By MICHAEL D. KLEMENS
Property tax: hot potato between local and state politicians
There has been a plethora of property tax relief talk in the Capitol of late. In 1988 Senate Minority Leader James "Pate" Philip (R-23, Wood Dale) conditioned support for an income tax increase on property tax relief. There was no increase and no relief. Last spring House Speaker Michael J. Madigan's (D-30, Chicago) temporary income tax increase stalled under pressure for property tax relief, then was revived by increasing income tax relief for property taxes paid.
Assessment-driven property tax increases in Chicago sparked renewed calls for tax relief last fall, including higher homestead exemptions. Although Madigan and House Minority Leader Lee A. Daniels (R-46, Elmhurst) pushed the exemption increases, they failed in the House. They failed again in January. The House and Senate agreed on an expansion of the circuit breaker program to benefit low-income seniors, but Gov. James R. Thompson promptly promised a veto.
There has been no shortage of interest in revising property taxation; there has been no overhaul because the issues are complex. The property tax raises more money than any other tax in Illinois, making elimination or replacement an expensive proposition. And property taxes cause different problems in different parts of Illinois. Changes that would benefit citizens in one part of the state would damage those in other parts.
In Illinois the property tax is a local government revenue source. Not since 1932 has the state collected a tax on real property. The tax on individually owned personal property was eliminated with adoption of the personal income tax in 1969, and the corporate personal property tax was eliminated in 1979. Overall the percentage of local government (including school district) general revenues raised by property taxes has declined from 66.9 percent in 1962 to 35.6 percent in 1987. But the decline in Illinois has trailed that in other states, and Illinois remains a relatively high property tax state. The U.S. Advisory Commission on Intergovernmental Relations' latest tax burden comparisons put Illinois' property tax effort at 132 percent of the national average, 12th highest among all the states.
The property tax raises a lot of money. In 1988, the most recent year for which figures are available, Illinois local goverments billed (extended is the technical word) $7.4 billion it property taxes. For fiscal year 1988 that amount was more than the state received in state sales and personal income taxes combined. Those two largest state government revenue sources produced $3.7 billion and $3.5 billion, respectively.
Property taxes go for all kinds of purposes, mostly education. Property taxes billed by the various types of local governments in 1988 included:
• Elementary and secondary schools - $3,970 million or 53.6
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percent of all property taxes.
• Municipalities - $1,246 million or 16.8 percent of all property taxes.
• County governments - $765 million or 10.3 percent of all property taxes.
• Park districts - $358 million or 4.8 percent of all property taxes.
• Community colleges - $297 million or 4.0 percent of total property taxes.
• Townships and road districts - $252 million or 3.4 percent of total property taxes.
• Sanitary districts — $239 million or 3.2 percent of total taxes.
• Fire protection, forest preserve, library districts, etc., the balance.
Property taxes are levied against real property (land and buildings). For 1987 (taxes billed in 1988) the equalized assessed value of all property (equalized at one-third of market value) in Illinois stood at $93.1 billion. By class of property, residential property accounted for $45.0 billion or 48.4 percent of the total; commercial was $35.2 billion or 27.3 percent of the total; industrial $15.1 billion or 16.2 percent of the total; farms were $6.9 billion or 7.5 percent of the total; and railroad property and mineral rights $.6 billion or .6 percent of the total.
Between 1981 and 1987 the equalized assessed value of taxable property increased from $76.0 billion to $93.1 billion, an increase of $17.1 billion or 22.5 percent. Adjusted for inflation with the consumer price index, the 22.5 percent increase becomes a 2.4 percent decrease. Over that same period the residential share of the tax base declined from 49.6 percent to 48.4 percent and the farm share dropped from 12.4 percent to 7.5 percent. Those decreases were offset by increases in the amount of the tax base made up of commercial property, from 23.3 percent to 27.3 percent, and an increase in the industrial property share, from 14.1 percent to 16.2 percent.
However, tax base changes were not spread equally across the state, and looking at overall numbers masks some individual changes. Assessment changes are reported by county. The tax base grew $17.1 billion statewide from 1981 to 1987, but that represents growth in some counties offset by tax base loss in others. Cook County (including Chicago) equalized assessed value grew $12.3 billion or 39.1 percent, and DuPage County equalized assessed value grew $3.2 billion or 50.2 percent. Cook County and its five collar counties — DuPage, Kane, Lake, McHenry and Will counties — saw an $18.5 billion increase in equalized assessed value. In short, the loss outside the six-county Chicago metropolitan area was $1.4 billion. Of the 102 counties, only 23 saw an overall increase in equalized assessed valuation between 1981 and 1987.
