Chicago households making $100K targeted by Brandon Johnson allies

An ominously titled document by close confidants of new Chicago Mayor Brandon Johnson states the new administration’s top priority is to take more money from households making $100,000 or more to fund what they claim is a “just Chicago.”

Allies of newly elected Chicago Mayor Brandon Johnson are pushing a $12-billion financial plan for the city ominously titled, “First We Get the Money.” The newly released plan is supposed to make a “more just” Chicago by slashing funding for the Chicago Police Department and implementing new income and other taxes in the city.

Citywide income tax on households earning $100,000 and up

“First We Get the Money” proposes adding a new citywide income tax on household income above $100,000. That would bring in an estimated $2.1 billion a year in new revenue, of which they claim “$1.6 billion would be from high-earning Chicagoans and $490 million from high-earning commuters.” The report cites city income taxes above 3.7% in New York and Philadelphia as justification for implementing a similar tax in Chicago. This proposal would require state lawmakers’ approval, which Gov. J.B. Pritzker has seemingly nixed.

What to know: A municipal income tax would be devastating for Chicago’s economy. Estimates of how much revenue could be raised with the proposed income tax are too high.

Everyone from Nobel Prize winners such as Edward Prescott to former chairs of the Council of Economic Advisors – including Christina Romer in the Obama Administration, the Director of the Congressional Budget Office Douglas Holtz-Eakin, George W. Bush economic advisors Harvey Rosen and Greg Mankiw, whose textbooks are the most widely used in macroeconomics – agree higher taxes carry negative economic consequences, including reduced investment, employment and wages. New studies are consistently confirming these findings.

Historically, municipal income taxes have failed to fix the financial issues plaguing struggling cities. When Detroit instituted a city income tax for residents and nonresidents in the 1960s, many businesses simply left for the surrounding suburbs. Today the city generates less tax revenue than it did from property taxes alone 60 years ago.

Despite this evidence, the authors’ revenue estimates assume raising taxes on those working in Chicago would yield no economic consequences. In post-COVID Chicago, that could mean many office workers opt to work remotely instead of commuting into Chicago and paying the city income tax. Neither option is good for city revenues.

And despite claims from proponents, taxing those with incomes above $100,000 wouldn’t only affect “high-earners.” One-third of all households, and nearly 42% of families in Chicago, earn $100,000 or more annually.

On top of affecting a large share of the population, data shows a $100,000 income doesn’t go as far in Chicago as it does in most other U.S. cities. Chicago ranks 58th out of 76 U.S. cities for actual take-home pay from an income of $100,000, with Chicagoans taking home just $59,505 under current tax conditions. A city income tax would further erode take-home pay and make a $100,000 income in Chicago worth even less than it already is in other cities. Nearby cities such as St. Louis, Indianapolis, Lexington and Milwaukee all see $100,000 incomes go much farther in terms of actual take-home pay than Chicago.

Reinstating a Chicago head tax

The plan calls on Johnson to restart the city’s head tax “to make large corporations pay what they owe for benefitting from the city’s public infrastructure.” It claims the head tax should be $33 per employee annually and it would generate an additional $106 million in tax revenue. Johnson’s campaign platform included a head tax.

What to know: Revenues from a head tax are overstated as the report lobbies for an annual head tax of $33 and alleges such a tax would generate $106 million annually. That’s wrong. To get to $106 million, employers would need to pay $33 per employee each month – not each year – for a total of $396 a year per worker, as was estimated for a previously-filed head tax proposal.

Chicago has already conducted a head tax experiment. Previously, the city had a $4-per-month head tax until former Mayor Rahm Emanuel dismantled it in 2014. It consistently underperformed revenue expectations and Emanuel dubbed it a disaster for economic growth. Aldermen called the tax a “job killer” and Emanuel said, “Eliminating the head tax is the right thing to do for businesses big and small, and it’s the right thing to do to secure Chicago’s future.”

To generate the revenue proponents are promising, the tax would be more than 8 times larger than Chicago’s old $4-per-month “job killer.”

Real estate transactions tax

Next up, the plan calls on Johnson to implement the Bring Chicago Home Ordinance, which would increase the real estate transactions tax on sales worth more than $1 million by 1.9 percentage points, bringing the total real estate transfer tax rate to 3.1%. The “First We Get the Money” authors claim this would create $163 million in new revenues for the city. Johnson campaigned on this tax.

What to know: Although proponents of this tax have called it a “mansion” tax, an increase in the real property transfer tax rate would apply to commercial and industrial real estate as well. The tax would cost millions for many commercial property tax sales in the city, which experts say will be passed on to tenants in the form of higher rent prices at a time when office vacancy in downtown is at a record high. For residential properties, the tax will likely serve to reduce home prices as buyers must account for the increased cost of the transfer tax. Home sales and prices within the city are already in decline.

