Rumors have circulated this year that United Airlines is considering moving their Chicago headquarters – and their 5,000 employees – to Denver. Chicago residents and businesses packing up and leaving is not new, but the real estate tax hike on the March 19 ballot would accelerate it.
Chicago voters are set to decide a referendum next week on allowing the city to hike the real estate transfer tax on properties over $1 million – tripling the rate on properties over $1.5 million. It has been misleadingly billed as a “mansion tax” to suggest it will hit the city’s wealthiest residents and the impact on the average Chicagoan would be modest.
But the reality is a recent survey showed there were nine times more commercial property sales than residential in that price range. Over 5,142 commercial properties could be affected – from high rises and industrial buildings to bowling alleys and supermarkets.
That means businesses considering getting their start in Chicago would have to face a potential tripling of the tax increase on their initial property investment, on top of Chicago’s second-highest-in-the-nation commercial property tax. Downtown office vacancy rates already reached another record high at the end of 2023 at 23.8% – nearly double the pre-pandemic rate – and a hefty tax on property sales will only make Chicago’s commercial real estate less attractive.
Without new businesses coming into the city, more and more Chicagoans will wonder why they’re still putting up with high state and local taxes. Fewer jobs and services will give them less reason to stay.
In the first year of the pandemic, IRS data showed, on net, Cook County lost more than 41,000 households and $7.6 billion in taxable income. For context, that’s more residents and taxable income than 47 states lost on net. It’s also 26% and 49% more than the net households and taxable income, respectively, that departed Cook County in 2019.
That’s in large part because of an increase in remote work and flexible work arrangements that enabled city residents to leave while still making a living. While rates of remote work decreased nationally between 2021 and 2022, the number of Illinoisans working remotely in that time period increased by more than 20%. Chicago is already struggling to revitalize its economy without adding new taxes that directly discourage businesses from coming back or starting.
Chicagoans hardly need more reasons to pack up and leave. A poll conducted by the Illinois Policy Institute last year found more than half of Illinoisans are looking to leave the state, with high taxes cited as the primary reason. Adding policies that drive away residents and businesses is not the way to reverse these trends.
Tax hikes on property purchases can also push out city residents another way. Chicagoans have already seen rent prices climb 10% since the onset of the pandemic. Developers need to purchase property to build new housing, and such projects would likely come to a halt should this tax hike go into effect, shrinking an already low supply.
That was what happened in Los Angeles after the city approved a similar “mansion tax” in November 2022. Loans for new multifamily construction projects suddenly dried up as developers went elsewhere and lenders began to worry about increased risk, as the transfer tax took a big bite out of the potential profit. Compare this to Austin, Texas, where developers were allowed to flock, growing total inventory 19% in a single year and making rent go down.
Those trends should also cast doubt upon the reliability of this new tax as a source of revenue. Higher taxes only boost Chicago’s coffers if there are real estate buyers willing to pay them. If previously Chicago-based businesses give up on a tax environment that doesn’t allow them to prosper, Chicago loses tax revenue as well as the economic activity those businesses and employees previously brought.
Chicago needs to foster a tax and regulatory environment that retains or brings people back to the city. A massive tax increase that would directly target businesses would only accelerate Chicagoans taking flight.
