Chicago Fed economists recommend statewide property tax

Chicago Fed economists recommend statewide property tax  

Jack up property taxes for pensions, say 3 Fed economists

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By Dennis Rodkin

Photo by CoStar Group The Federal Reserve Bank of Chicago is at 230 S. LaSalle St.

Illinois homeowners, who already pay some of the nation's highest property taxes, should pay about 40 percent more for the next decade to wipe out the state's crippling pension debt, according to a trio of economists at the Federal Reserve Bank of Chicago.

The economists argue that paying off the state's $129.1 billion in unfunded pension obligations cannot be done with revenue from new taxes such as a tax on marijuana sales or on financial transactions.

"In our view, Illinois' best option is to impose a statewide residential property tax," they wrote, in part because it would be fair: "Illinois residents who have benefited most from the past services of governmental employees are more likely to be homeowners, so it seems reasonable that they should pay a larger share of the costs."

They are proposing a statewide tax of 1 percent of a home's value. Under their plan, the tax bill on a $500,000 house would go from about $11,600 to $16,600 under the Fed economists' plan, an increase of $5,000, paid each year for 10 years.

The economists—Thomas Haasl, Rick Mattoon and Thomas Walstrum—calculated that a property tax equal to 1 percent of a home's value could plug the state's pension gap in 10 years.

Illinois homeowners pay an average of 2.32 percent of their home value in property tax every year, which according to WalletHub is second only to New Jersey's 2.40 percent.

But rates vary widely in the state. The economists note that Lake Forest homeowners pay about 1.7 percent of their home's value in property taxes, while in nearby Waukegan they pay 4.4 percent.

The proposed increase would amount to a 43 percent increase​ on the average that Illinois homeowners pay.

"We already have people leaving the state over property taxes," said Mabel Guzman, an @properties agent in Chicago who said one pair of clients moved to northwest Indiana in 2017 in part because of lower taxes there, and another is making plans to sell a Chicago home and build one in Northwest Indiana.

"Taxpayers in Illinois are not going to be happy to see this," said Carol Portman, president of the Taxpayers Federation of Illinois. In particular, Illinoisans selling their homes "could expect to get a lower price than they were expecting," as buyers plug the higher monthly tax bill into what they can afford to spend on housing each month, and as a result trim something off the price they'll pay for a house.

The price adjustment would be small, but in Chicago's poorly recovering housing market, where many homeowners are underwater and others don't stand to make enough of a profit to fund a move up to a pricier house, the additional tax "is another nibble around the edges of a home's value," Portman said.

The economists deal with the issue in their paper and write that prices would go down "quickly."

"Current homeowners would not be happy about this, but it would be a good result for the Illinois economy," the paper says.

Two reasons: First, people who are considering moving to Illinois would find the higher taxes offset by increased home affordability thanks to lower prices. Second, "current homeowners would not be able to avoid the new tax by selling their homes" because prices would go down right away.

The authors also note that wealthier people would pay more under their plan, because they'd be paying based on higher home values. They suggest that legislators could determine whether to make it easier on lower-income homeowners by, for example, exempting the first $50,000 of home value from the tax.

Illinoisans are inevitably going to have to pay higher taxes to fix the pension problem, the economists write. In the paper, they ask: "Would you rather pay your higher taxes through a higher sales, income or property tax?"