We’re already getting a live look at  how massive increases in real estate transfer taxes work, as Los Angeles’ new real estate transactions tax on property sales over $5 million took effect in April. Reports indicate homeowners have been scrambling to get inventory off their hands in the weeks and months leading up to the new tax. Meanwhile, Los Angeles property records indicate numerous institutional lenders have not issued a single construction loan for a multifamily or commercial project since voters approved the new tax in November. A smaller number of available lenders means it is more difficult for potential borrowers to get favorable terms to proceed with projects, placing further strain on the supply of housing and driving up rent prices.

Data already suggests the high-end real estate market is cooling in Chicago. Because the tax would affect multi-family real estate, it would likely drive up rent prices – which are already at all-time highs – for many Chicagoans.

Raiding tax increment financing funds

The plan also calls for Johnson to declare an automatic surplus of all tax increment financing districts every year and instead send the $1.2 billion in TIF revenue to the other taxing bodies within the district. Johnson’s campaign platform called for a slightly different course of action, including a more regimented schedule for assessing surplus TIF fund balances and transferring them to the city’s budget.

What to know: TIF does not take revenue away from local taxing bodies such as Chicago Public Schools. Taxing districts set their property tax levies independently of the TIF system, and raise the same amount of revenue regardless of whether TIF districts exist.

Instead, TIFs raise property taxes higher than they otherwise would have been for taxpayers.

While the efficacy of TIFs has been widely debated, they certainly allow city government to subsidize favored businesses at taxpayer expense and are ripe for corruption.

A better idea would be to reconsider TIF districts and  return the $1.2 billion in additional property taxes to Chicago taxpayers.

Financial transactions tax

The plan calls for a common Johnson-backed proposal to institute a financial transactions tax. This would also require Johnson to work with state legislators to make such a tax possible. This plan says a $1 to $2 tax per trade could generate $10 to $12 billion, which Chicago could share with the state. If Chicago’s share were 20%, since it is about one-fifth of the state population, it would bring in $2 billion extra for the city.

Interestingly, the $10-$12 billion estimated revenue from a financial transactions tax is far greater than the $100 million Johnson said it would generate during the campaign.

What to know: Financial transactions taxes have historically failed to generate their promised revenues as the tax base is highly mobile, meaning companies can easily leave the city. Evidence also suggests such a tax would carry economic harm such as higher commodity prices and reduce gross domestic product.  Germany, Japan, the Netherlands and Sweden have each repealed their financial transactions taxes in recent decades, while European Union nations which levy the tax have struggled to generate anticipated revenues as financial transactions migrated to other jurisdictions.

Pritzker has made it clear he is against a financial transactions tax because “it would be easy for those companies’ servers to move out of the state.” Chicago Mercantile Exchange Group CEO Terry Duffy made it clear CME is among the businesses prepared to leave the city and state if necessary. “Mr. Johnson has no legal authority to impose a transactions tax on my business,” Duffy said. He noted the company has sold its properties and now leases them through deals that contain language to void the terms of the leases should lawmakers enact anything that is “ill-conceived.” Duffy added, “if we had to leave, we could leave.” CME group supports more than 100,000 jobs in Illinois.

Citadel already moved its headquarters out of the city last year while Guggenheim Partners is poised to also move to Miami.

Implement a “local wealth tax”

The proposal doesn’t stop there. It goes on to say Johnson should press state leaders to change state law to allow Chicago to implement a local wealth tax “on the financial and business assets of the 10% wealthiest Chicagoans.” The plan says a 0.4% wealth tax on those assets of the wealthiest 10% of Chicagoans would generate $960 million annually.

What to know: Wealth taxes have failed to pass at the state level numerous times. Additionally, wealthy Chicagoans are among the best positioned and most likely to leave a city that lost nearly 33,000 people last year. On top of residents being highly mobile, many of the assets of the wealthiest Chicagoans are virtually impossible to sell or value in order to assess such an annual tax.

In fact, because of these issues, tax experts have criticized the revenue estimates purported by Emmanuel Saez and Gabriel Zucman, whose work was the basis for the estimates of what a Chicago wealth tax could generate.

On top of being incredibly difficult to impose, wealth taxes also create some of the worst distortions on the economy. Economists argue wealth taxes discourage saving and investment. When France instituted a wealth tax, an estimated 42,000 millionaires and $200 billion in assets fled the country, resulting in the loss of $7 billion in annual tax revenue. The tax only brought in $3.5 billion annually.

France repealed virtually all aspects of their wealth tax in 2018. So have most other European nations that previously enacted the tax. Today only three countries in Europe levy a wealth tax, down from 12 in 1990.

Digital ad tax

The plan also calls for a digital ad tax, which again would require Johnson to work with legislators in Springfield to allow the city to implement. This tax, the plan claims, would target only nine of the largest digital ad entities such as “Google, Facebook, Amazon and Twitter.” The 13% tax measure would bring in an additional $193 million, according to the document.

