Diamond Star Motors and local governments in Normal are disputing whether more than $100 million in machinery at the new automobile manufacturing plant is subject to property tax. The governments argue that because the machinery is an integral part of the plant it should be taxed as real estate. Diamond Star claims that other manufacturing equipment in McLean County escapes property tax, as does equipment at auto plants elsewhere in Illinois.

If local governments prevail, Diamond Star loses. The manufacturer would pay both the disputed property tax on the machinery and a 2.5 percent income tax surcharge that at least some parties thought would supplant the machinery tax.

If Diamond Star prevails, the local governments and school districts lose. They do not get the tax on the machinery and equipment. And in any case the income tax surcharge gets distributed statewide under a formula that will yield them a minuscule share.

Local governments are worried about tax receipts and have banded together to retain an independent appraiser and attorney to push for a higher assessment. For them the question is fairness to their other taxpayers.

Contributing to the overall problem is the former tax on personal property and the legislative compromise that led to its replacement. Since before statehood local assessors had placed a value on both real property — land and buildings — and personal property — buggies, automobiles, furniture and inventories. Both had been taxed at the same rate, so it was initially mere formality whether a local assessor classified something as real or as personal property.

That changed in 1970. With enactment of the state income tax, the tax on personal property owned by individuals was abolished. Personal property owned by corporations was taxed a while longer. The 1970 Constitution directed the General Assembly to eliminate the corporate personal property tax by 1979 and to replace the revenues lost to local governments and school districts. Voters rejected a 1978 constitutional amendment to delay the date.

That left lawmakers to contend with the twin constitutional mandates of eliminating the tax and replacing lost local revenues. An income tax was settled upon as the replacement source. Corporations were taxed at 2.85 percent from July 1,1979, until January 1, 1981, and at 2.5 percent since. Taxes on partnerships, trusts and subchapter S corporations were 1.5 percent. Utilities paid .8 percent of their invested capital. Money was collected by the state and paid into the Personal Property Tax Replacement Fund, where 51.65 percent goes into a "pot" for Cook County and 48.35 percent into a downstate "pot." The money is then distributed to local governments and school districts based on their share of collections before abolition of the tax.

That was the compromise solution. To be considered a success it must meet two tests: Has the replacement tax replaced income lost by local governments? Has personal property been removed from the tax rolls? The Illinois Economic and Fiscal Commission, the General Assembly's bipartisan revenue forecasting arm, concluded this year that the solution may have failed on both counts, identifying:

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• The distribution formula fixed in the base year (1977 in Cook County and 1978 downstate) inflates receipts to areas that have since seen businesses leave and deflates them to areas that have grown.
• An instability because collections are tied to the corporate income tax, a volatile source linked to corporate profitability that has been broadened by federal tax reform and narrowed by state tax credits.
• A tendency underscored by a 1982 survey of assessors to classify as real property what had previously been classified as personal property, causing a business to be taxed twice, once for its personal-now-classified-as-real property and once on its income.

One of the state's largest recipients from the personal property replacement tax is the city of Chicago, which received $42.6 million in 1987. Chicago Comptroller Ronald Picur says that the replacement has not been adequate because studies show that its share of revenue has lagged behind inflation and presumed growth in the personal property tax. Fluctuations in receipts have made budget preparation difficult, Picur says.

Douglas L. Whitley, president of the Taxpayers' Federation of Illinois and a party to the original negotiations, says the compromise reflected the instinct to preserve the status quo. His organization tried in 1981 to pass legislation clarifying personal and real property but could not get agreement. "The problem is if you have a clear definition some counties will gain some tax base. Some counties will lose some tax base." And Whitley says those compromises make less sense the farther one gets from 1979.

The Economic and Fiscal Commission report is more direct: "The abolition of the personal property tax and its replacement have proven unsatisfactory from the perspective of local governments and taxpayers alike. . . . The compromise offered just enough to both sides to secure support for the basic plan but ultimately did little to resolve questions concerning the completeness of abolition and adequacy of replacement over the long run."

The Normal area governments are worried about revenue and fairness to their taxpayers. Elsewhere, observers are looking for the dispute, if it ends up in court, to shed some light on the distinction between what is real and what is personal property.

The personal property replacement tax is not a burning issue in Springfield. Issues likely to create losers seldom are. But there has been plenty of talk about another replacement, substituting statewide taxes for local property taxes to pay for schools. The experience with the personal property replacement tax shows how difficult that can be.□

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