Here’s another in our occasional series, “Ask the Assessor,” in which Wednesday Journal asks Oak Park Township Assessor Ali ElSaffar to demystify taxes for the average property owner (and anyone else interested):
Why isn’t all the new construction in Oak Park reducing the tax burden?
There has been a significant amount of new construction in Oak Park in recent years, and one might think the revenue generated by the new buildings would offset some of the taxes paid by older properties. Unfortunately, the taxes for most homeowners have grown significantly, not withstanding all the new construction.
The primary reason for this phenomenon is that the revenue generated by new construction is small compared to Oak Park’s total tax levy of $144 million. The accompanying chart indicates that the large construction projects that have been completed since the year 2000 generated an impressive $4.1 million in revenue this year. But this new revenue represents less than 3 percent of Oak Park’s total tax levies.
The ability of new construction to reduce taxes for existing properties is further limited by state law. Most taxing districts can increase their levies by the rate of inflation. But because districts often incur new expenses when new properties are constructed, the state allows taxing districts to increase their levies by above-inflation amounts to collect new construction revenue. Oak Park’s taxing districts have made use of this law, which means they have spent much of the revenue generated by new construction. As a result, very little of the new revenue has been available for property tax relief.
When the above-inflation levy increases are coupled with the effect of recent tax-increase referenda, the limited role of new construction on tax bills becomes apparent. This year, the total tax levies are $49.8 million higher than they were in 2000. This year’s revenue from new construction projects completed since 2000 is a little more than $4 million. New construction has not reduced the tax burden because spending increases have outpaced new revenue by more than 10-1.
What would have to happen for a new construction project to reduce local taxes? Well, imagine that Oak Park replicated the Sears Tower and called it the “Hemingway Tower.” If the Hemingway Tower generated $31 million in revenue, which is what the Sears Tower generates, Oak Park residents could see tax reductions of as much as 23 percent.
The Hemingway Tower, of course, is a fanciful example. The reality is that Oak Park does not have the physical space, the political will, or the real estate market to support the type of mega-project that would generate enough tax revenue to significantly reduce property taxes.
This is not to say that the new construction of recent years has been unhelpful. Without the revenue from new construction, our schools and other local taxing districts would have less money and greater financial problems, and/or the tax burden on Oak Park property owners would be heavier than it currently is. But given the community’s physical constraints, its residential character, and its willingness to support tax increases for local schools and governments, new construction is not likely to significantly reduce the community’s tax burden.
Why didn’t the taxes on condominiums go up as much as the taxes on single-family homes?
The taxes on nearly 90 percent of owner-occupied condominiums fell as a result of the recent reassessment. By contrast, a significant majority of single-family homes experienced tax increases. For some homeowners, the tax increases were substantial.
The primary reason for the disparity in tax increases between homes and condominiums relates to a new law known as the “7 percent assessment cap,” which increased the value of the homeowner exemption in an effort to limit tax increases after a reassessment. Properties that received the full benefit of the 7 percent assessment cap, primarily condominiums and small houses, received small reductions in their tax bills. Most single-family homes received only a partial benefit from the new law, however, and experienced tax increases.
One way to illustrate why some properties received the full benefit of the 7 percent assessment cap while others received only a partial benefit is by analogy to a store coupon. Stores periodically offer coupons for 10 percent off all purchases. But these coupons often have an important limitation-the total savings due to the coupons cannot exceed $100.
If a customer using a coupon buys $1,000 in merchandise, a 10 percent reduction would result in savings of $100. But if the total purchase price rises above $1,000, the $100 coupon would be worth less than 10 percent of the amount purchased. For a customer buying $5,000 in merchandise, a $500 coupon would be necessary to obtain savings of 10 percent. But due to the coupon’s limitations, the coupon can be worth only $100, yielding a discount of just 2 percent.
The new, expanded homeowner exemption is similar to the coupon described above. If a property’s assessed value increases by more than 7 percent in the first year after a reassessment, the portion of the increase that is greater than 7 percent should be exempt. This means that the larger the increase in a property’s assessed value, the larger the exemption must be. But the new homeowner exemption law has an important limitation-the total amount of the homeowner exemption cannot exceed $20,000 in equalized assessed value.
Just as purchases totaling $1,000 or less get a full 10 percent savings in the coupon example, properties with relatively low values get the full benefit of the 7 percent assessment cap. This is because there is little likelihood that lower value properties will require an exemption of more than $20,000 to limit assessment increases to 7 percent.
High value properties, however, are akin to the purchases for more than $1,000. They receive a benefit from the expanded homeowner exemption, but they are likely to need an exemption of more than $20,000 to reach the goal of a 7 percent assessment increase. Since exemptions for more than $20,000 are not allowed under the law, the assessment increases of higher-value properties can be substantially more than 7 percent.
Since condominiums tend to be worth less than single-family homes, and since the assessed values of condominiums did not increase as fast as the values of single-family homes, most condominiums received the full benefit of the 7 percent assessment cap. By contrast, most single-family homes did not receive the full benefit of the 7 percent assessment cap because of the maximum $20,000 homeowner exemption. As a result, the tax burden on single-family homes increased by more than the burden on condominiums.
Tax Revenues
(Major projects completed since 2000)
OP Hospital Medical Office Building: $1,209,026
Madison Square (36 townhomes)*: $405,271
101 N. Euclid (34 condominiums): $386,671
106 S. Ridgeland (54 condominiums): $345,947
140 N. Euclid (31 unit condominiums): $223,511
Volvo dealership*: $172,382
255 South Boulevard (22 townhomes): $167,866
701 Lake (apartment/commercial building)*: $159,406
515 N. Harlem (20 condominiums): $148,420
641 S. Maple (14 townhomes): $144,483
1040 Susan Collins (27 condos/townhomes)*: $131,484
CVS Pharmacy (Roosevelt & Austin): $102,313
915-917 S. Oak Park (11 condominiums): $91,940
100 S. Elmwood (10 townhomes): $88,316
CVS Pharmacy (Madison & Ridgeland)*: $84,261
Belmont Village (senior citizen residences)*: $66,847
407 S. Oak Park (9 condominiums): $60,734
421 S. Ridgeland (7 condominiums): $59,636
Kentucky Fried Chicken (Madison & Ridgeland)*: $43,230
324 Wisconsin (4 condominiums): $40,171
Total: $4,131,914
* Denotes property is in a Tax Increment Finance (TIF) District