How Tax Reductions Pass the Buck

Tax reductions may seem like a good way to help deserving people, but the system is designed to simply shift the burden to the next taxpayer’s shoulders.

In my fall 2020 Insight column, I gave a basic overview of the Illinois property tax system and how reductions in assessed values for some properties in a taxing district have the effect of increasing the amount of property taxes paid by the remaining property owners. I warned that the description was a bit simplistic and didn’t consider many of the complications that affect the property tax base. Now I’ll try to decode some of those complications and outline some of the provisions that reduce the tax base and further shift the allocation of property taxes from one property owner to the next.

The Illinois Constitution allows the Illinois General Assembly to exempt certain real property from taxation—property of the state, units of local government and school districts, and property used exclusively for agricultural and horticultural societies, or for school, religious, cemetery, and charitable purposes. The Constitution also allows the General Assembly to grant homestead exemptions or rent credits. The General Assembly has exercised its power to grant homestead exemptions but has not yet adopted rent credits.

In exempting property used exclusively for agricultural and horticultural societies, school, religious, cemetery, and charitable purposes, the General Assembly has also included a statutory ownership requirement along with the constitutional “exclusive use” requirement. As you can imagine, what constitutes “exclusive use” has been the subject of extensive litigation. Without getting too deep in the weeds, suffice it to say that although “exclusive” has not been defined by the courts to mean 100 percent, the term has been defined in such a way as to be a high bar for a taxpayer seeking property tax exemptions.

The General Assembly enacted a general homestead exemption for residential property, as well as many other homestead exemptions targeted to discrete groups of taxpayers. To claim the homestead exemption, a taxpayer must attest the home is his or her primary residence. Individuals are only entitled to one homestead exemption. You may recall that more than one candidate for political office has been embarrassed by the disclosure that a homestead exemption was claimed for multiple residences.

The general homestead exemption is a reduction to the current year equalized assessed valuation (EAV) of $10,000 in Cook County and $6,000 in all other counties. But the General Assembly didn’t stop with a general homestead exemption: Illinois has also adopted legislation authorizing a host of special homestead-type exemptions to discrete groups of property owners, taking this constitutional authority to its limit.

In Cook County, there’s a long-time occupant homestead exemption granted to households with a total household income of $100,000 or less and occupied for 10 continuous years or five continuous years if the homeowner received assistance in acquiring the property as part of a government or non-profit housing program. Other homestead-type partial exemptions provided to certain homeowners include homestead exemptions for senior citizens, persons with disabilities, veterans with disabilities, veterans with disabilities exemptions for specifically adapted housing, and returning veterans. There are also additional homestead improvement exemptions and natural disaster homestead exemptions.

Further, while not an exemption, qualified senior citizens are authorized to defer all or a portion of their real estate taxes or special assessments under the Senior Citizens Real Estate Tax Deferral Program. The senior citizen must be 65 or older, have a total yearly household income of no more than $55,000, and have owned and occupied the property or another qualifying residence for at least the last three years to qualify. The taxes deferred must be repaid within one year of the taxpayer’s death or 90 days after the property is sold, transferred, or otherwise no longer qualified for the exemption. Interest is charged on the deferred amount at 6 percent per year— not the greatest interest rate in the current interest rate climate.

Along with these various homestead-type exemptions, Illinois’ Property Tax Code also contains a series of “preferential assessments” that reduce the assessed market values of properties granted to certain groups of property owners for things like open space, conservation stewardship, forestry management, solar heating and cooling (the system can be assessed as if heated and cooled by conventional means), rehabilitation of historic residences, veterans organizations (e.g., the local VFW hall), fraternal organizations (e.g., the local Elks lodge), and non-governmental airports in counties of 200,000 or more—just to name a few. My recollection is that these preferential assessments were granted to entities that came to their legislators requesting property tax exemptions when they didn’t qualify as one of the types of entities that could be exempted under the Constitution. The General Assembly worked around the constitutional limitation by passing legislation that reduces property taxes through the granting of a “preferential assessment.”

Local taxing districts may also instruct the local county clerk to abate any portion of its taxes for certain qualifying types of property. Examples include commercial and industrial expansion, horse and auto racing, academic or research institutes, senior housing, historical societies, recreational facilities, relocated corporate headquarters, and U.S. public or private residential development.

These exemptions, deferrals, and preferential assessments reduce the overall assessed values of properties in taxing districts even more, thus increasing the tax bill of all other property owners and shifting the incidence of the tax to an even greater degree. Simply put, property owners that don’t receive exemptions or reductions pay for the exemptions and reductions of others.

Reductions like these proliferate because they’re easy wins for legislators. If you vote against providing an additional homestead exemption to veterans with disabilities because it will increase property taxes on all other property owners, your opponent in the next election will accuse you of being a heartless anti-veteran. Additionally, such legislation has no effect on state revenues or local revenues—the taxing district levies are not reduced. The taxes are just shifted to other taxpayers who don’t receive the exemptions or reduced assessments. Because Illinois’ property tax system is so complicated and opaque, most taxpayers don’t understand that these exemptions and reduced assessments contribute to the size of their individual property tax bill.

Two notes in conclusion: I’ve only scratched the surface of Illinois’ property tax system. I haven’t even touched upon tax increment financing, the Cook County property tax system, or the property tax assessment system. Secondly, I’m not contending that property tax relief shouldn’t be provided in appropriate situations, but such relief isn’t free—it contributes to the bottom line of your property tax bill and those of your clients.