Waiting to hear Chicago suburb advertising lower property tax rates

In recent years, multiple Chicago suburbs have advertised for businesses and residents to move there including Elk Grove Village, Bedford Park, New Lennox, and Lemont. Their pitch often includes mention of the suburb’s transportation advantages, amenities (ranging from water supply to community atmosphere), and available land.

Here is one local feature that is missing from these advertisements: lower property taxes compared to other suburbs or Chicago. This would be a competitive edge in a region where residents and businesses face relatively high property tax rates.

There have to be communities that actually do have lower property taxes. There are a number of suburbs that have higher concentrations of commercial and industrial businesses that provide a good tax base. Industrial parks and office parks provide space for businesses and offices. Many suburbs would want this: the companies help carry more of the local tax burden and this provides extra revenue for the community. In comparison, a bedroom suburb may have really high property taxes because it is primarily residents paying the property taxes and there are limited sales tax revenues.

If the advertisements for suburbs are primarily aimed at businesses and not residents, then perhaps the property tax arguments make less sense. At the same time, a strong existing business base could be very appealing for other firms. Some proof that other businesses have thrived in a suburb plus some opportunities for local synergy in addition to lower taxes could all be very appealing.

In the super competitive race between the Chicago suburbs and the city plus competition from other nearby states like Indiana and Wisconsin (let alone Texas and Florida) for businesses and residents, I am surprised to not hear a property tax appeal. Perhaps this simply means that few Chicago area communities could offer any real advantages in this area. Or, maybe there is some reluctance to tout lower property tax rates. Yet, as suburbs compete, I would expect that their mass appeals will continue to evolve.

Township argument: don’t disband us because we only take a little of your money

Continuing with local governments making interesting appeals to suburbanites, I received a newsletter from our township earlier this week. Illinois and DuPage County have had discussions about limiting taxing bodies and dissolving townships because of the state’s large number of taxing bodies. In response, the township put this graphic on the first page of the newsletter:

TownshipGraphic

While other parts of the newsletter described what the township does and how residents benefit, this graphic makes one argument: the township does not really ask for much so leave us alone.

In relative terms, this is a good argument: townships ask for the least amount of money. Even the Forest Preserve, a rather large one, asks for more money. On the other hand, given property values in the township, even 1.69% can add up to some decent money over the years. Plus, how does the money for townships compare to what residents get from the other taxing bodies?

On the whole, the quick appeal to property taxes hints at how suburbanites think: they do not want to pay more in taxes and want to be able to see how the money is being spent. I’m guessing relatively few DuPage County residents could detail what the townships do (compared to other taxing bodies) or connect the township activities to their property values.

Rallying cry: support higher property taxes for schools to have higher property values

I saw a yard sign that made this argument about a proposed tax rate increase for a nearby school district: voting yes to the increase means you are protecting your property values.

This is a circular argument fit for the suburbs. Property values are partly dependent on the perceived status of a community. Generally, higher status suburbs have better performing schools. Thus, paying more in taxes means the property values are likely to increase. For the average suburbanite, this means they should expect a bigger payoff in the end when they sell their home. In other words, vote to hand over some money starting now to guarantee a bigger amount of money later.

There are other reasons a school district and its supporters could give in order to support a tax increase. Provide a better education for the children of the district. Support the important work of teachers. Invest in the community’s future.

But, given the difficulty of asking many suburbanites for higher property taxes, perhaps these abstract notions do not work. Many districts work hard to develop support for a referendum way before it comes to a vote. In this case:

The Board’s vote comes after months of community-engagement work. In January 2018, CCSD 89 Superintendent Dr. Emily K. Tammaru convened a Superintendent’s Finance Committee to examine the district’s financial status and priorities. The committee looked at the nearly $3 million in cuts the district has made since 2009, and examined how rising enrollment and increasing costs have affected the district’s budget.

The members of the Finance Committee eventually recommended two options to the Board of Education:

  • Option A: Increase revenues in order to maintain comprehensive, high-quality educational programming. Increasing revenues would allow the district to avoid cuts to programs that directly impact students.
  • Option B: Reduce programs and increase fees. The district would need to make about $1.2 million in cuts during the 2019-20 school year. These cuts could include reductions of: gifted services, band and orchestra, social work services, library staff, and full-day kindergarten. The cuts could also result in larger class sizes. The cuts could be more significant in subsequent years.

The district then hosted three community meetings to share financial data and gather feedback. Community members who attended those meetings said they valued fiscal responsibility, but did not want cuts that would affect programming and potentially property values.

