Commercial Properties Would Bear The Brunt Of Transfer Tax Increase, New UChicago Analysis Shows
Sales of nonresidential properties would account for about 75% of the increased revenue generated by the Bring Chicago Home real estate transfer tax set to go before voters in March, according to an analysis released this week by researchers at the University of Chicago.
The analysis, which looked at historical data from 2013 to 2022 to inform its projections, estimates the tax will raise revenue by about $160M per year on average. The breakdown of the revenue increase shows a bump of roughly $40M from residential properties and an uptick of $120M from nonresidential properties.
The proposed tax would create a tiered system that lowers the burden on property sales below $1M to 0.6% and increases the rate on sales larger than $1M. The transfer tax on property sales between $1M and $1.5M would be 2%, while the transfer tax on property sales over $1.5M would increase to 3%, quadrupling the current rate.
The Chicago City Council approved a measure Tuesday to put the tax on voters’ March ballots, with revenue designated for fighting homelessness.
“The tax burden will shift significantly towards high-value transactions, which predominantly consist of large apartment buildings and commercial properties,” the authors of the study wrote.
The immediate aftermath of the tax increase would likely “grind the market to a halt,” said Christopher Berry, a professor at the University of Chicago’s Harris School of Public Policy and faculty director of the Mansueto Institute for Urban Innovation.
Raising the price on something doesn’t mean getting more of it, and there could hardly be any fewer real estate sales downtown at the moment, he said.
Berry said the biggest outstanding question is how long a depressed real estate market will last. It could be years, but eventually, people will sell commercial property in the city again, he said.
“In the long run, the market can't stop forever,” Berry said. “At some point, the market will factor in this and somebody will take a hit. And the truth of the matter is that we know that the tax will be somehow divided between buyers and sellers.”
Properties worth more than $10M already provide significant revenue to the city, and these properties would see taxes go up by nearly a factor of four, according to the analysis.
Researchers also found that the additional revenue generated by the tax would have varied significantly on a year-by-year basis, from a low of $106M in 2020 to a high of $324M in 2016. One of the main reasons for this volatility is the narrow base of the new tax rate, as the vast majority of transactions are for properties worth less than $1M, all of which would see their taxes reduced.
Potential volatility of the revenue stream was on the minds of Chicago aldermen even before they voted to put the tax to voters earlier this week.
“If the real estate transfer tax is to be a less volatile stream of funding for homelessness, we have to work to support the recovery of our commercial industry,” 11th Ward Alderwoman Nicole Lee said at Tuesday’s city council meeting.
While commercial real estate stakeholders would bear the heaviest load of an increased tax, Berry said the industry could benefit if policies to combat homelessness are executed well.
“Whenever we see a tax, we have a tendency to just evaluate that tax in isolation, and clearly, an additional tax seen in isolation can only be bad,” Berry said. “But it is possible that this could work.
"What if Chicago actually takes this money and becomes a national model for fixing homelessness? That alone is going to increase the appeal of downtown real estate, of all real estate. That's going to increase people's desire to invest here and live here.”
