605 Davis Redux: Our Tax Code Sucks

Is a bird in the hand worth two in the bush?

I’m sorry but this is an incredibly dense post, which is part of the problem. It’s impossible to write about property taxes without falling down a rabbit hole and/or getting a CPA license.

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A few weeks ago, I wrote a story about 605 Davis, the hotly debated construction project in Downtown Evanston. I got a ton of feedback on the story. I was wrong about a few things.

In particular, my calculations of taxes are incomplete. The method I used calculated the taxes backwards - I took the total tax base, increased it over time, and charged a fixed tax rate on the property. I treated it like we are playing SimCity 2000. However, the tax levy calculations are much more complicated.

This was pretty much the advice I got too!

I would like to rant for a second: our property tax code here in Illinois, and especially Cook County, is a rat’s nest of statutes, exemptions, and edge cases. The addition of things like HB 2621 only makes it worse. I’m not convinced that there is a single person in Cook County who understands how the system works end-to-end.

Nationally, we are having conversations about trust in our institutions. Having tax calculations accessible only to a CPA or someone who can run the Assessor’s PTAXSIM software seems like a real problem!

It is entirely possible that after I hit publish here, I get an email informing me of an obscure Illinois statute that I’d never heard of that completely changes all of the information below.

So caveat emptor, but I’m doing my best.

How Taxes Work

In Cook County, you elect a County Assessor, his name is Fritz Kaegi. His office keeps a list of every property. They track of the “Fair Market Value” for properties and then apply some modifiers to come up with a EAV (Equalized Assessed Valuation). The EAV is not the value of your property, but it’s some percentage of it.

Every property has an EAV and if you add up all the EAVs, this is the “tax base.” For District 65, which includes Evanston and parts of Skokie, the total EAV is $4.8 billion. This is always a controversial process in Cook County. There was some great reporting during the Berrios years about how the Assessor was using Zillow.

At this point, you might say “Let’s just charge a 2% tax on all the EAVs and that is how we will fund the government” and you’d be about halfway there, but first you need to know how governments ask for money.

How Levies Work

Each November/December, all the taxing bodies have a meeting where they put together a budget. They can’t just make up a number, they have to follow rules that are governed by this thing called PTELL. They start with last year’s levy and then they can raise the budget only so much, up to an inflation indicator (CPI). The reason for this is two-fold;

• Taxing bodies should be able to ask for money at the rate of inflation, to match the inflation-pegged salary increases in their collective bargaining agreements¹;

• Taxing bodies should not be able to obtain a large tax increase without taxpayer approval (referendum). You can imagine District 65 would’ve gone nuts during the Horton years, if they could.

The resulting ask is called the levy. For 2025 for District 65, the CPI is 2.9% so you can do the simple math below (the true math is more complicated but hang with me)

2024 Total Levy = $136,517,321.52
CPI = 2.9%

PRIOR TAX LEVY * (1 + CPI INCREASE) = NEW TAX LEVY
$136,517,321.52 * 1.029 = $140,476,323.84

New Levy = $140,476,323.84

With these two things in hand, they can determine how much taxes you pay. They take the levy and divide by all EAVs. For 2025,

$140,476,323.84 / $4,834,239,338 = 0.02905862 = 2.905%

So then everyone in the town pays 2.905% and assuming the Treasurer bills on time, you get the money for the schools. This is extra confusing because the CPI of 2.9% is the same as the tax rate of 2.9%. It’s a confusing coincidence they are aligned this year. You can do the exact same math for ETHS and see their overall tax rate is lower:

ETHS 2024 Total Levy: $91,235,464
$91,235,464 * 1.029 = $93,881,292.45
$93,881,292.45 / $4,834,239,338 = 0.0194200754 = 1.942%

New Construction

Forget about affordable housing for a second - suppose you build a new high rise with an estimated $30 million EAV at 605 Davis. Initially, the tax levy does not change based on EAVs, so it would only impact the denominator: the total EAV would increase from $4.83 billion → $4.86 billlon. Then you can do the math:

Tax Levy: $140,476,323.84
EAV: $4,834,239,338 + $30m = $4,864,239,338

$140,476,323.84 / $4,864,239,338 = 0.0288794021 = 2.887% 
(previously 2.905%)

Congrats! You just lowered everyone’s taxes through economic development - the pot is now spread out among more people.