At the community meetings, 84.7 percent of the people in attendance said they supported increasing the tax rate rather than cutting programs to balance the budget. When the district conducted phone surveys this summer of all residents (parents and non parents), 56.9 percent of residents said they would support a 40-cent referendum.

Even with this supposed support (note the drop-off in support in those who attended the meetings versus those who answered the phone survey; plus, who answered their phone?), the bottom line appeal here is money. Some parts of the district will pay more than others – the referendum page uses a $300,000 value as a baseline while Glen Ellyn has a median housing value of just over $400,000 and Lombard has a median value of $240,000 – but the money will come eventually. Pay us now so you can gain later.

If suburbanites value property values above all, perhaps this is the only way to build support for local tax increases.

“[T]he federal government has backed away from subsidizing homeownership as a pathway to the “American Dream.”

The recent changes to the American tax code signal a shift toward homeownership:

It may be a few years before experts can accurately assess how the new tax reform law will affect each city’s individual housing market, but one thing is clear: For the first time in a century, the federal government has backed away from subsidizing homeownership as a pathway to the “American Dream.”…

“It’s very hard to come up with how this is helpful to housing,” said Jonathan Miller, President and CEO of Miller Samuel Inc., a real estate appraisal and consulting firm “It’s either neutral or negative; there’s no positive, at least that we’re aware of at the moment. All this does is make everything more expensive, at least in high-cost housing markets.”

As a result of the bill, Moody’s Analytics estimates that housing prices will drop about 4 percent nationwide relative to projections in which the law doesn’t exist, and those drops are more pronounced in high-cost housing markets.

A lower sale price is good news, though, right? Not necessarily. Average home prices will drop because of the lowered cap on the MID (from $1 million to $750,000), and a new cap on SALT deductions. These two tax deductions were baked into the price of homes-for-sale, so without them, prices will seem lower. But homeowners and buyers could end up with less mortgage interest to deduct, and a potentially astronomical property tax bill. Previously, there was no cap at all on property tax deductions.

Several things to keep in mind:

  1. The context – the specific address of the residence – matters a lot for this bill. And, local communities and states can respond uniquely to how the changes affect local homeowners.
  2. A lot of urbanists have criticized the subsidies from the federal government for single-family homes and suburbanization. Might these tax code changes help encourage more density in certain locales (and these high-price/high-tax locations are also ones where affordable housing is sorely needed)? Of course, since context matters here, some of those who prefer more sprawl could move to cheaper states where the disappearing SALT deductions matter less. But, isn’t this good for limiting Americans deducting mortgage interest?
  3. Could this help some communities move away from such reliance on property taxes? As one example, some have argued for decades that school funding needs to be more equitable and this is directly tied to property values and taxes: wealthier communities can draw in more tax revenue. (I would argue this is a red herring to as there are bigger issues at work.) Could these federal tax changes encourage more revenue sharing within counties, regions, and states?

Perhaps the best thing to keep in mind is the first sentence of the article quoted above: it could take years to see how this all plays out.

Could the loss of SALT deductions lead to cheaper and denser housing?

Perhaps a solution to the affordable housing issue affecting many major American cities and their surrounding regions is in the contentious current tax cut debates: removing the SALT (state and local taxes) deductions. The consistent commentary on this is that it will hurt residents and homeowners in blue states where local property taxes and sales taxes tend to be higher. But, could this drive people, developers and builders, and local officials toward cheaper and denser housing?

The reasoning could work like this: larger homes and lots mean more taxes that cannot be deducted from federal taxes. To avoid this, people might prefer smaller and cheaper houses. Communities could balance out the reduction in property tax value per housing unit by building more units. (This leads to another issue many communities do not want to face: providing more services for more residents, particularly schools.) Or, communities could pursue other kinds of development that could pay those higher property taxes – businesses, for example – or pursue creative solutions (merging public services? revenue sharing?) to address funding issues.

Could this help break the affordable housing logjam in places like New Jersey or the Bay Area? Wealthier neighborhoods and suburbs would still resist.

(Perhaps this should be part of a series of creative ways to address affordable housing issues. It reminds me of an earlier post where I suggested the lack of affordable housing could lead to population growth in less desirable locations.)

