Chicago’s Mayor Endorses Proposal Seeking To Increase Real Estate Transfer Taxes

Chicago's new mayor, Brandon Johnson, is endorsing a revised proposal to increase real estate transfer taxes on property sales of $1 million or more. This move is aimed at raising funds to combat homelessness, following a similar step taken by Los Angeles and other local governments.

What’s the goal: Mayor Johnson's support for this "mansion tax" seeks to address the challenges in the housing market, including soaring prices and limited options. However, the proposal is likely to face strong opposition from real estate professionals, who argue that new taxes are too burdensome, especially during a historically challenging period for property sales and occupancy.

This new plan emerges more than a year after the last sale of a downtown Chicago office tower, largely due to rising interest rates and other obstacles that have slowed down real estate deals nationwide. This extended downturn is the longest since the Great Recession of 2008-2009, which severely impacted property sales.

Critics also question whether higher taxes are the most effective way to encourage more real estate development.

The proposal: Mayor Johnson has proposed a revised version of the Bring Chicago Home initiative. Under this new plan, city transfer taxes on sales under $1 million would decrease to 0.6% from the previous 0.75%. For sales between $1 million and $1.5 million, the tax would increase to 2%, and for deals over $1.5 million, it would rise to 3%, higher than the previous proposed rate of 2.65% on all sales over $1 million. This means that larger commercial properties could face taxes four times higher than the current rate, potentially further lowering property prices.

The possible consequences: Opponents, including organizations like BOMA/Chicago, a trade association for 240 commercial buildings in Chicago, argue that this three-tiered transfer tax plan would harm the city's commercial office industry at a time when it's already vulnerable due to factors like the impact of COVID-19 on the downtown business district.

The proposed plan could be introduced to the full City Council next month, with potential approval by October, followed by a binding referendum vote by Chicago voters next year. Backers estimate it could generate $100 million annually for homelessness programs, down from the initial estimate of $160 million.

Critics, however, argue that these estimates do not consider the sluggish sales market and the potential slowdown in deals and price reductions that the new proposal might trigger. Proponents suggest that most homebuyers spending less than $1 million would see a decrease in their real estate taxes, emphasizing the potential benefit for first-time homebuyers. However, opponents believe that this approach overlooks the long-term effects of COVID-19 on the city's economy and property values