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Housing Bulletin—Transit Funding and the Real-Estate Market

Last week, months of wrangling in the state legislature over how to fund the metro area’s rail and bus lines resulted in a deal that included an increase on the tax on real-estate transfers in Chicago. That increase¬—$3.50 per $1,000 in value of the property sold—will all go to mass transit, presuming the Chicago City Council approves the tax. (The current tax—$7.50 per $1,000—does not fund mass transit.)

The reasoning behind the measure was that Chicago was paying less than its share for transit because its sales-tax receipts weren’t up to what the collar counties collected. Since the owners of city property—not just housing, but retail and commercial real estate—clearly benefit from…

Last week, months of wrangling in the state legislature over how to fund the metro area’s rail and bus lines resulted in a deal that included an increase on the tax on real-estate transfers in Chicago. That increase¬—$3.50 per $1,000 in value of the property sold—will all go to mass transit, presuming the Chicago City Council approves the tax. (The current tax—$7.50 per $1,000—does not fund mass transit.)

The reasoning behind the measure was that Chicago was paying less than its share for transit because its sales-tax receipts weren’t up to what the collar counties collected. Since the owners of city property—not just housing, but retail and commercial real estate—clearly benefit from the area’s transit system, the tax on real-estate sales made sense to its sponsor, Representative Julie Hamos (D-Evanston).

But in this faltering real-estate market, the tax won’t bring anything near the amount of money it might have a few years ago. In the city over the past 12 months, the number of sales of single-family homes dropped 31 percent from the year before, and condo sales were down 16 percent, according to data from the Multiple Listing Service of Northern Illinois.

That drop results in a steep decline in what the new transfer tax might contribute to mass-transit funding. Looking at both the average home sale price in the city and at the number of transactions, I found that if the transfer tax had been increased before 2006—the final boom year—the sales of houses and condos would have contributed approximately $29.3 million to mass transit. (When sales of commercial real estate, which average much higher prices, are included, the total for 2006 would have been $156 million, according to Brian Bernardoni, the governmental affairs director of the Chicago Association of Realtors.) On 2007 sales, residential sales’ tax receipts would have dropped to $23.4 million. That’s $6 million in tax money that would have been lost from one year to the next—and the number of sales could be even lower in the coming 12 months.

All this means that Chicago home sales won’t kick in quite the amount of money that they might have. “It’s a temporary problem in the [real-estate] market,” Hamos says. “The CTA might have to get some supplemental funding in the first few years,” while waiting for real-estate sales to perk up again. But Hamos notes that the legislation includes a provision for gradual implementation of the funding, so if it takes some years for the market to get back to where it was, that shouldn’t cripple the plan.

Nevertheless, Bernardoni’s mantra on this—“the wrong tax on the wrong people at the wrong time”—seems at least one-third right. The timing of this tax, coming as it does when the target of the tax has shrunk and may shrink more, makes it seem almost like a tax on buggy whips long after automobiles had hit the nation’s streets.

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