Tax Increases are Coming & Chicago’s Economic Viability Hangs in the Balance

By Ron Tabaczynski, BOMA/Chicago Director of Government Affairs

Chicago is facing a predicament whose resolution will surely impact office building owners. State law mandates that Chicago make a $590 million contribution to its police and fire pension funds in 2015. If the city funds that contribution entirely from real estate property taxes, a recent analysis done by Crain’s Chicago Business suggests that this could result in Chicago having the highest commercial property tax rate in the nation, not to mention additional spending cuts to city services.

For years, Chicago building owners and managers have borne a disproportionate share of the city’s real estate tax burden, a burden which does not compare favorably with other major markets. According to BOMA/Chicago’s 2012 Economic Impact Study, Chicago buildings had the third highest property tax rates in the country for 2011, exceeded only by New York City and Washington, DC. Moreover, real estate property taxes in Chicago accounted for nearly 76 percent of a large building’s total operating expenses, the highest percentage among the nine comparable markets.

Since 2007, BOMA/Chicago’s Tax Committee has monitored annual assessments and property tax rates of more than 190 of our building members as part of our Annual Property Tax Index. Most recent available data for 2012 (payable in 2013) shows that commercial buildings were hit with significant increases in assessed value and overall tax rates. While trying to gain traction in a challenging market, BOMA/Chicago buildings in the index paid more than $89 million more in property taxes than the previous year. The average BOMA/Chicago building saw an increase in its tax bill of nearly half a million dollars last year. Some saw much more.

While it is widely believed that property taxes fund meaningful city services and infrastructure, the reality is the entire property tax levy goes toward funding pensions and debt. If an additional $590 million in property taxes were imposed for 2014, none of that would be used to provide city services. Given the increasing costs of providing city services, it seems likely that additional taxes and fees would be created or increased to provide those services.

All combined, this creates a perfect tax storm that could cause a harmful trickledown effect directly harming our long-term economic viability. From a commercial perspective, high property tax rates directly impact our city’s ability to attract and retain businesses – the lifeblood of our local economy – as additional cost is passed through to tenants.

We’re already starting to see an exodus of businesses due to Illinois’ high taxes and unfriendly business climate. Local companies like Jimmy Johns, Office Max/Office Depot, CME Group and Sears have all threatened to leave Illinois given the state’s tax environment. Some of these companies have stayed only after accepting financial incentives from the city and state. Others are relocating to cities with friendlier business environments. With property taxes likely to increase again, our concern is other businesses will follow suit – taking jobs and revenue with them.

While we are still in the early months of 2014, there’s no getting around the fact that tax increases are coming. We implore the city and the state to find a fair solution to pension funding in 2015 without compromising Chicago’s long-term economic competitiveness.

What are your thoughts about the 2015 pension funding? Let’s start a discussion today. Leave your comments below.