Analysis: Blue state property tax ‘doom’ hits commercial real estate, then homeowners  

In high-tax blue states, the property tax burden is becoming so large that it acts as a reverse tax capitalization, pushing prices down, according to newly released real estate data.

The consequence: more of the tax burden gets shifted onto homeowners.

So far, no state has been hit harder by this effect than Illinois.

Today, a suburban Chicago office complex, Cantera Meadows, sits vacant with a starting bid of $1.5 million, Brian Costin, deputy state director of Americans for Prosperity-Illinois, noted.

The same property sold for $28.4 million in 2014, a 95% collapse in value. If assessments follow the sale price, annual property tax collections on the building would drop from roughly $650,000 to around $35,000.

But the missing $615,000 does not disappear from government budgets. It has to be paid by homeowners, Costin said.

It’s part of the “doom loop,” where rising taxes force commercial property values down, leaving homeowners to make up the difference.

Downtown Chicago tells the story at metropolitan scale.

A sampling of recent office building sales from real estate data firm Nightingale Associates, shared by Costin, shows the widespread decline.

Across 14 major downtown Chicago property sales tracked by Nightingale, losses range from at least 53% to as high as 94% of value.

“Downtown’s health is tied to our neighborhoods, and rising property taxes should warn against adding harmful policies,” Farzin Parang, executive director of the Building Owners and Managers Association of Chicago, told Axios.

Even county Democrats are growing alarmed.

The median Chicago homeowner’s property tax bill rose 16.7%, the largest percentage increase in at least 30 years, Cook County Treasurer Maria Pappas noted in a report released late last year.

Then in March, Pappas released a revised report showing a 189% increase in taxes imposed by K-12 school districts, far outstripping the 91% inflation rate over the same period.

Illinois law creates loopholes that allow taxing bodies to raise rates to match their revenue targets, no matter what happens to property values, Pappas said.

The result is runaway property taxes, even as property values fall.

In 2024, downtown commercial property tax bills dropped by more than $129 million as values declined.

“For tax year 2024, Chicago homeowners will pay $469.4 million more than they did the year before,” while Chicago Public Schools and other municipal governments asked for more money, the report said.

But Illinois isn’t the only state with this problem – just the most extreme example.

The highest effective real estate tax rates in the nation are concentrated in the Northeast and Midwest, led by Illinois, followed by New Jersey, Vermont, Connecticut and Ohio, according to ATTOM Data Solutions.

The fixes proposed by experts often seem out of step with political reality.

“If cities can find ways to keep spending in check while maintaining quality of life, this doesn’t have to spell doom,” Justin Fox, a Bloomberg Opinion contributor and former editorial director of the Harvard Review, said.

That may be too much to ask of certain blue states.

New Jersey and Connecticut run structurally similar levy systems to Illinois, where municipalities decide how much money they want and then set property taxes high enough to raise it.

Fairfax County in suburban Virginia is probably the closest to facing a doom loop similar to Illinois.

The county’s commercial property values based on rent fell from an assessed value of $18.03 billion in 2024 to about $16.74 billion, a 7.2% decline, according to county data cited by Virginia Business.

The county reports residential assessments are expected to rise 6.17%, while nonresidential assessments will fall 0.38%.

“Office values were down again,” the Fairfax budget summary said. “In terms of revenue projections, future revenue forecasts must account for this trend in the office market, which negatively impacts the County’s real estate base.”

Pappas, who blames Illinois’ “governor, state lawmakers and local government leaders” for failing to protect taxpayers, put it succinctly.

“When taxes go up by more than half-a-billion dollars and commercial values plummet, homeowners are left holding the bag,” she told Axios.

Critics say the system appears designed to protect tax revenues, and the politicians who keep demanding more, regardless of the cost to the people writing the checks.

“The thirst for property tax dollars comes as Illinois gives a lower percentage of money to schools than any other state and as it has cut the percentage of income taxes it shares with cities, villages and towns,” the treasurer’s report said.