Funding schools would relieve property taxes

Fair tax, consolidating townships would also provide benefits, says new ILEPI-UIUC study

Property taxes don’t have to rise — if the state increases its share of funding for public education. (Shutterstock)

By Ted Cox

The state could rein in property taxes and create jobs and grow the economy by pulling out of last place nationally in education spending, according to a new study released Thursday.

The study, “Assessing Potential Options to Provide Property Tax Relief in Illinois,” is from the Illinois Economic Policy Institute and the Project for Middle Class Renewal at the University of Illinois Urbana-Champaign. It points out that the state ranks seventh in the nation for highest property taxes, with the main reason being that “Illinois ranks 50th in the nation in the share of K-12 education revenues coming from the state.”

Property taxes, therefore, have to make up the bulk of local education spending — 63 percent, according to the study, while state funds pay for about 24 percent of local education. “Illinois ranks 50th nationally in state support for public schools, and it’s no secret that municipalities are relying on property taxes to fill the gap,” said study co-author and ILEPI Policy Director Frank Manzo IV. “However, property taxes are regressive and reliably consume a larger share of income for working and middle-class families than the state’s highest wage earners. This leaves lawmakers with the choice between finding ways to equitably boost state funding or dramatic reductions in the delivery of local public services.”

According to a news release touting the study’s release, “By adding $5 billion in state funds over four years to the coffers of K-12 public schools, property-tax levies could be held constant.” It examines three proposals to raise that extra revenue — a graduated income tax (endorsed by Gov. Pritzker as the “fair tax”), a tax on retirement incomes above $100,000, and expanding the sales tax to some services — and compares them to conservative ideas to cut government spending instead.

Comparing them, the study finds raising revenue, according to any of the three proposals, would create up to 14,000 jobs and potentially generate almost $1.25 billion in economic activity, while simply cutting property taxes 10 percent without raising other revenue would have a cataclysmic effect, costing more than 27,000 jobs and shrinking the state economy by by more than $2.2 billion.

Better would be consolidating townships to gain efficiency in administrative costs. But according to the study a 20 percent cut in the state’s 1,431 townships, while creating $312 million in property-tax relief statewide, would still only produce $11 million in economic activity and create just 100 jobs, while the average homeowner would see just over a 1 percent cut in property taxes, for savings of about $60.

The study makes the case that property taxes are regressive. It points out that “a home represents the largest share of total wealth for working families, so most of their wealth is taxed.” The rich might pay more in property taxes for pricier homes, but “the increase in home value generally does not increase at the same rate as incomes,” while other forms of amassed wealth — say, holdings in stocks and bonds — go untaxed unless they’re cashed out, in which case they’re still usually taxed at a rate lower than the income tax as capital gains.

“The average Illinois homeowner pays more in property taxes (7.4 percent of their income) than state income taxes (4.9 percent of their income),” the study states. “In Illinois, homeowners earning $35,000 pay 10 percent of their taxable incomes in property taxes, and families earning $75,000 contribute 6 percent, but the average millionaire pays less than 1 percent.”

“The structural dependency our K-12 schools currently have on property taxes drives regressive levies higher,” said Professor Robert Bruno, study co-author and director of the Project for Middle Class Renewal. “The data show that only by increasing the state’s share of education funding can we equitably reverse this dynamic, while delivering both economic growth and real relief for the working and middle-class families who are hurt most by the current system.”

Adding $5 billion in state funding — on top of the additional funding allotted last year and retweaked this year under the evidence-based funding formula — would enable counties to hold property taxes flat for four years. Of the three proposals to generate that additional revenue, the progressive income tax would also produce an estimated $1.2 billion in economic activity and create more than 14,000 jobs, a tax on retirement income would generate $854 million and create 10,000 jobs, and a tax on services such as attorney fees would generate $1.1 billion and create more than 13,000 jobs.

The study compared that to House Bill 320, submitted earlier this year by tax hawk Rep. Dave McSweeney of Barrington Hills, which would have unilaterally cut property taxes 10 percent across the state. The bill went nowhere in the General Assembly, but according to the study, if it had been adopted, “local governments would have been forced to slash spending on essential services by $3 billion annually,” including in education and infrastructure. “Although property-tax relief would produce an economic stimulus,” the study added, “it would be completely offset by the cuts to long-term public investments — shrinking Illinois’s economy by $2 billion and 27,000 jobs.”

The study concludes: “Local schools are responsible for about two-thirds of all property tax assessments, so any effort to reduce property taxes likely relies on increasing the state’s proportion of the revenue spent on public education. Any other approach would have little effect and may produce negative unintended consequences for school quality. By rebalancing the state’s share of the investment in public education, Illinois lawmakers could reduce Illinois’s overreliance on property taxes and promote both taxpayer fairness and funding equity across school districts.”

“A state task force is expected to issue a report on the cause of increasing local tax burdens later this month,” according to the study’s accompanying news release, “but four prior efforts since 1982 have called out a lack of state funding for public education and the expansion of local units of government as major contributing factors.”