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Property tax burden in Cook county shifts back toward business

Monday, August 23, 2010
Crain's Chicago Business
by Steven R. Strahler

The real estate crash is shifting more of Cook County's tax burden to business property owners, reversing a long trend during the housing boom when homeowners picked up a bigger piece of the tab.

A study provided exclusively to Crain's by the Civic Federation shows that effective tax rates for commercial and industrial property in Chicago rose by 25% to 30% between 2006 and 2008 after falling by as much as 70% between 1999 and 2006. Rates for homeowners also increased during the 2006-08 period but by a much smaller amount—just 1% in Chicago.

The results could threaten business investment here by reigniting age-old complaints about Cook County's peculiar property tax system, which allows business property to be assessed at up to 2.5 times the level of residential.

“It will continue to have a negative impact on Cook County, particularly the commercial portion of the market,” warns Patrick Doody, a property tax lawyer in Chicago.

Effective tax rates illustrate the disparate share of property taxes shouldered by business in Cook County. In 2008, commercial property in Chicago was taxed at 2.35% of market value, industrial at 1.61% and residential at 1.31%.

In measuring the share of property market value paid in annual taxes, the effective tax rate doesn't reflect changes in the tax bill itself. It does show how taxing districts stack up against each other, providing a useful yardstick for business-location decisions.

A decade ago, Chicago had the highest effective tax rate for commercial property and the second-highest for industrial property among the 50 largest U.S. cities, according to data from the Minnesota Taxpayers Assn. Now, despite the recent uptick in effective tax rates, Chicago is ranked just above the average, the group says.

The rate is tied to property values—hence its long decline as values surged in the late 1990s and early 2000s, followed by a rebound as they started to fall at mid-decade.

But the change in effective tax rates was much more pronounced in Cook County than in the five collar counties covered by the Civic Federation survey. Residential owners over the last decade have been paying a steadily increasing portion of Cook County's $1.1-billion overall property tax bill: 57% in 2008, up from just over 40% in the mid-1990s.

The trend has been reinforced by a 50% decline in assessment levels of commercial and industrial property relative to sales prices since the late 1990s, when the ratio exceeded the 2.5-to-1 assessed value limit mandated by the Illinois Constitution. By 2005, the sales ratio had declined to about twice that of residential assessments.

“The pendulum had to swing back,” says Douglas Whitley, CEO of the Illinois Chamber of Commerce.

A spokesman for Cook County Assessor James Houlihan says, “Our ability to control effective tax rates is pretty limited.”

For the decade covered by the Civic Federation report, effective tax rates declined by 63% for industrial property in Chicago and by 49% for commercial, compared with a 13% drop for residential property.

“Tax levies have not grown as fast as underlying property values,” says Laurence Msall, president of the fiscal watchdog, citing tax caps as a restraint. Even where they are not invoked, “many communities have moved to a heavier reliance on other forms of tax revenue.”

But in economically depressed areas with limited alternatives and sagging property values, effective property tax rates have soared. The biggest increases among the 32 communities covered by the report were in Waukegan and Harvey.

© 2010 by Crain Communications Inc.

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