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.


About Ron Tabaczynski

Director of Government Affairs at BOMA/Chicago
This entry was posted in Chicago CRE Industry, Chicago Infrastructure, Chicago News and tagged , , , , , , , , , , , . Bookmark the permalink.

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

  1. Dan Curran says:

    Great topic for discussion Ron. The reason the system is so severely unfunded is because of the payout to the participants. Everyone would enjoy a pension 70% of the highest five earning years but that is not something that can be sustained solely on taxes alone. The public employee all cry that the private employee receives Social Security in addition to their 401(k) which is true. What also is true is the 401(k) value can fluctuate with the market and that will affect the payout for the participant. Social Security provides back to the contributor a monthly Allowance that is based on the overall earnings of the individuals career. The states public employees all receives a pension based on their five highest earning years, again which is something that cannot be sustainable and that’s where the system is insolvent. The public employee contributes 9% of their salary to their pension fund while the employer or the state contributes another 9% for a payout that their union is calculated out to a 70% of your five highest earning years. Social Security requires the private employee contributes 6 3/4% employee contributes 6 3/4% for total contribution of 13.5% interest average return of 22% of your overall average earnings. As a union member my pension will be roughly 25% of my average earnings. Yes I have a 401(k) but again you cannot depended on it because it will fluctuate based on the market. Madigan and Cullerton have set the system up to fail and they’re going to try to blame the taxpayers for not funding their portion. In addition the union for the public employee did them no favor by artificially increasing the payout. What I would suggest is the entire system be audited, individuals that are not Vested in the system be removed and the employees entire career earnings be averaged and then 40% of that be returned as a pension. With that type of format the system then would be sustainable and solvent.

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