The impending real estate dilemma in Chicago and San Francisco sparked by proposed ballot measures demands the undivided attention of the respective cities’ officials. With an unfortunate trend of rising real estate transfer taxes causing significant discomfort among stakeholders in both cities, it is high time for decision-makers to draw insights from the past and revisit their strategies.
For instance, in Chicago, Mayor Brandon Johnson’s current idea of increasing the city’s real estate title transfer tax is on the March referendum. This proposition seems to be influenced by San Francisco’s dispiriting past scenarios. Despite the good intentions, high transfer taxes can turn cities economically unattractive and become an impediment to housing development, as exemplified by San Francisco’s experiences over the years.
A prime example is the situation in San Francisco, which is presently overturning a related policy due to its reverberating effects on the city’s economy. Amid a record-high office vacancy rate of 36% and weekly office attendance just 42% as recorded, the city’s Mayor, London Breed, proposed a ballot measure to waive real estate transfer taxes for qualifying office-to-residential conversions.
San Francisco’s Proposition I, passed in 2020, doubled transfer taxes on real estate sales of $10 million or more, eventually leading to reduced real estate transactions and lower valuations. As a result, transfer tax revenue plummeted by 64% in the fiscal year 2023 as people exited the city, proving to be an unreliable revenue source. The proposal for Proposition C, to be voted on in March, aims to rectify the economic consequences of this tax increase.
Simultaneously, in Chicago, the city council has placed the ‘Bring Chicago Home’ measure on the March ballot. This referendum seeks to transition the city’s real estate transfer tax from a flat rate to a graduated one. It can potentially increase the transfer tax rate by 167% on sales between $1 million and $1.5 million and hike rates by 300% on sales exceeding $1.5 million.
Proponents argue that the additional tax proceeds, estimated at $100 million annually according to some reports, will fund permanent supportive affordable housing for the homeless. However, as San Francisco’s experience demonstrates, transfer taxes can destabilize funding for government programs over time.
Ultimately, high transfer taxes could discourage improvements and adaptations, decrease residential mobility, chill real estate markets, and disincentivize real estate owners, investors, and developers from building. Therefore, it is highly recommended for voters in both cities to make informed decisions, ideally reducing real estate transfer taxes to the bare minimum. Such a measure could open up more opportunities for housing development, especially larger multifamily projects.
The formulating and implementation of effective housing strategies count on striking the right balance between economic prosperity, urbanization, and housing accessibility. As such, authorities in both Chicago and San Francisco should take lessons from history to ensure their cities remain economically favorable and prosperous for residents and investors.
In the original article, economist Lawrence J. McQuillan of the Independent Institute further discusses these issues in detail. You can access the full report here.