Driven by exploding pension costs, the city’s property-tax hikes are depressing the housing market.
Steven Malanga January 4, 2021 @ City Journal, published with permission. I recommend subscribing, it's free.
Early in 2019, a real-estate website predicted that Chicago’s housing market would be one of the nation’s worst over the next year. Chicago-area home prices, among the slowest to recover from the 2009 housing recession, were being suppressed by various factors, including escalating property taxes.
Now it’s clear from a new study just how much of a burden those taxes have become.
Over the past 20 years, they’ve risen about four times faster than the rate of local inflation and more than twice as fast as Chicago-area wages, eating up more and more of the average homeowner’s disposable income. And there’s more to come, thanks to Mayor Lori Lightfoot’s latest budget, which raises Chicago property taxes again. Much of that money, moreover, isn’t targeted to better services but simply to pay off the city’s and Chicago school system’s enormous debt. For local homeowners, it’s all pain, little gain.
The study, by Cook County Treasurer Maria Pappas, found that residential property taxes in Chicago have risen, on average, by 164 percent over the past 20 years, while inflation increased by 36 percent in the greater Chicago area and wages grew by 57 percent during that time. For a home valued at $300,000, the average annual tax bite is now $6,351, according to SmartAsset.com. That’s nearly twice the national average for property taxes on a similarly valued home. Local homeowners have been battered by a few big increases in the last few years, including a $543 million property tax hike in 2015 by the city, and a $224 million boost in 2017 from the Chicago Public Schools, which also has dibs on local property taxes.
Now Lightfoot has added $94 million in property taxes in her latest budget, along with a host of other levies, including a “cloud tax” on business computing services. These increases are driven by city and school system debts, especially in their deeply underfunded pension systems. Chicago’s pension payments have risen from about $500 million in 2015 to $1.2 billion last year. They’re set to grow by another $1 billion by 2023. The pension system alone now consumes all of the city of Chicago’s property tax collection.
The situation is little better at the school system. In 2008, its pension costs were a bit above $200 million, and the state contributed a chunk of that money. In 2021, total costs for school pensions will rise to $885 million. The school system has financed that big increase in large part with a so-called supplemental-pension property-tax levy on top of the real-estate taxes it already collects. That new levy alone will dun Chicago property owners for $490 million next year. The rising pension costs are one reason taxes are soaring even as the size of the school system shrinks. In 2009, city schools enrolled 407,157 students. By 2019, that number had slipped to 355,156. In part because of Covid-19, enrollment fell this school year to 340,658. Even so, local revenues collected by the school system have increased by 58 percent in that time.
Because of the way Chicago tax assessors have valued properties, homeowners have borne the brunt of the tax increases, the Pappas study found. Commercial property taxes have grown at 81 percent over the last 20 years, still faster than inflation or wage growth, but nothing like the impact on homeowners, who pay about half of all real estate taxes collected in the city. Businesses, however, are now bracing for even larger tax increases aimed at them. The Cook County tax assessor has begun hitting local business properties—including apartment buildings and office towers—with double-digit increases in its assessments.
While nearly everyone agrees that the problem is getting out of control, the progressives who run Chicago argue that the solution is not to cut costs but to shift the burden away from homeowners by funding more of the school system through state revenues. They were counting on the state’s new progressive income tax on wealthy individuals in Illinois to produce a windfall for Chicago schools, but voters, wary of claims that a new tax would relieve the pressure on property levies, handily defeated the proposed constitutional amendment that would have permitted the new tax.
If the experience of other states is a standard, Illinois voters were right to entertain suspicions. New Jersey, for instance, instituted an income tax in the 1970s expressly to allow the state to move more funding toward that tax. Nearly 50 years later, New Jersey has one of the nation’s highest state income-tax rates, yet its property taxes have continuing rising and are also among the nation’s highest—even steeper than Illinois. And it has just about as much pension debt as state and local governments do in Illinois.
Skyrocketing property taxes are not only bad news for homeowners now, but also for when they try to sell their properties, because high taxes suppress the value of real estate. A 2019 article in the Journal of Finance and Accountancy found, not surprisingly, that states with low property taxes tend to see house values appreciate more rapidly than in states where real-estate taxes are higher. Appreciation has been a big problem in Chicago. It took a decade for housing prices in the city to recover from the 2009 real-estate bust, and even today, Chicago home prices aren’t growing nearly as much as in other places. The Case-Schiller Index of housing prices in 20 major markets, for instance, ranks Chicago next-to-last in housing appreciation for the last 12 months.
It’s unlikely that yet another property tax increase will help.
Photo by Scott Olson/Getty Images
No comments:
Post a Comment