How To Address High Property Taxes? Look To The Past.

Jan 1, 2015

Charlie Wheeler
Credit WUIS/Illinois Issues

Property taxes are excessively high and oppressive and the legislature should do something about it.

Gov.-elect Bruce Rauner, explaining his call for a property tax freeze, whatever that means?

Lame duck Gov. Pat Quinn in his budget address last spring, urging lawmakers to send every homeowner a $500 refund check?

Good guess, but nope.

In fact, the source was Gov. John Reynolds, the state’s fourth chief executive, in an 1831 message to the legislature, then sitting in the state capitol at Vandalia. And the tax the governor was berating was not a local levy, but a state property tax, the main revenue source for Illinois from territorial days until the Great Depression, when the specter of general default resulted in a final levy for $18 million in 1932.

To shore up state finances back then, the General Assembly approved a graduated tax on net income, which Gov. Louis Emmerson signed into law on February 22, 1932. And contrary to what one might expect in today’s climate, Republicans held majorities in both chambers — 33-18 in the Senate and 81-72 in the House, and Emmerson, too, was a Republican.

The Illinois Supreme Court held that the graduated income tax was unconstitutional, though, so a year later a new Democratic-controlled General Assembly passed and Democratic Gov. Henry Horner approved what we now know as the state sales tax.

Property taxes continue as the main funding source for local governments, of course, and remain as unpopular today as they were more than 180 years ago, accounting for the interest paid by Rauner and Quinn.

The Democratic governor’s proposed refund scheme gained no traction in the spring legislative session, and with Quinn on his way out the door, is now a moot issue.

But if voters expect the new Republican governor to follow through on his campaign pledge of a property tax freeze, just what might it look like? Details would be forthcoming, Rauner promised during the campaign, but so far his most concrete proposal has been to suggest a blue-ribbon panel should study the issue.

A reasonable starting point would be a review of the basic nuts-and-bolts of the state’s property tax system, which produced almost $26.2 billion for some 6,000 local government bodies in 2013, the last year for which complete data is available from the Illinois Revenue Department.

Property taxes operate on a two-year cycle, so the bills property owners paid in 2013 were for taxes imposed in 2012.

In the first year of the cycle, local officials approve a budget and formally request how much in property taxes they’ll need to fund operations, then report the information to the county clerk. Meanwhile, local assessing officials are determining the fair market value of each piece of property located within the district, one-third of which becomes the basis for calculating a parcel’s value for tax purposes. (In Cook County property is assessed at different levels depending on its use, ranging from 10 percent of fair market value for residential parcels to 25 percent for commercial and industrial property.) Once assessments are finished and taxpayers’ challenges are resolved, the assessment books go to the county clerk.

In the second year, the clerk divides the amount each local unit levies by the total equalized assessed valuation of all property within its limits — its tax base. The resulting percentage is the tax rate, traditionally expressed in dollars per $100 of EAV. Because every square inch of Illinois lies within the boundaries of several distinct taxing bodies — think county, township, maybe city or village, school district, community college — the tax rates for all those districts are added, yielding an aggregate tax rate, which when multiplied by a particular parcel’s EAV yields the much-despised property tax bill.

So, back to Rauner’s proposition. What exactly would be frozen? Tax rates? State law already sets rate limits for most local taxing bodies; in fact, the revenue department’s comprehensive tax rate and levy manual is 64 pages long. As property values increase, though, taxing bodies can reap additional property taxes while remaining within the fixed rates.

Assessments? Homeowners, senior citizens, veterans and persons with disabilities already qualify for various exemptions and assessment freezes, which collectively lower tax bills for those folks, sometimes substantially. Farmland also is assessed largely on its agricultural productivity, rather than potential worth as a subdivision. But such breaks cause property taxes to go up for everyone else, to meet the taxing body’s levy.

Faced with those circumstances years ago, lawmakers and Gov. Jim Edgar enacted the so-called tax caps law, which in general limits the increase in property taxes a local unit can request in a subsequent year to the lesser of 5 percent or the inflation rate. But that’s a districtwide limit; individual bills can still rise dramatically with improvements like adding a room or a pool, which would boost a home’s market value.

Rather than freezing property taxes altogether — or tinkering with the system’s moving parts — perhaps a better approach would be to look at exactly where that $26-billion-plus went last year. The largest chunk — $15.9 billion, about 60 percent — paid for local elementary and high schools. General government like counties and municipalities collected $6.3 billion, roughly a quarter.

But more than 10 percent — almost $3 billion — went to more than 2,000 special districts, most created to do one thing, be it fighting mosquitoes, maintaining a cemetery, providing street lights or running an auditorium. Almost $600 million, for example, went to more than 800 fire protection districts. Some of them simply pass the money along to city fire departments, which do the actual firefighting.

Might it make sense to assign some of those specific duties to a multipurpose government like a county or a city and eliminate the special district? You’d still have to fund the basic services, but you’d get rid of the overhead of maintaining a separate government unit.

The elephant in the room, of course, is the state’s system of funding its schools. Local property taxes provide almost 57 percent of schools’ resources, while state appropriations — including pension contributions — account for only 33 percent, according to the Illinois Board of Education. The breakdown is well outside the national averages of roughly equal shares of 45 to 46 percent from state and local sources, with the remainder from federal funding.

So one logical conclusion might be that the best way to freeze property taxes would be to have the state pick up a much larger share of the tab for elementary and secondary education.

The concept is hardly new. In 1977, Edgar proposed — and House Speaker Michael Madigan shepherded through his chamber — the largest property tax relief bill in memory, a plan that would have rolled back $900 million in school property taxes. The catch was the legislation also increased state income tax rates to provide a dollar-for-dollar trade-off plus some $600 million in new money to property-poor school districts, which led the Republican-controlled Senate to bury the bill.

Now, Rauner has said he wants to increase school funding; he’s also on record as favoring a revamp of the state’s tax structure. Taking a fresh look at Edgar’s proposal would be a way to kill two birds with one stone.

Charles N. Wheeler III is the director of the Public Affairs Reporting Program at the University of Illinois Springfield.

Illinois Issues, January 2015