May 24, 2024

(Bloomberg) — Chicago is bracing for more taxes after progressive Brandon Johnson’s surprising win this week.

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The mayor-elect’s proposed levies on corporations, financial securities and the rich would add pressure on the business community in the nation’s third-largest city that’s already grappling with rising crime, high-profile headquarter departures and fragile finances.

“He wants to put more of the burden on the business community,” said Richard Ciccarone, president-emeritus of Merritt Research Services, a muni research firm. “There’s some anxiety about the approach that he’ll use and solutions. You don’t want to start a negative spiral.”

The unexpected victory on Tuesday by the 47-year-old Cook County commissioner and former teacher over Paul Vallas, the ex-schools chief who had the business community’s support, comes as Chicago’s finances face growing strain. Its pension funds are short $34 billion, and the city is projecting a $474 million deficit next year as a recession looms.

“Whenever people hear the word taxes, everybody gets a little bit uptight,” said Twyla Blackmond Larnell, an associate professor of political science and a faculty affiliate at the Institute of Racial Justice in Loyola University Chicago.

She noted that the city’s small businesses and lower-income residents often carry a heavier burden, in proportion to their incomes, from property taxes and regressive levies on items such as gasoline and cigarettes, while large corporations get preferential treatment in a bid to lure jobs. “This is a hard dance,” she said. “You don’t want to increase corporate taxes too high — but we need them to pay their fair share.”

While incumbent Lori Lightfoot was also elected in 2019 on a reform-focused platform, the pandemic and the problems that it brought superseded her plans, Blackmond Larnell said. As Covid’s impact fades, she sees Johnson with a chance to succeed where Lightfoot fell short, citing his ability to attract a diverse group of voters.

“Crossing the threshold, I had a flood of emotions,” Johnson told reporters Thursday at City Hall after meeting with Lightfoot. He called the moment historic as the first openly gay black female mayor is transitioning the office to a black man.

“We are going to be not only united, we are going to be a strong city,” he said.

Johnson, who is backed by the powerful teachers union, surprised many when he beat Lightfoot in the first round, making her the first mayor of Chicago to lose a reelection bid since 1983. He appealed to the city’s progressive voter base and gained momentum by linking his Democrat opponent to the Republican party. He also benefited from higher turnout of younger voters compared to the first round of voting on Feb. 28.

During his campaign, Johnson proposed $800 million in new taxes, without raising property levies, to deal with the deficit and invest in residents and neighborhoods across the city, not just downtown.

He also favors a $4-per-employee tax on large companies that have at least half of their operations in Chicago and has floated taxes on airlines that pollute the city’s air. Additionally, his plan includes a $1 or $2 tax per securities-trading contract — a measure opposed by Chicago’s iconic exchange giants, CME Group Inc. and Cboe Global Markets Inc.

See also: Pro-tax progressive wins Chicago mayor race after long-shot bid

Johnson argues the city’s wealthiest residents and businesses need to contribute more in order to tackle the city’s deficits and address problems in education, transportation and health.

‘Considerable Harm’

A securities tax would “only cause considerable harm,” a Cboe spokesperson said Wednesday, adding that the exchange has no plans to leave Chicago. The company officially took Chicago out of its name in a 2017 rebranding.

Many traders have already relocated to states such as Colorado, Florida and Tennessee, and parking lots around the Chicago Board of Trade are rarely full, P.J. Quaid, a senior vice president at R.J. O’Brien, said in a telephone interview. The “edge,” or profit, on some trades is about 5 cents, Quaid said.

“So if you’re going to tell the last remaining people that they are going to pay a $1 a contract, the floor would close overnight,” Quaid said. “It’s just another piece of private industry that would be decimated by these tax policies.”

‘Job Killer’

Many of Johnson’s plans need the backing of the city council and in some cases, the state of Illinois. Some of his ideas have been floated in the past and didn’t materialize, or ended. Former Mayor Rahm Emanuel in 2011 called the head tax, phased out in 2014, a “job killer.”

The Chicagoland Chamber of Commerce said it wants to work with Johnson to find solutions for the city’s challenges, but opposes taxes on employee headcount, financial transactions and airlines. It’s also against his push for a higher real estate transfer tax, the chamber said in an emailed statement.

Reactions to Johnson’s victory weren’t uniformly negative among traders. Don Wilson, founder and chief executive officer of DRW Holdings LLC, which trades in futures, options and cryptocurrencies, said he plans to reach out to the incoming mayor.

“Campaigns are divisive and use broad brush strokes to define each candidate,” Wilson said in an email to Bloomberg. “Though I did not support Mayor-elect Jonhson’s candidacy, I was impressed on the multiple occasions he mentioned being open to hearing from and working with people across the city with opposing views. I plan to take him up on this offer.”

Economic Impact

The city shed its junk credit rating in November after paying more into pensions. Lightfoot’s administration increased its annual retirement fund contributions by $1 billion over the last three years.

“We’re hopeful mayor-elect Johnson will maintain fiscal discipline and continue on the path that earned the city several credit-rating upgrades last year,” Molly Shellhorn, senior research analyst for municipals at Nuveen, which holds Chicago debt, said in an emailed statement. “Investors will be looking for additional detail on the potential impacts of some of Johnson’s new tax proposals.”

–With assistance from Katherine Doherty.

(Adds Johnson’s comments in eighth and ninth paragraphs.)

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