Plenty of costly fine print in Ill. tax plan
Senate Dems try to sell graduated-rate income, vow property tax relief
Illinois Senate Democrats have sweetened a sales pitch to voters for a proposed graduated-rate income tax in 2020 by attaching to it a vow of property tax relief to weary taxpayers.
Like any sales pitch, the proposal — to freeze property taxes that go to schools — has some significant fine print attached.
First, it would only happen if voters ratify that proposed graduated-rate income tax amendment to the Illinois Constitution. And, it would only take effect if the state shouldered more of the overall funding for education in Illinois — including funding special education, transportation, free and reduced meal programs and other mandated categorical programs. The state also would have to meet its decadelong commitment to boost funding for the new general state aid formula by $350 million a year.
That means a state price tag of at least $650 million for the state budget that takes effect July 1, 2021. If the state doesn’t meet recommended funding levels, as lawmakers and administrations have failed to do repeatedly over the years, the freeze melts.
The property tax freeze plan was part of a package associated with the Senate’s approval Wednesday of a proposed state constitutional amendment that would remove the state’s mandated flat-rate income tax and
allow for a tax with rates that increase with earnings.
The proposed tax amendment, and the accompanying package, now goes to the House, where prospects appear more difficult. Democrats under House Speaker Michael Madigan have 74 seats in the chamber, with 71 votes needed to approve an amendment. But many of Madigan’s newer members represent once-Republican rich suburban areas and may be leery of casting a vote that could put them at risk.
Supporters of the graduated tax tout that 97% of taxpayers earning $250,000 or less will receive an income tax break or pay no larger than the current rate of 4.95% under a series of rates approved by the Senate and contingent on voter ratification of the constitutional change. It’s projected to raise more than $3.5 billion and is aimed at ending a long-term structural imbalance in the state budget.
Opponents, mainly Republicans in the minority in the General Assembly, said the Senate-adopted rates are not set in stone and that subsequent legislatures could easily hike rates for all taxpayers — or single out wealthy taxpayers to pay even more than the proposed 7.99% top rate that would apply to all income for single earners of $750,000 or more, or married couples earning $1 million or more.
But the potential of property tax relief is an alluring one, particularly involving schools, whose funding makes up the bulk of local property tax bills due to the way education is paid for in Illinois.
State Sen. Andy Manar, D-Bunker Hill, an architect of the state’s new, historic rewrite of the way state dollars flow to schools, said the graduated-rate tax revenue and property tax freeze legislation — coupled with local school administrators holding down costs — raise the potential to vastly put more dependence on state dollars for education.
“If we can thread that needle, then we might get to a place where we are seriously addressing what we all know is a serious problem for our state,” Manar said. “This is an incremental step. This is not going to solve the problem. But it is the most serious step I would say we could take at this time coupled with tax (rate) reform.”
But Sen. Jason Barickman, a Bloomington Republican who also was a major player in the school funding formula rewrite, said the promise of a property tax freeze was unlikely given its dependence on a variety of factors — including graduated-rate income tax revenue and more state dollars for schools. “The real test for any property tax relief is whether it’s real or not,” Barickman said. “This property tax relief is not, in fact, real.”
“Everything else that purports to potentially happen in property taxes is conditional. It’s conditional property tax relief. It relies on a series of ifs and contingencies for which our constituents know are too unlikely ever to occur,” he said.
Illinois’ public education system, with its heavy dependence on property taxes that helps fuel skyrocketing real estate tax bills, has long been cited as at or near the bottom of state support, including by Rutgers University and the Education Law Center.
While the state constitution says the state “has the primary responsibility for financing” public schools, the Illinois Supreme Court has ruled that the phrase was a goal and not a mandate. As a result, state appropriations have been at the whim of legislators.
Because of legislative and administrative funding decisions, combined with the state’s financial morass, the state’s share of public school funding fell from 28% in the 2008 budget year to 25% in 2017, State Board of Education figures show. In exchange, the local share of funding from property taxes rose from 59% to 63% over the same time frame, with other local and federal funding making up the difference.
Nationwide, the split is more even, according to a Rutgers study that showed the funding share split 46% state, 45% local and 9% federal.
The dependence on local property taxes to fund local schools has created an educational system where quality and opportunity often are dictated by ZIP code and local property values.
The Civic Federation, in a 2017 study, found that $28.7 billion in property taxes were levied statewide in 2015 with nearly $18 billion, or 62.6%, going to school districts. In Cook County, the study found, 57.5% of property taxes levied went to fund public schools while the percentage in the suburban collar counties was nearly 70%.
“A lot of people say they want their property taxes to go down but when twothirds of it goes to schools, they don’t really want the schools to get less money. So it’s a very complicated and contentious issue,” said Senate President John Cullerton, a Chicago Democrat.
Attempting to counter Barickman, Cullerton called the school property tax measure “a real attempt to finally do something in a straightforward way to freeze property tax rates and incentivize the General Assembly to fully fund education.”
But a March study by the progressive-leaning Center for Tax and Budget Accountability showed the process of the state assuming a much larger share of funding for schools is still far away, even after enacting a new general state aid funding formula and making the first $350 million deposit last year. The center did not factor in potential new dollars from a graduated-rate tax.
The center cited the State Board of Education in saying the $7.89 billion state appropriation to public schools for the 2018-19 school year was $7.35 billion short of the legislature’s adopted Evidence-Based Funding for Student Success Act. Evidence-based funding is considered the best practice in school funding because it ties the dollar amount taxpayers invest in schools to educational practices that research shows enhance student achievement over time, the center said.
While the new statute commits the state to fully funding the formula by June 30, 2027, the center said the promised $350 million in additional school funding each year will not be enough to meet the full-funding goal.
The graduated-rate income tax has represented an all-purpose answer for Democratic Gov. J.B. Pritzker, who campaigned heavily on changing the state’s tax structure. But the move by Senate Democrats to pitch a school property tax freeze also was an acknowledgment that Pritzker’s initial plan fell short of promises to provide property tax relief. Pritzker’s original plan, which would increase the current 5% deduction for property taxes from the state income tax to 6%, was adopted by the Senate and is also part of the package. It would cost an estimated $100 million in state revenue.
Senators also approved and sent the House a plan to eliminate the state’s estate tax, applied to estates above $4 million. The tax has long been derided by opponents as a “death tax” that hurts large-scale family farms and businesses.
But such a move also has its costs. A Civic Federation study in October estimated estate taxes, a volatile revenue source, generated $275 million for the state’s general bank account and have averaged about $282 million per year during the last decade. While representing less than 1% of revenue to the state’s general fund, it would still amount to lost dollars for a financially troubled government.
Still, it is the school property tax freeze plan that will gain the most attention as part of the push for the graduated-rate income tax if the House sends it to voters for consideration in the 2020 election.
In defending the proposal, Manar said the freeze plan had the potential of forcing individual lawmakers to take a stand on local property taxes on an annual basis when the state considers its budget. Manar said it was something lawmakers should “welcome,” though legislators often try to escape criticism over property taxes because the state doesn’t get real estate tax revenue and property taxes are set at the local level, not in Springfield.
“We should loop in the direct conversation about tax rates to the state budget because we all know they have a direct impact on what school districts do,” Manar said. “So in the future, under this measure, a vote on the budget would also be a vote on a very significant piece of everyone’s property tax bill in this state. That is a good step in the right direction.”
The state constitution says the state “has the primary responsibility for financing” public schools. The state’s high court has ruled that the phrase was a goal and not a mandate.