Chicago voters deal defeat to real estate transfer tax change

Chicago Mayor Brandon Johnson’s proposed real estate transfer tax change — also known as the mansion tax or Bring Chicago Home — was defeated in Tuesday’s election.

The city has said the revenue generated from the tax would go to fight homelessness in Chicago. About 53.6% of Chicago voters had rejected the measure by Wednesday, according to results posted by the Board of Elections. Plenty of mail-in ballots remain to be counted but the outcome isn’t expected to change.

The change would have restructured the real estate transfer tax, “a one-time tax on properties when they are sold, to create a substantial and legally dedicated revenue stream to provide permanent affordable housing for people experiencing homelessness,” the city said on a website promoting the referendum.

Johnson’s proposed restructuring would have lowered the tax rate on sales under $1 million to 0.6% from 0.75%. Sales of $1 million to $1.5 million would have had to pay 2%, about 2.5 times the current rate, and sales of $1.5 million and above would have had to pay 3%.

Some criticized the city’s proposal for its potential impact on the commercial real estate sector in Chicago. Real estate and development groups had filed suit seeking to keep the question off the ballot, The Chicago Sun-Times reported. 

“We don’t know why people voted the way they voted,” said Joe Ferguson, president of the Civic Federation of Chicago, a nonpartisan government research nonprofit. “But we do know from our perspective that there wasn’t enough there to reach a threshold of confidence and trust that this was absolutely needed, in the sense that all other options were explored… and that ranges from revenue to non-revenue levers, before we go to this.”

In a March 2024 position paper, the Civic Federation highlighted the lack of oversight and accountability measures, the chosen tax structure’s likely effect on commercial real estate and the potential volatility of the tax revenues.

“It will be impossible for the residents of Chicago to hold the city accountable for whether funds generated by the new tax have actually helped to improve the lives of people who are experiencing or at risk of homelessness,” the paper said.

There was no reliable analysis of how much money the change would actually bring in, Ferguson told The Bond Buyer. There was insufficient information about how much money was actually needed. And “there wasn’t a meaningful engagement” with “certain constituent quarters,” such as the commercial real estate and multifamily residential sectors.

“They tried to drive straight through it,” Ferguson said of the city’s response to pushback. “From what we’ve been told, there were endeavors by various of the associations and sectors that were opposed to this tax… to engage the administration in conversations about alternative measures. And our understanding is, that conversation never has really been engaged.”

Ferguson pointed to the case study of Los Angeles,
where a transfer tax change projected to bring in roughly $1 billion brought in about $150 million instead — “nowhere near enough to achieve the objectives they set out to achieve,” Ferguson said.

Homelessness, Ferguson said, is a humanitarian crisis that government should be trying to address. But “if something is important enough for government to do, then it’s equally important that the government endeavor to do it well, with full transparency. And that is where we’ve fallen short here. There’s an opportunity for a better accounting… [and] making a better case for why we need additional money going forward.”

The real estate transfer tax proposal’s apparent defeat brough a sigh of relief among groups that openly opposed the change. Bryce Hill, director of fiscal and economic research at Illinois Policy, a Chicago-based think tank with libertarian leanings, said the measure would have hurt the city’s real estate market.

“Chicago is already struggling with record-high commercial vacancies and the second-highest commercial property taxes in the nation,” he said. “This tax hike would’ve punished the few individuals and businesses moving into the city.”

Chicago also already has $44 million in unused federal funds that could go to fight homelessness, Hill added, plus $200 million budgeted for the current fiscal year. 

“Chicagoans saw through the cash grab,” Hill said. “Homelessness in Chicago is a significant problem… The most important things the city can do are find ways to attract new businesses and employers to the city and reduce the cost of housing development.”

The defeat of this measure is unlikely to affect Chicago’s credit rating or ability to take on new debt, said Ashlee Gabrysch, director and Midwest region manager for local government ratings at Fitch Ratings.

“It’s obviously a hit to the ability to execute and implement programs and expenditures for that policy priority, but it doesn’t really affect the rest of the corporate spending base,” she said. 

The constraints on the city’s ability to control migrant costs are a continuing issue, Gabrysch added, “and if they were able to use some of that money, that certainly would’ve been beneficial. There were some questions around whether that would have been possible. But it sort of gets to one of the fundamental weaknesses of the city of Chicago’s credit, and that is that they have a really constrained expenditure profile. You’ve got these pretty sticky labor costs; you’ve got high debt service and pension costs; there are very few aspects of the corporate spending budget that you can cut.” 

When push comes to shove, cities often “find things that they can live without, at least in the short term,” said Michael Rinaldi, Fitch senior director and head of local government ratings. But that’s “more challenging for Chicago than it might be for some other municipalities.” 

Fitch upgraded Chicago to BBB-plus from BBB last autumn, Rinaldi noted, and “an important factor in that upgrade was that we had observed over a period of time that the city’s liability burden, around debt and pension liabilities, was improving.” 

For its part, S&P Global Ratings recently lowered the outlook on Chicago’s general obligation bonds to stable from positive, citing budgetary pressures not counterbalanced by new revenue growth. In February, the rating agency released a report laying out the budgetary challenges facing Chicago due to the migrant crisis. 

The defeat of the real estate transfer tax measure is “a lost opportunity for revenue to support new programmatic spending, but is neutral to the existing budget,” said Scott Nees, director and lead analyst at S&P, pointing out that the Johnson administration had not planned to use the revenues to support operations or fund existing programs.

Fitch’s Gabrysch said that from a credit perspective, the city should be focusing on steps like making supplemental pension payments above the statutory requirements.

It should also be avoiding the scoop-and-toss practices “that patched the city together year to year, but that over the longer horizon, have added to their debt profile, increased the amount that they’re spending in debt service and in pension costs… and allowed for less discretionary spending and less room for additional policy priorities,” she said.

The defeat of the Bring Chicago Home proposal leaves the Johnson administration no worse off than it was before the election, the Civic Fed’s Ferguson said.

“We have the same amount of revenue generation potential that we had before we took this vote,” he said. “Worse off from the perspective of various crises becoming worse over time? That’s a little more complex.”