But the downside is the schools now have to educate more people, but have the same pot of money as before. So, the State allows taxing districts to increase their tax levy calculations to back out the EAV from the new construction. Here’s a slide that District 65 presented at Monday’s meeting.

So this changes the levy calculations from above:

2024 Total Levy = $136,517,321.52
CPI = 2.9%
EAV: $4,834,239,338
EAV + $30m: $4,864,239,338

Limiting Rate = $136,517,321.52 * 1.029 / ($4,864,239,338 - $30,000,000)
Limiting Rate = 0.02905862 = 2.905%

And we’re back at 2.905%, even though there was new construction. The EAV is larger, so they’ll get more money to account for the new students.

My point here is that this allows the District to essentially cook in new construction into the tax rate. So as long as the budget increases year-over-year, your taxes will never go down but the schools will receive funding for the new students.

605 Davis and HB 2621

Here is where things get messy and where I was wrong. In my original story, I wrote:

Someone has to pay for this tax abatement. You have two options:

• Keep everyone else’s taxes the same: They can leave all other taxes the same but the problem is in Illinois, your local school district gets 70-80% of its funding from local property taxes and they’d be shorted here. This means that the schools would subsidize the project.

• Raise everyone’s taxes: The County Assessor can simply take the discount here, add it to the tax levy and spread it out among all taxpayers.

Everyone I spoke with is actually a little unclear on this, but it seems like the consensus is that option #2 above is how it will work. All Evanston taxes will go up to subsidize this project’s tax discount.

This is incorrect. The answer is more complicated, so let’s walk through the math. This project will not, at least directly, raise everyone’s taxes. But it will put the taxing bodies in an awkward position of having to service new residents without immediate revenue.

According to the Assessor’s Office, when a property onboards with HB 2621 at the 20% affordable housing level, the EAV increases are phased in over time. The first three years of the program feature a 100% discount on the new EAV. In those three years, this new building is basically invisible to local government when computing the tax levy. It is not in the total EAV and it is not in the “New Construction” part they can back out. It’s just invisible, as if the land was never improved.

Then after year three, it starts to get phased into the tax base:

Years	Abatement (%)
1–3	100
4–6	80
7–9	60
10–12	40
13–30	20
31+	0

So according to this schedule, at year four, 20% of the EAV will be added to the total tax base. If the building’s EAV is $30 million, then $6 million will be added to the total EAV and at that point, the District will be able to add an increase to the tax levy to account for that.

How much will this cost the schools or the city over time? Your guess is as good as mine. To calculate this, you’d need to know:

• Over 30 years, what will the annual CPI increase be?

• In each of those 30 years, will the taxing bodies ask for the full CPI increase or will they ask for an increase less than the PTELL maximum (sometimes they do!)?

• What is the compounded loss of not being able to ask for this increase to the tax levy in full in year one?

• What does the annual increase in EAV City-wide look like? Is there other construction occurring? From 2015 → 2025 the total EAVs have doubled from: $2,435,187,621 → $4,834,239,338. Will this continue?

• How much additional sales tax will flow through to the state/county to the schools?

I could put together a table and throw a number out there, but the margin of error would be so high, I don’t feel comfortable doing it. This is the downside to having such opaque tax laws - you can’t actually reliably calculate the implications of a program like this.

Opportunity Cost Math

The only way you can really game this out is to compare against alternatives. Let’s imagine that a smaller building was constructed on this plot with an EAV of $15 million (instead of $30 million), and no affordable housing. Let’s use the 2025 District 65 math.

2024 Total Levy = $136,517,321.52
CPI = 2.9%
EAV: $4,834,239,338
Limiting Rate = $136,517,321.52 * 1.029 / ($4,834,239,338)
Limiting Rate = 0.02905862 = 2.905%
2025 Levy = 4,834,239,338 * 0.02905 = $140,434,652

EAV + $15m: $4,849,239,338
Limiting Rate = $136,517,321.52 * 1.029 / ($4,849,239,338 - $15,000,000)
Limiting Rate = 0.02905862 = 2.905%
2025 Levy = 4,849,239,338 * 0.02905 = $140,870,402


$140,870,402 - $140,434,652 = $435,750 additional levy

A smaller building with a $15 million dollar EAV nets an additional $435,750 to the schools in year one. But a larger building with affordable housing has an EAV of $30 million and by year 7 you will hit the 60% abatement mark. At that point, you’ll capture that same amount and then more over time, because the building is larger.

