Illinois Issues: The Real Chilling Effect Of A Property Tax Freeze

Commentary: At first blush, Gov. Bruce Rauner's property tax freeze seems like a great idea. What homeowner wouldn't want to know the next tax bill will never, ever be larger than the last one? Property taxes on my home last year went up $52.56, a 1.7 percent increase over my 2015 tax bill.  If a freeze had been in place, I could have saved those dollars, or spent them on something else. 

What's not to like about that? Indeed, Illinoisans for decades have told pollsters that the property tax is the most hated of all taxes, largely because it's based neither on ability to pay nor on consumption. So let's slap a permanent lid on the dastardly levy!

State of Illinois

But like most things in government, freezing property taxes is not as simple as it sounds. For starters, none of the freeze legislation introduced over the last couple of years would guarantee that taxes never increased on a particular piece of property. Rather, like the existing tax caps law, they all would cap the total amount of money a government body could ask from all property owners within its borders. Individual tax bills might increase, for example, if the value of homes in a particular neighborhood increased at a greater rate than homes in some less trendy part of town. Changes in the valuation of the properties making up the government's tax base virtually assures that the burden will be shared differently from year to year, even if the total doesn't grow.

And what of the consequences for the governmental bodies that collect property taxes? One important fact to keep in mind  — not one penny of property taxes goes into state coffers, nor has it for some 85 years. Instead, every cent goes to one of Illinois 6,000-plus units of local government.

Any confusion on the point is probably understandable; just last month, for example, House Republicans posted on social media a graphic proclaiming that we’re “Taxed to the Hilt,” adding that “Illinois has the highest property taxes in the nation and we still can't pay our bills.” That's the fiscal equivalent of asking why didn't the Chicago Bears make the postseason when the Chicago Cubs won more games than anyone else? And in fact, while Illinoisans pay a lot in property taxes, residents of a handful of other states pay more in total dollars and also on a per capita basis, according to U.S. Census Bureau data. (For more, see http://cgfa.ilga.gov/Upload/2016ILNationalRankings.pdf)

Not surprisingly, local officials are strongly opposed to a freeze. At a recent Statehouse news conference, for example, Illinois Municipal League executive director Brad Cole said that smaller communities without a strong retail or manufacturing base derive most of their revenue from property taxes.

Illinois Municipal League

“Many communities spend their entire property tax collection on state mandates, such as pension contributions,”said Cole, whose organizations represents most cities, towns, and villages in the state. “So when the hands of municipalities are tied behind their backs and they’re unable to collect more dollars to pay for the never-ending state mandates, then we have a serious disagreement.”

Belleville Mayor Mark Eckert noted how his city relies on property taxes to cover costs of police and fire pensions. "We do meet our threshold each year of the actuaries. If they would freeze the property tax, I'm not sure how we would meet those criteria to properly fund those pensions."

Cities collected only about 17 percent of the $28.7 billion in property taxes Illinois property owners had to pay last year, and municipal officials have other revenue sources, chiefly sales taxes augmented by other special taxes and fees. Indeed, a handful of towns don't even levy a property tax because a local shopping mall, amusement park, or other attraction generates so much revenue. 

The bulk of property taxes payable last year —  $16.9 billion, or 59 percent — went to local public school districts across the state, the chief revenue source for preK-12 education in Illinois, according to the state revenue department.  Property taxes accounted for roughly 63 percent of schools’ operating resources, according to the state education board. Excluding retirement contributions, the state's share was only about 26 percent of the total, well below the 44 percent national average. Federal funds completed the picture.

Given their heavy reliance on property taxes, what might a property tax freeze mean for public schools?

“In one word, death!” exclaims William Phillips, a professor of Educational Leadership at the University of Illinois Springfield “No new tax money assumes that all a district's bills are going to stand still... I can't believe they’re thinking along those lines. It's really horrible.”

