By CHARLES L. MINERT
Illinois tax revolt—the 8% solution
Totten calls for limits on state revenues and property tax rates
WITH the overwhelming approval of the Thompson Proposition, it is evident Illinois citizens want some kind of ceiling imposed on taxes and governmental spending. The 81st Illinois General Assembly now faces the task of translating this mandate into workable legislation. A focal point for tax limitation and spending discussion will be the Taxpayers' Rights Amendment, a proposed constitutional amendment drafted by the Illinois Tax Limitation Committee. It would place a ceiling on state revenues and set a limit on the property tax levies of non-home rule units and school districts. The tax revolt movement burst into prominence in the country with the passage of Proposition 13 in California on June 6. One question is whether Illinois would accept or need the very restrictive measures of Proposition 13. As summarized by Jerome Evans in his article, "Proposition 13: The Morning After" (State Government, Spring 1978), the four main provisions of Proposition 13 are: 1. A limitation on property taxes of 1 per cent of full value. This results in a reduction in existing rates from an average of $10.68 to $4 per $100 of assessed valuation (property being assessed at 25 per cent of fair market value in California). 2. A rollback of assessed values to their 1975-76 levels and a limit on annual increases to 2 per cent, except in the case of new construction or property that changes hands, in which case the property may be assessed according to fair market value. 3. The requirement of a two-thirds vote of both houses of the legislature, rather than a simple majority, to increase state taxes. 4. The requirement of approval of two-thirds of the voters in each local jurisdiction for the imposition or increase of local taxes other than property taxes in that jurisdiction. The provision with the greatest initial effect was, of course, the provision cutting local property taxes to 1 per cent of full value. Factors in California Several factors led to the success of Proposition 13, the first and most important being the impact of inflation on residential property values in California. It is not uncommon to find that the market value of a California home has tripled in eight years. For example, a house purchased in 1970 for $32,000 is now worth $96,000. Assuming that in 1970 it was assessed at 25 per cent of its market value or $8,000, its assessed value in 1978 is $24,000. If the 1970 tax rate was $7.00 per $100 or assessed value, the tax bill was $560. Assuming a modest increase in the property tax rate of $7.00 in 1970 to $9.00 in 1978, the current tax bill would be $2,160. The second factor was the size of the surplus in the California treasury and the failure of the legislature to pass property tax relief legislation. In June 1978, it was estimated that the surplus was between $5 and $6 billion. Because California's economy has been booming in recent years, its tax collections — especially from the 6 per cent sales tax and the steeply graduated income tax — have produced revenues far in excess of the state's financial requirements. Unlike California, Illinois has a very small treasury surplus. At the close of the 1978 fiscal year the surplus was approximately $86 million. This is about 5.8 per cent of the $1.475 billion revenue loss local governments would have sustained if a 1 per cent property tax limitation had been in effect in Illinois in 1976. The third factor was the mailing of revised property assessment notices immediately prior to the June 6 election. In the last two years assessed valuations
CHARLES L. MINERT 10/December 1978/Illinois Issues in California have increased by as much as 13 and 14 per cent. With higher prooperty taxes an immediate possibility, Californians seized upon Proposition 13 as a way to prevent the impending tax hike. California property taxes have been among the highest in the nation, according to data from the U.S. Bureau of the Census. In 1975-76 the average nationwide per capita property tax collection was $265.54. The California per capita collection of $415.23 was exceeded only by Alaska ($1,048.46), Massachusetts ($430.52) and New Jersey ($446.48). In Illinois the per capita amount was $283.95, $18.41 above the national average. California property taxes have been high also in terms of personal income levels. In 1975-76, property taxes nationally averaged $45.33 per $1,000 of personal income, but in California property tax collections totaled $64.13 per $1,000 of personal income. The California total was exceeded by Alaska ($120.45), Massachusetts ($70.31), Montana ($65.06), New Hampshire ($66.80) and New Jersey ($66.60). In Illinois property taxes totaled $42.14 per $1,000 of personal income, $3.19 below the national average. Tax limit in Illinois Since the passage of Proposition 13 here has been some speculation about imposing a similar 1 per cent property tax limit in Illinois. What would a 1 per cent limitation mean in Illinois? Data from the Department of Local Government Affairs