Winners and Losers In Chicago's Planned Tax Hike

7 Replies | Chicago, Illinois

While the recent major tax hike is far from certain, I am curious as what local investors think of the potential tax hike detailed in the linked article amount many others:

http://www.cnbc.com/2015/09/03/chicagos-tax-nightm...

Does it scare you out of the market?

What areas, investing types etc. are the winners and losers from this? 

From all I have read it seems like the poorer areas may be a beneficiary by comparison as politicians seem to be trying to shield those areas from bearing the consequences. Also, areas further outside of Chicago proper in Illinois which would have less exposure to Chicago pension problems. 

Any thoughts?

@Charles Worth

Growing up in the Chicago area, this was something that everyone seemed to be worried about all the time. My parents were constantly waiting for Chicago's Tax Day of Reckoning. 

I think comparing Chicago to Detroit, while geographically convenient, does not really tell the business story. Chicago has an extremely diverse economy. Most people would argue that Detroit's complete lack of economic diversity was a large factor in the city's decline. Chicago does not cease to exist in the business world, if for no other reason than the sunk cost fallacy for businesses there. Also, the fact that the cost of living is already good (when compared to other cities). No one likes taxes, but when your home is half to a third the cost of an SF or NYC equivalent, you still have some incentive to stick around.

I do agree that these tax hikes are more than likely to affect the high end of the market. The same groups that find privatization of city service unpalatable will fight for more affordable housing. The mobility of people renting affordable and lower-middle-class housing is also lower, so people will stick around for longer. Even if the projection is bad, I always expect more stability on that side of the market. You just may have to deal with the occasional Illinois-style (long) eviction or two.

Anything that hurts cash flow is almost always a negative in my opinion, but my general rule of thumb about the taxes argument is this: if you live in a high taxes area, and thus accustomed to high-ish taxes, you're acclimated to that type of environment and another tax hike may not scare you off. 

Ex) if you live in SanFran or NYC, you're accustomed to higher taxes. However, if you live in Atlanta, the idea of paying SanFran or NYC-ish taxes, it scares the bejesus out of you.

Obviously not an ironclad rule, but if you live in Chicago and own a dozen properties, are you really going to dump your entire portfolio and buy property in a lower property tax city/state? Maybe, but probably not. 

@Trevor Ewen

Don't know if I am in full agreement because Chicago is not NYC or SF. yes everything is true it is a vibrant economy and not limited to one thing like Detroit was but its not the power center NYC has always been nor what SF has become. 

So while the doomsday scenarios may be overplayed (I sure hope so for my own sake) it does not change the fact that there will be winners and losers. From what I understand there are still ways to access all you mentioned about Chicago at a little cheaper cost similar to how CT took a lot of people out of NYC. Also, certain areas if spared because of their profile (i.e. they are not the best areas) could become more attractive like has been seen in other areas.

@Account Closed

true but you may stop buying more or only buy at lower prices so the price will be lower. This is a separate argument but I really don't buy the who cares about price cash flow is what matters argument that people often use in the Midwest. No one wants to be stuck in a negative equity situation as evidenced by the posts I see on here sometimes from people trying to get out of their overpriced buys. 

Also, in many cases retail buyers set the appraisal pricing so that also matters.

In more flip areas, end buyers are retail so there it matters even more and there could be opportunities in areas that have favorable tax in comparison. 

@Charles Worth

I actually may have worded that wrong. I think that SF and NYC are not direct comparisons to Chicago in any regard (after all, I still live here despite the cost). 

I just think a lot of middle class workers, and even people in my field look at the relative cost of living, and Chicago is a competitive choice. There are fields where NYC and SF blow it out of the water. Others where it makes less of a difference to be in one or the other. 

As it pertains to investment properties, any tax hike will just have to be gradually passed on to tenants. Nothing ever goes DOWN. Just like utilities, insurance, your landscape guy, the garbage removal. It all goes up. And we as landlords generally have to pass on those increases or be prepared to settle for smaller margins. Why do landlords have rent increase ? Because we have to.

Tenants/Renters think they don't pay Property Tax. Of course they do !! 

Originally posted by @Ronan M. :

As it pertains to investment properties, any tax hike will just have to be gradually passed on to tenants. Nothing ever goes DOWN. Just like utilities, insurance, your landscape guy, the garbage removal. It all goes up. And we as landlords generally have to pass on those increases or be prepared to settle for smaller margins. Why do landlords have rent increase ? Because we have to.

Tenants/Renters think they don't pay Property Tax. Of course they do !! 

 Exactly.  The only losers are the tenants who will inevitably have their rents raised to compensate the landlord for the hike.