Taxed
to the
Max?

Illinois' outdated tax system hurts everyone, but mostly those with the least. An overhaul is overdue, but a cure for the state's addiction to property taxes has remained elusive.

Gordon Studer

Taxed
to the
Max?

Illinois' outdated tax system hurts everyone, but mostly those with the least. An overhaul is overdue, but a cure for the state's addiction to property taxes has remained elusive.

 
 
 

To understand what's wrong with Illinois' tax system, you need look no further than one revealing set of numbers.

The figures, as crunched by the Taxpayers Federation of Illinois, based on state data, examine what happened during and after the Great Recession, between 2008 and 2015. During that time, the average property tax rate on homes and offices, apartment buildings and factories statewide soared an eye-popping 43 percent as land values dropped and local governments, mainly schools, kept asking for more money.

Forty-three percent.

Changing that dynamic—making the tax that voters most hate a little less hateful, while still adequately funding schools—has been the great white whale of Illinois politics for better than a quarter of a century.

As far back as the early 1990s, Gov. Jim Edgar and Democratic rival Dawn Clark Netsch were pushing big tax reform in the form of a higher income tax in exchange for a lower property tax, a swap. They failed. Today's politicians aren't doing much better, Gov. J.B. Pritzker's pending graduated income tax amendment notwithstanding.

In fact, the picture is even darker. Illinois' towering property tax rates actually are just a symptom of a wider problem. Overall, according to most experts, the system is broken, failing to keep up with a modern economy and generate the revenues needed to match what state and local governments spend.


Property tax rate surge

Average property tax rates across the state surged in the wake of the Great Recession and have eased only slightly in recent years.

Average Illinois property tax rate


Sources: 2016 Property Tax Statistics, Illinois Department of Revenue, Tax Facts


The system is based on old-fashioned principles, taxing too few things too much (i.e., hard goods) and letting other, often growing potential sources of revenue go untapped (such as retirement income and services like legal fees). It's given Illinois a self-inflicted black eye in competition with other states while simultaneously hitting lower-income folks proportionately harder than the wealthy.

Homeowners and businesses alike know the resulting pain, with both being forced to pay property taxes that are among the highest in the country regardless of their ability to pay. The system has spawned startling disparities in who pays what, often falling hardest on less-fortunate individuals and communities.

"We have a bad tax system in a lot of ways," says Adam Schuster, research director at the Illinois Policy Institute, a right-leaning libertarian think tank.

"Revenue growth doesn't support the cost of providing current service levels," says a leader on the opposite side of the ideological spectrum, Center for Tax & Budget Accountability chief Ralph Martire.

Laurence Msall, from the establishment-backed Civic Federation, agrees: "Illinois needs to change the way it's doing business. But it needs to do so in a comprehensive way and not just a political way."

Good luck with that. As Edgar and Netsch discovered, forging a political consensus to deal with the very real problems that all sides agree exist is at best a harrowing task, sort of like trying to solve a Rubik's Cube one-handed. Voters fear that taxes go only one way in this state: up.

Associated Press

Gov. J.B. Pritzker outlines his proposal to adopt a graduated income tax in March 2019.

Here's what the data shows:

According to a variety of sources—Wallet Hub, the Tax Foundation, the Tax Policy Center and the Federation of Tax Administrators, to name four—Illinois ranks about 10th highest of the 50 states on tax collections as a share of gross statewide income, give or take a notch or two. With property taxes particularly toxic, those figures recently led Kiplinger magazine to rank Illinois the worst state in the union for taxes—not very helpful when officials here are trying to recruit companies and workers against states like Wisconsin and Indiana.

Still, the dollar differences are not huge, with 9.67 percent of total income here going toward state and local taxes—more than Indiana's 8.22 percent, but fairly close to Wisconsin's 9.15 percent and Iowa's 9.49 percent and below the 10.25 percent in Minnesota.

Beyond that, adding in nontax income, such as charges and fees, as well as revenue from levies on oil and gas, puts the state in much better relative shape—32nd by one accounting. But we still have those property taxes. And we're still a relatively high-tax state.

The conservative response is to cut spending, with the IPI's Schuster and others urging that the state income tax actually be repealed over time with some replacement revenues found by extending the sales tax to more services. In other words, he backs a slow conversion to a tax on consumption rather than income or wealth.

 
 
 

In fact, over time, the idea of having the sales tax apply to more services has garnered significant backing from officials such as former Cook County Assessor Jim Houlihan, ex-Mayor Rahm Emanuel and the city's current mayor, Lori Lightfoot. A recent study by the Taxpayers Federation of Illinois and Martire's group concluded that Illinois taxes fewer services than any other state with a general sales tax.

However, Pritzker flatly opposes the idea. He says it would hit too many middle-class people. Instead, with an eye toward making the state's tax structure more progressive, he wants voters to authorize a graduated income tax in a November referendum. That would allow higher rates on those with higher incomes, unlike the flat rate that Illinois and only a few other states now impose.

