For local property tax relief, state must fix revenue policies

The county treasurer recently released a report that found Cook County property taxes are too high. According to the treasurer, from 1995 through 2024 property taxes increased by $6.8 billion or 182% in the county. While noting state actions are in part to blame, the report called out school districts for hiking “property tax levies by 189.4%” during that period, or “nearly double the rate of inflation.” While that’s true, it understates the state’s role in driving-up property taxes.

It would be reasonable to expect schools to limit spending — and hence property tax increases — to inflation, if they were adequately funded. They aren’t. Currently, education funding in Illinois is $3.2 billion less than what the evidence indicates is required to provide every child a quality education. The main reason for this shortfall is the state’s failure to sufficiently fund education.

Today, state-based revenue covers only 27% of K-12 funding, well below the national average of 45%. That pushes the primary burden for funding schools down to local property taxes. In fact, fully 62% of K-12 costs are covered by local revenues — compared to the national average of just 42% (the feds cover the balance). So the state’s inadequate investment forces schools to increase property taxes at rates that outstrip inflation.

Which means the only sustainable pathway to meaningful property tax relief in Illinois is for the state to assume the primary financial responsibility to fund education. Unfortunately, Illinois doesn’t have the fiscal capacity to do so due to the structural deficit that’s historically plagued its General Fund. A “structural deficit” exists when tax revenue growth consistently fails to cover the cost of maintaining the same level of public services from year-to-year, after adjusting for inflation.

And no, overspending isn’t driving Illinois’ structural deficit. In fact, real General Fund spending on services in the current fiscal year is 14.3% less than it was under Republican Gov. George Ryan back in FY 2000. Whenever overspending isn’t the cause of a structural deficit, flawed tax policy is.

Illinois tax policy is so flawed it fails to satisfy any of the basic principles needed to create a sound fiscal system. Of those principles, the most crucial from a revenue standpoint is that taxes be imposed where economic activity is both significant and increasing over time. Neither Illinois’ income nor sales tax, the two primary revenue sources that feed Illinois’ General Fund, satisfy this principle.

The state’s income tax is structurally flawed because Illinois is constitutionally prohibited from using a graduated rate structure. This hampers long-term revenue generation because of the tremendous spike in income inequality that’s occurred over the last four decades, when the average incomes of the wealthiest 1% in Illinois ballooned by over 325% in real terms, while average incomes grew by just 30% for everyone else. Illinois can’t solve this problem directly without a constitutional amendment, but it can raise more revenue from wealthy folks by increasing the flat income tax rate, and then targeting tax relief to low- and middle-income families to offset any additional tax burden such an increase would otherwise create for them.

Then there’s Illinois’ sales tax, which focuses mainly on transactions involving goods, not services. That’s a losing proposition, given services are both the largest and fastest growing segment of Illinois’ economy. Expanding the sales tax base to include all consumer services, like Wisconsin and Iowa already do, would generate needed revenue that’d grow with the economy over time.

Bottom line: To reduce property taxes in any meaningful way, the state needs enough new tax revenue to allow it to assume the primary role in funding education.

• Ralph Martire, rmartire@ctbaonline.org, is Executive Director of the Center for Tax and Budget Accountability, a fiscal policy think tank, and the Arthur Rubloff Professor of Public Policy at Roosevelt University.