Vallas: Mayor Johnson should learn from LA that ‘mansion tax’ is a failure

Chicago Mayor Brandon Johnson’s mansion tax idea failed in Los Angeles, something his recent trip there should have shown him. Here’s why it promises to drag down Chicago businesses in an already hostile environment and shift costs to homeowners.

Chicago Mayor Brandon Johnson recently found himself in Los Angeles, ironically, home to a recent real estate transfer tax hike much like the one he is pushing in Chicago on the March 19 ballot.

So, did he ask LA Mayor Karen Bass about her city’s disastrous experience with its “mansion tax” increase? If he had, he’d have learned it’s been a total failure he shouldn’t want to replicate. Not only has LA’s mansion tax generated a fraction of the money projected, but it is harming commercial property and rental property owners.

The same will be true in Chicago.

Presented as a tax on rich mansion dwellers to provide funding to address homelessness, Chicago’s real estate transfer tax will do neither. Instead, it’s a tax hike on businesses that will knock down Chicago’s struggling business scene and, in the process, hurt residential properties, too.

According to Crain’s Chicago Business, commercial properties are a disproportionate number of the properties sold over $1 million, at a ratio of 9-to-1. Owners of high rises, apartment complexes, storefronts and more will be asked to pay more. Chicago businesses are already wrestling with the second-highest commercial property taxes in the nation and the third-worst state in the nation for business, according to Chief Executive Magazine.

Johnson’s “Bring Chicago Home” piles on an already suffering sector of Chicago. The program would be more accurately called “Bring Chicago Down.”

There is already a massive shift coming in property tax burdens from commercial to residential property owners in Chicago. Any major tax increase on commercial property will only accelerate that shift and harm residents more. Only about 56.4% of Chicago’s office building space is occupied, according to swipe-card company Kastle Systems. Empty buildings mean lower commercial property values and that, in turn, means lower property tax revenues for the city.

The continuing dramatic 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 money they ask for 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.

An analysis for Crain’s Chicago Business by the Mansueto Institute for Urban Innovation and the Center for Municipal Finance at the University of Chicago estimates a 40% drop in downtown commercial property values shifts $700 million in tax load to other property, primarily residential.

So, what will Chicagoans get in exchange for killing the commercial and residential real estate sectors?

The ill-advised tax increase has no guarantee the city will use the money on the city’s homeless population. There are no specifics to Johnson’s plan. The mayor just directed $95 million in COVID-19 funding to be used to support migrant services. The city and state have found hundreds of millions of dollars to house over 35,000 migrants. Meanwhile, the city provides only 150 beds to domestic violence victims each night.

Ultimately, Chicago’s affordable housing crisis can be addressed without raising taxes by unleashing the potential of the housing market and by removing obstacles. Solutions include: converting unimproved spaces to garden units, securing thousands of unoccupied homes and apartments, streamlining the process for securing permits and zoning approval for new housing, and offering property tax abatements for affordable housing. Dedicating a portion of the annual tax increment financing surplus can provide additional funding.

Expect the proposed real estate transfer tax increase to be the first of many Johnson tax increases that will impact businesses and homeowners. The truth is clear for those who can see through the mayor’s “Bring Home Chicago” propaganda: this is a commercial tax hike that will hurt businesses already struggling and shift the tax burden, with no guarantee on how the money will be spent and a lot of history telling you how it is likely to be misspent.