Overall the tax base grew fastest in the fastest growing counties — those in the Chicago and St. Louis metropolitan areas, particularly St. Clair County. In counties containing older downstate industrial centers around Peoria, Decatur and Rock Island, tax base losses were 15 to 20 percent. Less industrialized downstate cities like Springfield, Bloomington-Normal and Champaign-Urbana held their own or posted modest increases. In rural counties the tax base declined 6.9 percent.
The rural tax base decline is primarily the result of loss in the farmland tax base. In 1981 Illinois changed the way that farmland was assessed, from what the land would bring at sale to what it can produce agriculturally in terms of income. Factors include the productivity of the soil, prices for crops and interest rates. That change, together with a decline in the agricultural economy, devastated the rural tax base.
Between 1981 and 1987 the equalized assessed value of farms tumbled from $9.44 billion to $6.95 billion, a fall of 26.4 percent. Adjusted for inflation, the decline was nearly 40 percent. And over the six-year period the value of lower quality farmland declined more than the better farmland. For counties that contain a lot of farmland and little else, the drop in farmland values forced down total equalized assessed value. Over the period only Kendall County saw an overall increase in farm value. All but six of the 102 counties lost at least 10 percent of their farm tax base; 10 counties lost more than half their farm tax base.
In rural counties local governments have increased tax rates to make up for the loss in base. One result is that farm property tax bills fell only 5.7 percent, while farm property tax base declined 26.4 percent. With tax rate increases, the property tax burden shifted onto other types of property, notably residential. Analysts believe that the agricultural tax base will never fully recover and that property taxes have been pushed as far as they can. Rural areas are left with the choice of cutting services or finding new revenue sources.
Tax base changes vary by region. While in rural areas the loss of farmland tax base has resulted in higher taxes on residential property. Cook County, in contrast, has seen a slight decline in the residential tax burden, which was shifted to industrial and commercial properties.
But tax base is only one part of the property tax picture. The other is the rate at which property is taxed. If the base were down 10 percent and the rate up 25 percent, more taxes would be collected. That is exactly what happed in many parts of Illinois between 1981 and 1987.
For the 1981-87 period total property taxes billed increased from $5.25 billion to $7.41 billion, a boost of 41.2 percent. Adjusted for inflation by the state and local government price deflator, these bills or extensions were up 12.7 percent. Eighty-four counties saw increases in their property tax extensions, compared to 23 that saw growth in their property tax base.
Taxpayers become angry when property tax extensions go above the level of inflation. Property owners complain that they are paying too much. The tax falls heavily on retired home-owners who bought their houses when they were working and who can see their tax bills rise as their property value increases and their incomes do not.
For state lawmakers the property tax poses a dilemma. Their constituents periodically demand action, as did newly reassessed Chicago residents this summer. But the state has no direct stake in property taxes because it levies none itself. Nor do state lawmakers have a direct say on how much money local governments spend. To limit local spending or property taxes sparks demands that the state replace the money. That of course means less money for state programs.
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Lawmakers' response to calls for relief has focused on tax breaks for residential property. Under the general homestead exemption program begun in 1978, homeowners are eligible for a $3,500 reduction in the assessment on their residences. In 1987 more than 2.4 million residents look advantage of the exemption to the tune of $7.5 billion, an 8 percent reduction in the property tax base that year. Homeowners can take advantage of this exemption only to the extent that equalized assessed value has increased since 1977. Homeowners in stagnant or slow-growth areas take longer to get to the full $3,500 value of the exemption. On the other hand, those in high-growth areas are able to enjoy almost all the benefits.
The other major homestead exemption, the senior citizens' homestead, is unrelated to assessment increases. The exemption reduces the assessment of eligible property owners by $2,000. In 1987 there were 550,000 senior citizens' homestead exemptions that reduced assessed value by $1.1 billion, or just over 1 percent of the total tax base.