indicate that the full market value of all taxable Illinois real estate was about $181.7 billion in 1976. It should be noted that the 1 per cent limitation would be applied against the market value of all taxable real estate and not the equalized value, which generally, in Illinois, is two-thirds lower. One per cent of this $181.7 billion tax base is $1.817 billion. In 1976 the total property tax levied by all local governments came to approximately $3.3 billion on tax bills sent to property owners. Thus, a 1 per cent property tax limitation would reduce Illinois property tax revenues by about 45 per cent. In California, it is estimated there will be a 57 per cent reduction in property tax revenues. One estimate of the effect of a 1 per cent tax limit in Illinois shows a tax loss of $1.475 billion, using 1976 figures. If the loss is spread among all types of governments which receive property tax revenues, the results would be particularly catastrophic for municipalities and school districts (see table). In the turbulent wake of Proposition 13, the newly elected 81st General Assembly will be confronted with many tax cutting proposals. One of the most prominent will be the Taxpayers' Rights Amendment proposed by the Illinois Tax Limitation Committee. The committee, headed by Rep. Donald Totten (R., Hoffman Estates), listed 80 members of the current 80th General Assembly as supporters of the amendment — 66 Republicans and 14 Democrats. In broad terms the proposed Taxpayers' Rights Amendment would do two things. First, it would set a limit on the amount of revenue the state of Illinois can take in during the fiscal year and second, it would limit the amount of property taxes which can be levied by non-home rule units and school districts. Under the proposed amendment, home rule units could decide by referendum if they wished to be included in the local government revenue limitation. The committee anticipates that the proposed amendment would be voted on in the 1980 general election and if approved, would become effective July 1, 1981.
Taxpayers' Rights proposal Because this property tax proposal is the most developed of all the plans and packages which have surfaced during the last five months and because it has broad support among legislators, it may be the focus of the General Assembly's inevitable tax cut proposal. Section 1 of the proposed amendment provides that during any fiscal year the state's actual revenues from sources other than federal aid and trust accounts "shall not exceed 8 per cent of the aggregate personal income in Illinois of the calendar year in the next-to-the-last full calendar year preceding the fiscal year." This means that if the amendment were passed, the state's revenue limit for the 1982 fiscal year (which begins in July 1981) could not exceed 8 per cent of the total personal income received in Illinois during calendar year 1979. ("Personal income in Illinois" is defined in the proposed amendment as the total income received by persons in Illinois as officially reported by the U.S. Department of Commerce.) According to the committee's estimates, the state's total personal income in 1979 will amount to about $113.194 billion; therefore, the revenue limit for fiscal 1982 would be about $9.056 billion. Excluded from the proposed limitation are: 1) revenues from the federal government, 2) revenues received by the state's revolving funds and 3) contributions to and earnings from trust funds in the custody of the state treasurer. Section 2 provides that if the state's actual revenues exceed the 8 per cent limit by 2 per cent or less, the excess will be deposited in a Budget Stabilization Fund. Expenditures from this fund are to be reserved for emergency purposes only. This section also outlines measures to be taken in case of a fiscal emergency. Under the amendment, an emergency situation could be declared only upon completion of the following procedure: 1) the governor must request the General Assembly to declare an emergency; 2) the request must state the nature of the emergency and the dollar December/1978/Illinois Issues/11 amount necessary to alleviate it; and 3) the General Assembly must declare the existence of the emergency by a three-fifths vote of the members elected to each house. If this procedure is followed and the funds in the Budget Stabilization Fund are still not sufficient to allay the emergency, the General Assembly may approve state tax increases which would produce revenues in excess of the 8 per cent limit. These increases must be approved by a two-thirds vote and are effective for only one year. Section 3 of the proposed amendment provides that if the state's total revenues in any fiscal year exceed the 8 per cent revenue limit by more than 2 per cent, or if there are excess funds in the Budget Stabilization Fund, the General Assembly must use these funds to reduce the unfunded accrued liabilities of the state's pension systems, to retire the state's general obligation bond debt or to reduce or rebate state taxes. To illustrate the potential benefits of the proposed amendment, the