Cook County prices generally have recovered, a far different picture than in the south suburbs, where they have dropped severely. And keep in mind that the home price recovery for the whole Chicago area has badly lagged most other large cities in the nation.
Prices do seem to have stabilized in the past year, a recent trend that’s also reflected in assessed valuations published directly by the Cook County Clerk. If true, perhaps that’s no surprise. Arguably, prices are now so low that buyers have concluded that exceptionally high taxes don’t matter. The loss has already been suffered by previous owners, perhaps. Maybe that sentiment provides a floor. On the other hand, looking through actual sales and listing data certainly does not confirm that. Overwhelmingly, from what I have seen, that information shows an unbroken trend of dropped asking prices, lower actual sales prices and increased effective property tax rates.
What about new construction and home improvements? Who would build or improve their property when the additional value they create will be taxed at those rates, and what does that mean for expansion of the tax base these suburbs sorely need?
Here, too, we have some new, interesting data. Franzek Radelet PC recently published a report separating out new property in assessed valuations, broken down by areas around Cook County. As seen in their chart on the right, new property valuations have recovered for Cook County as a whole since 2012 as construction resumed for all categories — residential, commercial and industrial properties.
But for Bloom, Bremen, Rich and Thornton Townships, there’s been no recovery, except a bit in Bremen. High rates appear to have ended growth of the property tax base. The charts below show total new property valuations in the four south suburban townships.
A few particular communities:
An especially sad victim is Park Forest. It was, in its day, the classic post World War II suburb with miles of nearly identical three bedroom, one bath homes built in the 1950s. It teemed with happy kids when I grew up there, every one of whom knew exactly what “meet me at the clock tower” meant: Ride your bike to the clock tower shown on the right in the Park Forest Plaza, a great place for a movie, lunch or whatever.
It was modest by any standard, then or now (which, in retrospect, is the best way to grow up), but it was safe, clean and proud to have enacted an open housing ordinance long before Federal civil rights legislation. Schools were quite good and property taxes were, as best as the old-timers I talk to remember, well under 1%.
But residential property taxes today average over 7% and any look at sales prices of homes shows a steady decline. Schools have deteriorated. Crime abounds. The clock tower is long gone.
Robbins may be the worst off of Chicago’s suburbs, based on a look at its real estate. A regular reader called me on a Sunday afternoon this past Summer. He was in Robbins for a baseball tournament with his daughter. “Good God,” he said, “this truly looks like some bombed out city after a war.” For Robbins, I couldn’t really get a sense of going prices and effective property tax rates by looking at sales data because almost all are foreclosures and abandoned properties.
Flossmoor, however, may be the keystone, and it has cracked. It’s among the prettiest and was long among the most prosperous towns in the state, filled with beautiful older homes and huge oak trees. Its high school, Homewood-Flossmoor, was traditionally among the best in Illinois. Today, Flossmoor is where many of those stories originate of owners trapped in their homes. Their values have sunk below mortgage balances and potential buyers balk at effective tax rates around 5%, often far higher. Many owners are stuck there. It’s seen as the last island of stability in the area, but it’s submerging.
Suicidal property taxes are are both a symptom and a cause of the collapse of these suburbs, but other factors clearly contributed.
Manufacturing was traditionally concentrated in the south suburbs, so its decline hit them hardest. Recent data published by the Illinois Department of Employment Security show the total number of private sector jobs in south suburban Cook County down since 1996 by about 19,000 and declining even since the 2007 recession — no post-recession job recovery.
Some blame the tear-down of the Robert Taylor Homes, a vast, low income, high rise housing project that lined the Dan Ryan Expressway on Chicago’s Southside. Many former residents are said to have taken Section 8 vouchers and moved to the south suburbs.
Finally, all these communities are crushed under impossible pension obligations. Aside from their share of multi billion-dollar unfunded liabilities for Cook County and the Metropolitan Water Reclamation District, most of these suburbs have their own police and fire pensions, which are in miserable shape. A few random examples: Chicago Heights firefighter pension is 48% funded with a $38 million unfunded liability; Cicero police pension is 49% funded and $62 million in the hole; and Country Club Hills firefighter pension is 54% and $5.8 million in the red. They have no hope ever to pay those pensions in full, being over-taxed so badly already.
Each of those factors eroded the tax base or made government more costly, pushing effective property rates up and making the rates themselves the most powerful source of further decline.
“Don’t go past the curve”- the lesson for Chicago and others:
Some other suburbs scattered through other Chicago areas have rates just as insane as in the south suburbs. Waukegan’s residential rate, for example, is 5.5% plunging it, too, into a death spiral. Riverside’s is 7.6%; Zion’s is 7.1%. Many others have rates heading upwards towards the irrational. For them, the warning should be clear.
For Chicago, the standard narrative in its debate about property taxes says they’re low compared to the suburbs. That’s certainly true, but should it mean anything? Suburban averages are pulled up by the rates I’ve described. Suburban averages also include high rates in prosperous communities willing to pay very stiff taxes for some of the best schools in the country. Even a huge tax hike will not allow Chicago to offer that. Most importantly, property taxes are a much smaller part of the total tax picture for Chicago than for other places in Illinois. Chicagoans pay more in taxes and fees, per person, than residents of any other major city in Illinois, as detailed by the Illinois Policy Institute. Look at the bigger picture when thinking about Chicago.
By “don’t go past the top of the curve,” Prof. Inman at the Wharton School of Finance was saying that, after a certain point, tax rates destroy a community and reduce tax collections. It’s the phrase he used in a presentation last year at the Chicago Federal Reserve. Economists debate where the top of the curve is, but ordinary people should know it when they see it, and it’s plain to see in Chicago’s south suburbs.
No easy solution is apparent to me for the south suburbs.
Don’t repeat their history.
The best that come from their plight is the warning they’ve given.
The audio of a radio interview I did on this article for AM560 is linked here.
The south suburbs are not alone. For effective rates in Chicago’s collar counties and other Cook County communities, see the further article I did today, linked here.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.