Losing sales and property tax revenue as stores close

The difficulties facing retail stores also have an effect on local governments who rely on sales tax and property tax revenue:

Nationwide, sales taxes comprise nearly one-third of the taxes that state governments collect and about 12 percent of what local governments collect, according to Lucy Dadayan, a senior researcher at the Nelson A. Rockefeller Institute of Government, a New York-based research group. “The epic closures of the brick-and-mortar stores is troubling news for state and local government sales-tax collections,” she said. They’re already feeling the hit: States’ tax revenues grew just 1.9 percent between 2014 and 2015, after growing 5.8 percent in the previous four quarters, according to the Rockefeller Institute. Local-government sales-tax collections grew just 1.7 percent, after growing 7.5 percent in the previous four quarters. In Ohio, state tax revenues grew just 0.1 percent, when adjusted for inflation, between 2015 and 2016, according to Dadayan. When revenues don’t continue to grow, governments have to slow down spending and can’t readily invest in long-term projects…

Clark County is not alone. In the southeastern part of Ohio, near the border with West Virginia, Belmont County gets $17 million of its $22 million budget from sales-tax revenues, Mark Thomas, a county supervisor, told me. The county has lost a bevy of retailers of late, including Elder-Beerman, Hhgregg, MC Sports, and Radio Shack. A Kmart in St. Clairsville is expected to close soon, according to the company. The decline in sales tax isn’t the only thing that hurts revenues—abandoned malls mean less revenue from commercial property taxes too. Local governments also see lower income taxes and, when retail workers are unemployed, they spend less, creating a vicious cycle of less and less revenue. “That trickle-down effect is huge,” Thomas said…

States that have seen manufacturing companies depart are bearing much of the brunt of the retail closures, according to Dadayan’s research. She tabulated where Macys, Kmart, and Sears have announced in the past year that they are planning to close stores, and found that Pennsylvania will have the most of those total store closings, at 16. Ohio and Michigan have the second-highest number, at 15 each, alongside Florida. Other states that have bigger populations have much lower combined closings. California, for example, only has eight.

The closures raise the question of what state and local governments will do if retail continues to evaporate. Already, many local governments are attempting to raise taxes to make up for budget shortfalls. Springfield asked voters to approve an income tax in November; the measure failed. The sales-tax rate at both the local and state levels has been creeping up in Ohio as governments try to raise taxes to make up for declines, according to Jon Honeck, the acting director of the Greater Ohio Policy Center, a local think tank. Ohio has also cut back on revenue-sharing between states and local governments since the election of Governor John Kasich in 2010, making it more difficult for local governments to make ends meet. “Some have just cut services, since the state is not going to help them out,” Honeck said.

Two quick thoughts:

  1. Communities have competed for decades over shopping malls and retail establishments. This competition could only increase though it may be less about the opening of new stories (everyone wants replacements for old establishments – for example, see the fate of Dominick’s grocery stores in the Chicago region) and more about retaining existing stores and asking companies to close stores elsewhere.
  2. It is interesting to see which areas are experiencing closures. Not all malls or stores are doing poorly but the successful ones are likely in wealthier areas that will do even better comparatively with the ongoing tax revenues. It is very difficult to convince businesses to locate in communities with less income.

Four suburb annexation plans thrown out by a judge

Efforts to combine Warrenville, Woodridge, and Lisle with Naperville were derailed by a judge earlier this week:

Judge Paul M. Fullerton granted motions to dismiss the question filed by mayors of the three smaller communities, who oppose the idea of annexing their towns into their larger neighbor…

The question will not come before Warrenville and Woodridge voters because the idea’s originators — who have not come forward publicly — failed to gather enough signatures.

In Warrenville, 177 signatures are required to meet the threshold of 10 percent of the voters in the previous municipal election, but only 81 signatures were filed. In Woodridge, 235 signatures are necessary for ballot placement and 50 were filed…

The petitioners’ attorney Avila did not immediately return a call or email seeking comment. Avila previously said petitioners brought forward the idea as a way to decrease property taxes in Lisle, Warrenville and Woodridge, but mayors say there is no proof such a merger would have resulted in lower taxes.

An odd affair all around: not enough signatures, no public campaign to support the effort, the mayors of all four suburbs denounced the annexations, and the reason for the proposed changes has not been clearly explained.

Still, the idea raises interesting questions. In an era of tight budgets, it is worth it in American metropolitan regions to maintain separate communities and taxing bodies? Would there be advantages in some merging? In denouncing the idea of annexations, the mayors of these suburbs said it is not clear how the cost savings might happen (property taxes around here primarily support schools so merging municipal boundaries may have very little effect) and that residents of each community like their distinct characters. But, if voters were told that merging would reduce their tax burden at least $500 or $1,000 a year (particularly given the property tax burdens in Illinois), would that overcome an interest in local control and character?