During Illinois’ primary election on March 19th, Chicago voters will decide whether to change the city’s real estate transfer taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
structure to generate additional revenue. The “Bring Chicago Home” ballot measure would make Chicago’s tax structure substantially less neutral by raising taxes on some property transfers while decreasing taxes on others.
While proponents have nicknamed the proposal a “mansion tax,” most of the tax increase would fall on Chicago businesses, including local restaurants, bars, coffee shops, apartment complexes, gyms, and convenience stores, among many others. These higher tax burdens would affect not just the owners of various commercial properties, but their customers, employees, and tenants as well.
Proponents say the tax increase would raise $100 million in additional revenue annually to address homelessness, but Mayor Brandon Johnson (D) has not outlined a specific plan to spend the revenue and there is no guarantee that it will be spent on housing or homelessness services. If the tax increase is approved by voters, the Chicago City Council would need to pass its own ordinance determining how to allocate the money. The referendum only stipulates that the revenue be used “for the purpose of addressing homelessness,” which could be interpreted very broadly and applied to a wide range of government spending, not just spending on housing services or assistance to homeless persons.
What’s Being Proposed?
Under current Chicago law, a real estate transfer tax rate of 0.75 percent, or $3.75 for every $500 of the transfer price of residential and commercial properties, applies to the entire transfer price and is typically paid by the buyer. Under the referendum, the current single-rate structure would be converted into a graduated-rate structure. The rate would decrease to 0.6 percent (or $3.00 for every $500) on the portion of the transfer price under $1 million. Meanwhile, a higher rate of 2 percent ($10 for every $500) would apply to the portion of the transfer price from $1 million to $1.5 million, and an even higher rate of 3 percent ($15 for every $500) would apply to the portion of the transfer price exceeding $1.5 million.
Notably, this referendum has already faced numerous legal hurdles on its way to receiving voter consideration. In late February, a circuit court judge declared the ballot question invalid, ruling in favor of the plaintiffs who argued the three-part question violated the law, but an appellate court judge overturned that decision in early March, ordering the votes counted on the basis that courts should not interfere with the legislative process. However, even if this measure is approved by voters, it could be challenged at a later date, as the appellate court did not rule on the merits of the case itself.
Regardless of the continued legal uncertainty surrounding the referendum, Chicagoans should be fully informed about the tax policy and economic implications of the proposed tax change before voting on this matter.
Real Estate Transfer Taxes Should Remain Limited in Scope
First, it is important to understand the purpose of real estate transfer taxes. Unlike normal property taxes, which in most jurisdictions are collected annually to pay for general local government services, real estate transfer taxes are essentially a one-time property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services.
surcharge collected only when properties change ownership. Also known as recordation taxes, conveyance taxes, or a type of documentary stamp tax, real estate transfer taxes showed up early in U.S. history but quickly dwindled in importance as property, income, and sales taxes gained prominence.
Ideally, modern real estate transfer taxes should act much like a user feeA user fee is a charge imposed by the government for the primary purpose of covering the cost of providing a service, directly raising funds from the people who benefit from the particular public good or service being provided. A user fee is not a tax, though some taxes may be labeled as user fees or closely resemble them.
, whereby the seller or buyer of a property helps compensate the government for the costs reasonably associated with providing public services related to the transfer of the property, such as maintaining property ownership records, supplying the deed to the property, and being available to provide judicial services in the event a legal dispute arises regarding the property transfer. Much like marriage license fees help offset the costs to the state of providing marriage licenses and updating government records, modest real estate transfer taxes are justifiable when they help compensate for government services reasonably associated with the transfer of property.
The proposed tax increase in Chicago, however, would go far beyond that scope, with proponents seeking to take advantage of an existing revenue stream to generate large amounts of new revenue for unrelated purposes. This would violate the benefit principle in public finance that, where possible, taxes paid should have a relationship with the benefits received, a principle that is especially important at the local government level and is a notable characteristic of real property taxes.
Furthermore, as a type of narrow-based excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections.
, real estate transfer taxes are suboptimal as a source of general government revenue and even less suitable as a source of revenue for specific programs unrelated to the activity being taxed, in part because excise tax revenue streams can be highly volatile compared to that of broad-based taxes. As such, if Chicago residents believe more revenue is needed to address a specific societal challenge like homelessness, that funding should come from broad-based general revenue sources, not highly targeted taxes on activities that have no direct relationship with the programs being funded.
The Proposed Tax Increase Would Hurt Low- and Middle-Income Chicagoans
In addition to being a poorly structured and nonneutral tax change, the proposed tax increase would affect average Chicagoans—including renters, small business owners, customers, and employees—not just the wealthy.
Compared to residential properties, commercial properties make up the vast majority of Chicago properties valued at over $1 million that would face tax increases under this proposal. Since the pandemic, the commercial real estate market has faced unprecedented challenges in cities across the country, and a tax increase on real estate transfers would exacerbate that problem even further in Chicago, which already imposes the highest effective commercial property tax rates in the country.
Relatively few commercial properties in Chicago can be purchased for under $1 million, so proponents are banking on the idea that the proposed tax increase would be tough for businesses to avoid due to the relative inelasticity of this type of tax. For the many taxpayers who want to open a business or own a home, buying and selling property is inevitable, and even though taxpayers may not appreciate a high tax bill accompanying the sale, there are plenty of cases in which taxpayers will complain about the tax but may not ultimately let the tax deter them from purchasing the property they wish to purchase.
There are plenty of other taxpayers, however, for whom such a tax increase would give them yet another reason to look outside Chicago when deciding where to locate their business or own a home. A further exodus of small businesses from the city will detract from the vibrant atmosphere that attracts many people to city living in the first place, putting an additional damper on Chicago’s local economy.
Finally, if the goal of the proposed tax increase is truly to alleviate homelessness, the proposed tax increase could end up making the problem worse, not better. Apartment buildings are among the many properties that would be exposed to higher real estate transfer taxes, making it more likely that tenants would see their rents increase, especially after properties change ownership. While homeowners who purchase homes for under $1 million within the city would face a modest reduction in their real estate transfer taxes under the proposal, lower-income individuals are more likely to rent than own, so the tax reduction for properties valued under $1 million would do little to help those truly struggling to make ends meet. Instead, it could make it more difficult for struggling residents to afford rent and find and maintain suitable employment.
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