The Dark Side of Illinois Property Tax Law

The Illinois property tax system often has the unintended consequence of creating cities and neighborhoods that suffer from endemic poverty.

In Illinois, there are cities and neighborhoods that suffer from endemic financial problems and have a population mired in poverty—think East St. Louis or Cairo, as well as some of Chicago’s neighborhoods and south suburbs. A common “solution” to address these financial problems is to encourage businesses to open in these areas, with various state and federal tax credit and incentive programs adopted and announced with great fanfare. The problem is that however well-intentioned the programs are, high property taxes caused by the nature of the property tax system can negate the benefits offered by these credits and incentives. Without property tax relief, these programs are often rendered ineffective. To understand why this occurs, it is necessary to decode the basics of Illinois real property taxation.

In Illinois, real property taxes are governed by state law—the Property Tax Code—but are levied and collected at the local level. The state of Illinois does not levy or collect taxes on real property, and not all real property is taxable. The Illinois Constitution authorizes the General Assembly to exempt from property tax the property of governments, school districts, and property used exclusively for agricultural and horticultural societies, and for school, religious, cemetery, and charitable purposes. In addition, the Constitution forbids the taxation of personal property by state or local government.

According to the Illinois Department of Revenue, there are approximately 6,000 local government units in Illinois that are financed in whole or in part through local property taxes. The property tax bill for my house in a suburb of Springfield is not unusual. It lists 12 different taxing bodies that impose property taxes on my house: the city, the county, the school district, the community college district, the township, the township road and bridge district, the airport authority, the fire protection district, the convention center district, the mass transit district, the park district, and the water reclamation district.

Each local government unit determines its levy—the total amount of property taxes it needs to collect to fund operations. The levy is then divided among the property owners in the taxing district based on the taxable value of their property. The total value of all property in the taxing district is divided by the total amount of the levy to derive the tax rate. The tax rate is multiplied by the value of each individual taxable parcel to derive the amount of tax imposed on that parcel. The amount of tax from each taxing district is then totaled and results in the property tax bill for the individual parcel.

Taxing districts don’t have unlimited authority to tax, as state law limits the amounts that can be levied by individual taxing districts. For example, my local mass transit district can’t decide they want to replace buses with stretch limos and raise everyone’s taxes accordingly. Also, in many areas of the state, state law provides a limit on how much the overall tax bill to a property owner can increase in any particular year. The Property Tax Extension Limitation Law places limits on the year-to-year increase in the “extension”—the total taxes billed to the property owner— and allows taxing districts to receive a limited inflation-related annual increase on existing properties.

How does the property tax system contribute to businesses leaving impoverished areas? Let’s see how it works by using a simplistic example.

In 2010, City A has real property with a total assessed value of $1 billion and has a school district that levies $1.5 million for its operations. When you do the math (levy divided by total assessed value), this results in a tax rate of 0.0015 of assessed value of any individual parcel. I have a factory located in City A valued at $2 million, thus my factory’s property tax bill for the school district will be $3,000 per year.

In 2011, assume that the factory down the road from my factory was valued at $5 million, but at the end of 2010 the factory closed and moved to Missouri. The closed factory is razed and the land is donated to City A for a park. Assuming that everything else remains the same, the total assessed value of all properties in City A is now $995 million because of the reduction in the tax base. (When City A takes ownership of the property, the property comes off the tax rolls. Recall that properties owned by governmental bodies and used for government purposes are property tax-exempt.) The school district continues to need $1.5 million for operations, but now that levy is divided over a smaller base—so the property tax bill for my factory goes up to $3,015. (To keep the example simple, we are only discussing the school district portion of the property tax bill, but the portion of the total property taxes payable to the other taxing districts by my factory would also increase.)

In 2012, because the factory closed and moved away, a bar and a restaurant located next to the closed factory both close for lack for business. The owners of the bar and restaurant sell their buildings, but because of the closure of the factory, the buildings are no longer as desirable and sell for less than they would have before the factory closed. In addition, many of the workers who worked in the closed factory sell their homes in City A and move out of town. Because many homes are being sold in the same time frame in a city with fewer job opportunities, the homes sell for less than they would have before the factory closure. As a result, the value of all residential real estate in City A drops.

All of this contributes to a further decline in the total assessed value of real estate in City A, which means that the tax rate on the remaining property owners increases again in order for the school district to continue to collect its $1.5 million levy. That means the property taxes on my factory increase again.

Let’s assume that NUCO is looking to build a new factory. They have their site consultants evaluate various locations, including City A. They note that City A has rising property tax rates and when they compare property taxes in City A to other locations, they conclude that they could save money by locating in City B. As more companies make the same decision, jobs become scarcer. With fewer jobs in City A, more people move away. As the downward spiral continues, the property taxes continue to increase on my factory and City A continues to become more impoverished. Eventually I reach a point where I decide to move my factory out of City A.

This is a very simplistic example, but it illustrates what has happened and continues to happen in many areas in Illinois. The property tax system can contribute to an area’s downward spiral into poverty and make it more difficult to reverse that downward spiral.

State income tax and sales tax credits and incentives can entice companies to locate in impoverished areas, but they must be high enough to offset the higher property taxes associated with these areas, or they must be coupled with local property tax incentives (reductions). As an alternative to, or in conjunction with, local property tax relief, the state can offer additional incentives for businesses to locate in impoverished areas. The most recent version of the Illinois EDGE credit against the income tax includes an idea I suggested: providing a greater credit against the income tax for companies that locate in an underserved, impoverished area. This concept is also embodied in the 2019 Data Center Investment legislation, which provides an income tax credit for data centers that locate in these underserved areas. I was a principle drafter of that legislation.

However, like most things tax-related, there is no quick and easy fix. Without incentives to locate in impoverished areas with high property taxes, the overwhelming majority of businesses will choose to set up shop in areas that allow them the greatest amount of profit. While there are arguments against these incentives on both sides of the political spectrum, I believe that state-level tax credits and incentive programs are vital to encouraging businesses to move into and serve the cities and neighborhoods that badly need them.