The two homestead exemption programs have strengths and weaknesses. Their strength is political. Taxpayers can see the benefit and understand the savings, and from the state's point of view, there is no cost since there is no loss in state revenue. The weaknesses are more complex. One is that at least some of the savings to taxpayers are offset by the local taxing entity which hikes tax rates to recoup the loss from its base, in effect shifting the tax burden onto others. In the case of the homewiers' exemptions, the shift is to nonhouses — to factories, grocery stores and rental properties. Some property tax-related relief programs are state-funded. The circuit breaker provides grants of up to $780 a year to senior citizens whose annual incomes are less than $14,000 and whose property taxes exceed 31/2 percent of income. More than 4OO.OOO participate in the program at a cost to the state of about $70 million in appropriated funds.
The other major property tax-related relief measure is the income tax deduction for property taxes paid, which was doubled effective this year. The doubling came as part of the temporary income tax increase of 1989. At the higher temporary rates the deduction amounts to 6 percent of property taxes paid, and it will cost the state $170 million this year in lost revenue. There are several possible property tax reform scenarios. Here's why they have not been approved:
• Increase the homestead exemption. The recurrent proposal to increase the $3,500 maximum exemption constitutes a tax relief proposal that homeowners and voters can understand. To the extent that taxing bodies, particularly home-rule local governments, can raise tax rates to offset the loss, it amounts to a shift of tax responsibility to nonhomeowners, be they businesses or low-income renters. Cook County home-owners see the greatest benefit from the general homestead exemption because houses there are assessed at 16 percent of market value instead of 33 1/3 percent elsewhere. Because the exemption is based upon increased assessed value since 1977, homeowners in slower growing areas see reduced benefits.
From the perception of local governments, in high-growth areas the increased higher exemption would mean reduced growth in the tax base. In areas with a declining or stagnant tax base, the exemption increase means loss of local revenues. And for rural school districts already taxing at their maximum and short of money, it would mean a crushing loss of revenue.
• Increase the senior citizens homestead exemption. Boosting the $2,000 maximum exemption has the same advantages and problems as the general homestead exemption except that assessment loss is more immediate to local governments.
• Increase the circuit breaker. The circuit breaker's payments to low-income senior citizens does nothing to reduce tax bills, but the targeting assures that money goes to those who need help. It does nothing to undercut the local property tax base, although it does cost the state some money. Increasing the income limits from $14,000 to $18,000 was estimated to cost the state $28 million.
• Reform the property tax cycle. The Illinois property tax system is downright bewildering to the taxpayer who in some cases pays tax bills before assessments are finalized. Efforts to give earlier notice to taxpayers of tax obligations hinge on using a known equalized assessed value. The shift to "prior-known EAV" (equalized assessed valuation) would result in a one-year assessment freeze. Such a measure would be fought by high-growth areas and suburban schools since they depend on the assessment growth.
• Replace property taxes with other revenues. Illinois' heavy reliance upon property taxes and the sheer size of property tax collections complicate this option. The income tax is the only logical source of enough money to replace any significant portion of property taxes. Other states allow local income taxes, an option that would be complicated.
Increasing the state income tax rate and providing more of that revenue to local governments would be simpler, but increases in the rates would have to be substantial. Total replacement of property taxes would require a tripling of the individual and corporate rates to 7.5 percent and 12 percent, respectively. Replacing taxes for elementary and secondary schools would require a doubling of the individual and corporate rates to around 5 percent and 8 percent. Replacing only money used for direct education expenses in public schools would take 4 percent individual and 6.5 percent corporate income tax rates. All these rates would be above the national averages and would move Illinois into the ''high income tax'' bracket. Such a move would likely get little support from suburban legislators whose constituents would be spared high property taxes only to pay even higher income taxes.
• Limiting taxes. Property taxes can be limited a couple of ways. Currently school districts and non-home-rule governments have maximum tax rates set in state law. However, two-thirds of the state population lives in at least one home-rule unit (municipalities and Cook County) that have no limits. Proposals call for limiting the annual growth in the total amount of taxes that can be raised. A 5 percent limit on overall tax growth would reduce tax rates in areas whose tax base is growing faster than 5 percent annually. It would mean nothing in areas of no growth where tax rates are already at their maximum. Schools and local governments vehemently oppose limitation.
The $7.4 billion property tax system has numerous flaws. Proposals will continue to come often and easy, but solutions will come hard, damn hard.
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