committee has provided some forecasts of the financial ramifications of sections 2 and 3. The committee projects that if personal income in Illinois is $113.194 billion in calendar year 1979, the 8 per cent limit would provide state revenues of $9.056 billion in fiscal year 1982. However, it is estimated that the actual total state revenues for fiscal 1982 will be about $9.386 billion. This would leave a surplus of $330 million. About $181 million of this amount (2 per cent of the $9.056 billion in allowable state revenues for fiscal year 1982) would be placed in the Budget Stabilization Fund. There would be $148.9 million available for the General Assembly to redistribute as it chooses in the three areas: the state's pension systems, the state's general obligation bond retirement, and/or tax relief. Limits on local taxes Limitations on the amount of taxes non-home rule units and school districts can impose without referendum approval are provided for in the proposed amendment's fourth section. Excluding the value of new construction, improvements and annexation, non-home rule units and school districts are prohibited from increasing taxes levied on real property by more than 3 per cent over the previous year's collections. For example, a residence with a taxable value of $25,000 and a tax rate of $4 for $100 would have a tax bill of $1,000. Assume the taxable value of the home goes up the next year to $30,000. The tax bill for that year, however, may not rise more than 3 per cent — producing a tax bill of $1,030. To assure that this homeowner's tax bill would not exceed $1,030, the local county clerk would have to recalculate the tax rate. In this case, a rate of $3.43 per $100 of equalized assessed valuation on a $30,000 home would guarantee $1,030 in property tax revenue and satisfy the tax limit. But to get an increase higher than this, the school district or non-home rule unit would have to pass a referendum. Exempted from these limits are taxes imposed by non-home rule units and school districts to retire bonded indebtedness.
Sections 4 and 5 deal with changes in the tax base of non-home rule units and school districts. The fifth section provides for automatic revenue limit increases and decreases for local government units or school districts which have functions or programs transferred to or from them. No net increases in program costs would be permitted as a result of the transfer. For instance, if welfare relief provided by townships were transferred to counties, the county would be required to carry out the added welfare functions at the same level as the townships. Section 6 gives the General Assembly the responsibility of setting a revenue limit for a newly created unit of local government during its first year of operation. Section 7 provides that state aid to local governments and school districts may not be reduced below the proportion provided for by the General Assembly in fiscal year 1980. This section also requires that the state fully fund all programs mandated by it. However, if a program is mandated for local governments or school districts by federal legislation, the state would not be required to reimburse the local units. For example, federal mandates requiring that local government facilities be made accessible to the physically handicapped will be exceedingly costly. Under section 7, the General Assembly would not be required to help local governments pay for the federally mandated improvements. The eighth section provides that replacement taxes imposed because of the possible elimination of the personal property tax on businesses shall be excluded from all revenue limitations (See "Legislative Action," p. 28). The ninth section empowers the General Assembly to enact the necessary legislation to implement the amendment. A rational focus In summary, the Taxpayers' Rights Amendment appears to be a rational response to the tax revolt. Unlike Proposition 13 in California, the proposed amendment to the Illinois Constitution does not require that local governments absorb the entire tax relief burden. The amendment also recognizes that state government must operate within reasonable limits which assure adequate revenue growth. In addition, the amendment gives the state the flexibility to respond to financial emergencies and to target state treasury surpluses to areas of legitimate financial need. The limits imposed on local governments take into account the need for revenue growth but also provide for adjustments in the tax rates to limit financial windfalls resulting from increased assessed valuations. Finally, the amendment provides local governments with some financial relief by requiring that state mandated programs be fully funded by the state. For the past six months tax relief has been one of the most hotly debated items on the public agenda. Now that the campaign rhetoric has cooled, the Taxpayers' Rights Amendment can serve as an initial focal point fora rational discussion of the tax relief dilemma.
12/December 1978 / Illinois Issues
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