Rauner’s Proposed Property Tax Freeze: The Devil’s in the Details

In last week’s State of the State address, Governor Bruce Rauner offered up a bold agenda to turn the state around while focusing on efforts to make Illinois competitive again. Some of his key points included increasing education funding, raising the minimum wage, reforming workers’ compensation and unemployment insurance, “modernizing” the sales tax, hiring more prison guards – and providing property tax relief.

Here at BOMA/Chicago, you can bet our ears perked up when Governor Rauner declared that the property tax burden is one of the biggest impediments to growth and proposed to freeze them for two years.

As our building owners and managers know only too well, property tax is one of the largest and least controllable expenses for commercial office buildings and continues to be an oppressive burden for commercial real estate in the City of Chicago. Our buildings pay some of the highest property taxes in the nation, with only marginal exceptions in New York City and Washington, D.C. According to our most recent Economic Impact Study, property taxes account for as much as 75% of a building’s operating expenses and consume as much as 25% of a building’s gross revenue.

More importantly, despite Chicago being a market where high commercial office rental rates are not the norm, property taxes consume a disproportionate share of gross operating expenses. Two leading sources of tax trends in U.S. markets maintain that Chicago has either the highest or second highest ratio of property taxes to operating expenses.

But let’s not celebrate a property tax freeze too soon. The harsh reality is that our state’s financial condition is deplorable with a Fiscal Year 2016 budget deficit around $9 billion, projected first year revenue loss from the temporary income tax hike rollback at $3.9 billion, and measures to shore up state employee pension plans reliant on a ruling by the Illinois Supreme Court. Not to mention the additional funds necessary to invest in education and hire more prison guards as called for by the Governor.

We also want to be careful that we’re not robbing Peter to pay Paul by exchanging a property tax freeze for a “modernized” sales tax – which more than likely means extending sales tax to services – or any other taxes or fees that could be just as burdensome on the commercial real estate industry as a property tax hike.

The Governor will deliver his Budget address on February 18, and we look forward to hearing more details about how he will implement a property tax freeze given the state’s current fiscal condition and we will continue to monitor this important issue for our members.