The HB 2621 supporters and developers argue that these larger buildings are only possible because of this tax break, I have no idea if that’s true. The numbers depend on undisclosed financial models and the goodwill of developers.

I will concede that this scheme is certainly better than an empty lot. But is it better than the alternatives? I have no idea. Consider the twenty year history:

• October 2005: Developer John Buck Co. proposes a 20-story, 210-foot luxury condominium tower with 63 units at 605 Davis Street.

• September 2007: City Council approved a zoning variance for a one-story commercial building at 605 Davis (the drive-thru Chase)

• January 2017: Vermilion Development (and partners) pitched a 33-story residential tower at 605 Davis Street, but the city denied the proposal in October 2017.

  

• June 2019: Chase Rejected any plans to develop the property without a drive thru ATM on premises.

• January 2020: Plan for an 18-story, 232-foot office tower at 605 Davis Street, but although approved by City Council, the project never materialized as the COVID-19 pandemic derailed office demand.

  

• May 2024: Chase tries to auction the lot but the Mayor and Vermilion writes a letter urging them not to.

• January 2025: Vermilion unveils the current plan we are talking about.

This is exhausting! We should’ve just built the 20-story condo building in 2005. I don’t want to even think about the lost tax revenue to the schools for not building then. This feels like the Harley-Clarke situation all over again - a bunch of starts, stops, changing priorities, city/staffer interference, failed plans, and eventually some kind of sub-optimal outcome that makes everyone mad.

Is it a Hustle?

In my first story, I declared that, “this is a hustle” - do I still believe that? I don’t know. Consider some of the pros and cons:

Cons:

• Lost revenue to the schools and the city. They have to service the tenants of this building and won’t get the ability to increase their levy accordingly for some time. The lost revenue in 2028-2030 due to the abatement is non-trivial.

• It’s unclear who the tenants will be. Will this house a bunch of rich Northwestern undergrads in the affordable housing or local families in need of affordable housing?

• Opaque financial models: Is Vermilion getting rich off this deal? Could they really just build this without the tax abatement and everyone would be happy?

Pros:

• Schools + City will eventually onboard property tax revenue: Over time, the building will be onboarded into the tax base, but it will take some time and it’s unclear what the lost revenue will be due to the delay. The supporters will tell you it’s a net positive because the project is larger than it would be without affordable housing. I don’t know if that’s true.

• Increased Density and Foot Traffic: Presumably this is why the Chamber of Commerce endorsed the project. I’m sure there is some benefit from the increased sales tax revenue, but that revenue doesn’t flow to local government in the same manner as property taxes.

• Affordable Housing: If you’re a big supporter of affordable housing and believe the system works well, this will provide a ton of units.

Finally, it’s like .. what’s the alternative? We spent 20+ years debating what to do with this lot and nothing has happened. Chase didn’t publicly auction the property and it’s not like the City has a series of other proposals on their desk. But at the same time, the City has prevented other proposals from appearing due to their favoritism for Vermilion. But Vermilion is also the one who happens to own part of the land. Do we really want to start this process all over again? And if so, how long is that going to take compared to the phased on-boarding of this project under HB 2621 if we start today?

On top of all this, HB 2621 is a state law. The City Council can play around with variances and other building code restrictions to modify the project, but ultimately this tax abatement scheme comes from Springfield. Maybe they can win this battle, but longer term, they’re going to have to navigate more projects like this.

So I don’t know. I’m exhausted.

At this point, it seems like the political calculus for City Council is to ask, is a bird in the hand worth two in the bush? In other words, they can say:

• Yes: Let’s do this, it’s the best we can do right now and there is enough uncertainty involved in the alternatives, that this is our best bet.

• No, its not: We can get alternatives that are better for everyone and move quickly.

Let me know what you think in the comments and if I screwed up any of the calculations or missed an obscure state law that renders this all moot, feel free to email me.

1. PTELL is not perfect. For instance, the CPI raise is capped at 5%, so if there are years with inflation greater than 5% (like 2022-23), they end up getting short changed.