Pritzker has a point. According to a study by the Washington-based Institute on Taxation & Economic Policy, in 2016 the bottom 20 percent of Illinois taxpayers, with incomes averaging $12,400 annually, actually paid twice as great a share of their income as the top 1 percent ($1.7 million a year), 14.4 percent versus 7.4 percent in state and local taxes.

However, while imposing Pritzker's graduated income tax would pull in billions of dollars a year more for government services and make Illinois' tax system more progressive, there is no guarantee it would yield lower property taxes.

What actually happens depends on where the revenue from the hike ends up going—more spending or tax reform. Skeptics abound on both the political right and left.

For instance, Martire says the state and local governments have such deep financial woes that the $3.5 billion-plus in annual proceeds from a graduated income tax will have to go to pay old bills and bring spending closer to balance, at least for now.


Home values down, taxes up
Property tax rates in some Chicago suburbs have surpassed 30 percent to cover the cost of schools, police and other municipal services, even though median values for homes with a mortgage have fallen due to a pattern of decline that includes a loss of industry and jobs. Click on a municipality below to find out its tax rate, as of 2018.
2018 property tax rate
Note: Median home value is for homes with a mortgage. In towns that cross county borders, data is for Cook County homes only.
Sources: Better Government Association analysis of data from the Cook County Clerk and U.S. Census Bureau

"Property taxes aren't going to go down immediately even if Pritzker gets his graduated tax. The structural imbalance is too great," he argues, pointing in part to the roughly $2 billion a year extra the state will have to put into its underfunded pension system within a decade.

Schuster underlines what happened last year after Chicago Public Schools got a big influx of cash under the state's new need-based education funding formula. The Chicago Teachers Union gobbled up that money and more in its new contract, winning across-the-board 16 percent pay hikes over five years and expansion of experience "step increases" to more teachers than ever.

"Just because you get more money from one source doesn't mean you don't want money from another," Schuster says, predicting continuing pressure on the city's property owners.

Meanwhile, a state legislative task force that was charged with coming up with a plan to cut property taxes appears to be making little progress. It has kicked around some ideas such as consolidating school districts and overhauling the tax-increment financing system. But it's also divided sharply, with Democrats battling Republicans and among themselves.


Those with the most need get the least

Illinois school districts with a high share of students living in poverty also tend to generate less revenue from property taxes than do wealthy districts.

State and local revenue per student

For districts grouped by amount of students in poverty

The per-student funding gap

In Illinois, school districts with the most poverty receive 29 percent less money per student than those with the lowest share of students in poverty. That disparity ranks worst in the nation.

-20% to -29% -10% to -19% -1% to -9% 0% to 9% 10% or greater Data not available

Notes: Data adjusted for additional needs of low-income students

Source: The Education Trust


Another idea that makes sense to some experts is to end Illinois' exemption of retirement income from the state income tax, even on millionaires and billionaires.

Illinois is one of only three states with an income tax that totally exempts retirement income from taxation, Msall argues. His group strongly wants to change that, asserting that even just taxing retirement income above the $100,000 level would net $1 billion a year or more for schools, property tax relief or more.

But if state lawmakers are cool toward the idea of extending the sales tax to, say, accountants and lawyers, they're positively petrified about taxing retirees, who, unlike younger people, tend to turn out to vote at election time.

Still, whatever the motivation, legislative unwillingness to take the tough steps needed to modernize the state's tax code dates back decades¡ªand has created all sorts of distortions and pain.

The most obvious is that refusal to fund schools adequately at the state level has forced local jurisdictions to raise their own taxes, mostly property taxes to pay school bills. That's hurt even in wealthy areas, such as the north suburbs, where soaring tax rates and the complaints about them likely are a reason for major weakness in the home market. The pain is deeper in poorer communities, such as the south suburbs. A broken tax system there arguably has sparked a vicious downward circle, as a lack of commercial property forces up tax rates, which pushes businesses and residents to leave, which in turn results in even higher tax rates on those left behind.


It's all about the property taxes

State policy has left Illinois schools deriving, on average, two-thirds of their revenue from property taxes, more than any other state. That is the key reason why property taxes in Illinois are so high.

Sources of Illinois public school revenue

Source: Illinois Report Card


The verdict about Illinois' tax system isn't entirely negative.

Carol Portman, president of the Taxpayers Federation of Illinois, points to items such as the fact that Illinois' income tax closely follows the federal system in terms of what counts as income and how it must be reported.

"Our tax system is not as horrid as people think, particularly when it comes to the administrative side—you can figure out how much tax you owe, pay it, deal with an audit, etc., with much less heartache than in many other states," she says. "Most multistate businesses will tell you that Illinois is not anywhere close to their biggest problem."

Still, even Portman concedes, "there's a lot of room for improvement."

For what it's worth, the credit markets still have Illinois debt ranked the worst of the 50 states. They clearly want more money to go toward eliminating the state's $137 billion in unfunded pension liability. Just like public school advocates, social welfare organizations and numerous other groups want more money for their programs.

All that suggests that tax "reform" for the foreseeable future is shorthand for higher taxes, period. Reform later. If the political will to change that exists, the state's leaders so far haven't demonstrated it.


This article has been updated to correct the amount of Illinois¡¯ unfunded pension liability.

 
 
 

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