Phillips notes that the foundation level — the per-pupil dollars the state guarantees to each school district under a complex general state aid formula — has been stuck at $6,119 since Fiscal Year 2010, even as costs rise. Moreover, formula funding had been prorated since the 2012 budget year, so that districts received between 87 percent and 95 percent of the funds to which they were entitled. To his credit, Rauner ended proration in the current budget, in part by shifting money from special education programs to cover fully formula claims. He’s also proposed a $30 million increase for FY 2018 to fund fully general state aid. In addition, his plan would boost transportation funding by $145 million, hike early childhood spending by $50 million, provide an additional $38 million for bilingual education, and increase outlays for various other programs by some $12 million.

While the additional dollars would be welcome, the state's stricken finances have forced schools to wait months for cash promised them in the current budget, as grant money for special education, transportation, and other programs languish in the massive bill backlog, pegged at $12-plus billion plus this week by the comptroller's office. For example, districts have yet to receive any grant money for FY17, now eight months old.

“

I don't know how school districts can survive with the forces aligned against them,”says Phillips.

A freeze would impact more severely districts heavily reliant on local revenues, those whose tax bases are large enough that they receive few state dollars.

Among them would be Monticello Community Unit School District 25, according to Superintendent Vic Zimmerman. The Piatt County district counts on local property taxes for more than 90 percent of its funding, with about 7 percent from the state and the rest federal aid.

Had a freeze been effect last year, the district would have lost about $175,000 in revenue from its $16 million budget, equivalent to the cost of four teachers, Zimmerman said. The savings would have amounted to about $31 to the owner of a $150,000 home in Monticello. 

Monticello School District

“School districts” expenses increase,” he said. “The property tax is a stable revenue source ... If they take away our one stable revenue source, how do they want us to continue to function? Tighten our belts? That’s been going on because of proration over the last several years.”

If a freeze were implemented, districts would have to look at future cost-cutting measures like reducing the teaching force, leading to larger class sizes, or reducing program offerings, he said. “Cut sports? I'm not sure people really want that,” added Zimmerman.

Freeze proponents like to point out that schools and other local units have a built-in safety clause — seeking voter approval via referendum to exceed the freeze limit.

Easier said than done, however, noted Phillips and Zimmerman, a point backed up by referendum results compiled by the state elections board. Over the last 10 years, from the consolidated primary election in 2007 through last fall's general election, local schools asked voters to approve billings higher than statutory rate limits or tax cap ceilings 136 times. Citizens agreed on 46 occasions, about a third of the time, while turning thumbs down on the other 90 requests.

While a property tax freeze poses the greatest threat to local schools' revenues, Rauner's recommended FY 18 budget includes several other proposals likely to increase their costs. As part of his cost-saving suggestions, the governor would provide no funding for after school programs, advance placement classes, arts/foreign language instruction, and other programs, according to legislative analysts. Would parents expect their local schools to keep some of those offerings, even with no state dollars to help defray costs?

Consider, too, Rauner's plan to eliminate funding for social services like The Autism Project, homeless prevention, youth employment, addiction prevention, epilepsy services, and similar programs. Might not school-age children who need such services present a challenge to local schools, which then well might be expected to step in for the welfare of the affected youngsters?

An even bigger burden is embodied in the governor's ambitious proposal to cut state contributions to pension systems for public school teachers outside Chicago and other public workers. Under his plan, local school districts and public universities— not the state — would pay the full retirement costs for new teachers and other workers, a cost-shift that would save the state an estimated $500 million, with schools and universities picking up the tab.

Of course, a freeze isn’t the only way to limit, even reduce, property taxes. A better way, one less threatening to public schools, might be to have the state assume more of the costs of elementary and secondary education, as most states do.

As this column noted two years ago, “The concept is hardly new. In 1997, Gov. Edgar proposed — and House Speaker Michael Madigan, a Chicago Democrat, 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.”

The idea is as sound today as it was 20 years ago, providing significant tax relief for property owners without harming public schools.

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

Illinois Issues is in-depth reporting and analysis that takes you beyond the headlies to provide a deeper understanding of our state. Illinois Issues is produced by NPRIllinois in Springfield.