www.dailywire.com
Tax Hikes Are Coming To Left-Leaning Cities
This piece is part of MI x DW, a collaboration that brings Daily Wire readers exclusive commentary and research from the Manhattan Institute’s world-class team of scholars. Today, Manhattan Institute Director of Research Judge Glock explains why a tidal wave of tax hikes are coming to blue cities, and warns lawmakers to prepare for the fight.
***
Chicago homeowners have long faced high property taxes, but even by the city’s standards recent tax increases are shocking.
According to a new report from the Cook County Treasurer, the median residential tax bill increased 17% last year, the largest increase in 30 years. In some poor areas of the city, homeowners’ taxes doubled, increasing by around $2,000. The Treasurer said the main reason for these hikes is a “dramatic” decline in commercial property values and taxes in Chicago’s downtown, the Loop.
Chicago is not alone. For decades, America’s central cities have relied on a cornucopia of tax dollars from downtown office buildings to subsidize generous services. But the work-from-home revolution devastated the downtown office market. While some have worried the office decline will cause an urban “doom loop” of ever-more stretched budgets, it appears cities are just shifting the tax burden onto homeowners. Cities should consider how much more their residents can take.
In the largest American cities, commercial property taxes constitute about a third of all property taxes, which overall remain the largest source of city revenue. In some places, like Boston, commercial property can bring in about half of all property taxes.
Unfortunately, commercial property tax assessments have been dropping fast, most especially for downtown office buildings. In Minneapolis, assessed commercial values are down nearly $1 billion since last year. The drop was driven by downtown offices, whose assessments are now 45% lower than before the pandemic. Washington, D.C.’s total commercial assessments, in which downtown offices are particularly prominent, dropped by $8 billion, or about 8%, last year.
City tax assessments are probably lagging the real decline in office values. Tax assessors tend to smooth values year-to-year to prevent sudden jumps or drops, but they are especially slow to adjust to drops in value. Sometimes assessors exclude “distressed” or foreclosure sales when trying to measure comparable properties. After the pandemic, these distressed sales have become far more common. In some places tax reassessments only occur every 3 years. As late as 2022, most cities’ assessors claimed that commercial property values were increasing.
Some argue that office vacancy rates don’t show such a bad situation for downtown offices, but vacancy is a lagging indicator too. Office vacancy, meaning available office space that is not leased, was 17% before the coronavirus pandemic and since then has only ticked up to 21%. But many technically leased offices are ghostly silent. The keycard company Kastle finds the proportion of workers actually in the office is about 55% the rate before the pandemic. When more leases come due, companies will shrink their footprint and vacancies will rise.
Market sales of downtown offices show clear evidence of distress. Some downtown buildings are selling for a tenth of their pre-pandemic level, while others sell for as little as a dollar. A recent American Economic Review paper estimated that the pandemic and the work-from-home trend destroyed more than $550 billion in office value just up to 2023. For perspective, the whole U.S. office market is only worth about $1.8 trillion.
Click here for more Manhattan Institute content.
Once assessed values, vacancies, and tax rates fully reflect changes in the office market, the effects on urban homeowners could be disastrous. Boston’s rates for a typical single-family home went up 13% this year, or $780, after a 10% increase the previous year. The Boston Policy Institute expects a $1.7 billion property tax shortfall that would likely shift to residents over five years. In Minneapolis, commercial property taxes have already dropped from 30% of taxes in 2023 to 25% this year, with homeowners bearing almost all the difference.
While property tax revolts are generally associated with red states and conservative voters, the coming tax hit to left-leaning cities could inspire its own revolt.
America saw a comparable urban tax revolt after a shift in the tax burden from commercial properties to homeowners in the 1960s and ‘70s. In those years, many states and cities began tax “modernization” campaigns, which tried to make tax assessments match the market value of different types of property. It turned out that homeowners had been getting breaks from their assessors. After modernization, their rates exploded, leading to a wave of tax resistance.
Most research indicates that cities’ budgets can survive a big drop in downtown property values. If cities engaged in a reasonable amount of spending restraint, they could come out of the work-from-home revolution in a stronger fiscal position than before. But it appears cities just want to shift ever more of the tax burden onto their residents. They should instead consider whether homeowners can survive that shift, and for how long they will put up with it.
Judge Glock is the director of research at the Manhattan Institute and the author of “The Dead Pledge: The Origins of the Mortgage Market and Federal Bailouts, 1913-1939.”