What to know: The tax may not be legal. Maryland implemented one of the first digital ad taxes in the nation in 2022, similarly targeting large companies. The tax was met with multiple legal challenges which are still playing out, though a circuit court ruled the tax was unconstitutional in October 2022.  The case is currently being appealed in the Maryland Supreme Court

Raise the jet fuel tax

The plan calls on Johnson to raise the jet fuel tax from 5 cents to 14 cents, a move that would generate another $96 million annually according to the plan’s authors. This proposal was also included in Johnson’s campaign platform as a way to punish airlines for “polluting the air” in Chicago.

What to know: Raising taxes on jet fuel may bring in more revenue for the city, but industry experts said airline taxes are ineffective at reducing emissions. The taxes will, however, make traveling to and from Chicago more expensive.

Luxury apartment vacancy fee aimed at “lowering rents”

The plan calls for instituting a luxury apartment vacancy fee on “large luxury apartment buildings that sit vacant for more than 12 months at a time.” It says landlords owning more than 20 units and asking a rental price above the 75th percentile, based on the number of bedrooms, should pay a fee equal to the median rental price in the city for each unit that sits vacant for more than 12 consecutive months if more than three units in the building sit vacant for more than 12 months. The plan’s authors claim this would encourage luxury developers to charge more affordable rents that create higher occupancy rates. They claim the fee is designed to essentially force developers to lower rates to avoid paying the fee.

What to know: Should this complicated scheme work as intended, the authors said they hope it doesn’t generate any revenue for the city and rather increases the amount of affordable housing available to renters.

Other U.S. cities such as San Francisco and Berkeley, California, have recently voted to impose vacancy taxes, with San Francisco’s being modeled after a similar measure in Vancouver, Canada. According to a report by the British Columbia Ministry of Finance, the tax appears to pressure property owners into leasing empty units and primarily collects revenue from foreign investors. However, other experts believe the taxes are symbolic political posturing that have little impact on rent prices or housing issues and distract from larger problems.

Occupancy rates in downtown Chicago apartments sits at over 94% and rent growth at top-tier apartment buildings is growing at less than half the rate of the rest of the nation.

Other items from the plan

The plan also suggest savings could be had from “values-aligned spending priorities” that include slashing $538 million from the Chicago Police Department budget and $9 million from ShotSpotter and other public safety surveillance tools and contracts.

The plan’s authors do not mention any potential negative impact from the proposals to “get the money” for their agenda. However, it is likely many of the projected revenues would come in much lower than anticipated because of myriad factors. Chicago lost 33,000 people in 2022, one-third of the state’s population decline for the year. There is little reason to suspect these proposals would result in a reversal of chronic and continuing population loss.

Johnson’s proposed tax plan, coupled with additional new tax and fee ideas from progressive allies, would likely make Chicago’s population loss worse. An Illinois Policy Institute survey conducted by Echelon Insights Feb. 15-19 found 34% of Chicagoans would leave the city if given the opportunity, citing taxes and affordability as their No. 2 concern behind crime. In their open responses, 39% cited the city’s near nation-leading taxes and the high cost of living as their main reason for wanting to leave. Increasing taxes and fees to the tune of billions of dollars would virtually guarantee population loss would continue.

The city is also struggling to keep businesses in the area, resulting in the loss of more jobs and opportunities as well as secondary economic benefits employers provide the city. Despite having the second-most Fortune 500 companies among metro areas, Chicago saw three leave in 2022. McDonald’s, headquartered in Chicago since the 1950s, is among the businesses finding it “increasingly difficult to operate a global business out of the city of Chicago,” according to CEO Chris Kempczinski. “McDonald’s commitment to Chicago is not corporate altruism. It’s not open-ended. It’s not unconditional. As a publicly traded company, our shareholders wouldn’t tolerate that.”

Other major businesses have already been turning off the lights in their Chicago offices and heading for business-friendly cities elsewhere.  Guggenheim Partners, one of Chicago’s largest financial services firms, is expected to follow Citadel in relocating to Miami. The company previously employed about 1,000 employees in Chicago. Major Chicago and Illinois employers such as Boeing and Caterpillar, along with Tyson Foods, are heading for the exits and taking hundreds, if not thousands, of jobs and opportunities with them. Johnson’s tax proposals would likely make the situation worse and continue forcing major employers out of the city and even out of the state altogether.

If the progressive allies of Johnson are successful in pushing their “First We Get the Money” strategy on the city, it would mean pushing the city toward further fiscal upheaval. Pension payments are rising and the city will need to figure out a way to sustain those high payments on a debt that is greater than that of 44 states.

The Johnson tax plan would hurt the city’s recovery from the pandemic by costing it even more jobs and economic opportunities at a time when the slowing U.S. economy is facing serious questions about a forthcoming recession. “First We Get the Money” could turn into “We Have Even Less Money than Before.”