Multiplier applied in two counties; could mean higher tax bills
Property tax for public schools
BY DAVID V, MAY A lawyer and civil engineer, he is project administrator for Walsh Brothers Construction, Chicago.
THE SQUEEZE is on for public school districts in Illinois. Caught in the pinch between skyrocketing expenses and slowly growing revenues, many districts have cut programs, reduced staff, shelved expansion plans and withheld salary increases. Some have cut extracurricular activities such as sports, school newspapers and yearbooks. Others have gone to a 12-month schedule. In human terms these retrenchments mean that many Illinois students no longer have the benefit of the same programs that students enjoyed ten or even five years ago. In economic terms, they show that the revenue base supporting public education in Illinois — from federal, state and local sources — is insufficient.
A century ago, many school districts owned property bestowed on them by law when the land was first surveyed and platted. This land was used for school-yards, rented to farmers and sold, Today very few school districts own income property, and even those rare exceptions, such as the Chicago Board of Education with its several Loop properties, derive only a tiny percentage of operating revenues from income property. Another minute portion of school expenses is covered by bequests in wills and donations by civic groups such as PTAs. The only significant source of local revenue is the property tax.
Historically, the local property tax was the largest revenue source for public schools. State and federal funding was inconsequential. The 1964-65 school year saw local property taxes generate $855 million for Illinois schools, 70 per cent of total revenues. The state provided 27 per cent; the federal government 2 per cent. Ten years later, the 1974-75 school year saw property tax collections of $1,782 million. Although this figure was 108 per cent higher than 10 years earlier, it amounted to only 46 per cent of total school revenues. The state contribution had risen to nearly 40 per cent; federal funding was almost 6 percent. The 1975-76 school year found state funds exceeding local property tax revenues for the first time. What has happened to local school taxes in the last 10 years to reduce their former commanding role in school financing?
Dynamics of the tax
To begin to answer this question, one must first understand the dynamics of the property tax. In addition to education, property taxes fund many other local public functions such as county and city governments, fire protection, parks, sewage treatment, mosquito abatement, etc. The property tax levied to provide all these services is an annual ad valorem tax on real property and on personal property owned by corporations and certain partnerships and estates. "Ad valorem" means that the amount of the tax is related to the value of the property — not to the number of bedrooms in a house or the horsepower of a car's engine. The term "real property" refers to land, buildings, other structures attached to the land such as windmills or dams, minerals in the earth and other legal interest in land. "Personal property" is everything else: automobiles, furniture, livestock and other movable goods.
Many owners of real property are not required to pay any tax at all on their property; these include the federal, state and local governments. Religious organizations are exempt from tax on property used for the religion; this covers churches, religious schools and similar property but not investment property even though the income is used for religious purposes. Likewise, certain charitable, medical, educational and scientific organizations are exempt from taxes on property used directly in activities that are thought to further the public good. A partial exemption from property taxes is provided for the elderly: $ 1,500 is deducted from the assessed value of their homes before the tax is calculated. Further tax relief comes from circuit breaker legislation which provides for refunding a portion of the property tax paid on the homes of elderly and disabled persons who have a low income.
The personal property tax on individuals was abolished in 1972. At present, private corporations are the major class subject to the personal property tax. The 1970 Illinois Constitution Article IX, Section 5(c) directs the General Assembly to replace this tax by 1979 with a nonproperty tax on corporations. it is not clear whether the legislature will comply with this constitutional mandate, but whatever the legislature decides, this portion of school revenues should remain intact barring a constitutional amendment or a shift in judicial interpretation.
The abolition of the individual personal property tax in 1972 reduced the property tax statewide by about $1 billion or about 2 per cent. The impact of this reduction was not felt in the Cook County area because the tax had been ignored there for years. Conversely, in downstate school districts, the impact on the tax was roughly double the state percentage.
The process of taxing property for schools starts with the preparation of a budget by the local school district. This budget is divided into various categories called "funds": education, operations,
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building and maintenance, capital improvements, transportation, summer education, special or vocational education buildings, fire and safety, and bond retirement. After approval by the local school board, the budget is submitted to the county clerk who levies a tax upon taxable property in the school district sufficient to raise the money required to meet the budget. To levy the tax, the clerk calculates a tax rate which is a percentage of the taxable value of local property.
The catch here is that the state has set maximum tax rates for each fund which generally can be exceeded only if the voters approve by referendum vote. Since almost every school district needs as much money as possible, the budgets are carefully designed to require the clerk to levy the maximum tax rate for each fund. Thus the tax rate ceiling limits the budget, not the other way around.
Assessment is the process whereby the values of specific pieces of property are determined and placed on the tax rolls. Typically a township or county assessor is empowered to inspect parcels and, based upon experience and utilizing standard methods, estimate the current market value of the property. This determination can be adjusted or appealed before a final entry is made to the tax rolls.
Since such a value will soon change in response to improvements, deterioration inflation, altered surrounding circumstances, the economic climate, etc., reassessment is necessary. Illinois law requires assessors to reassess all property at least every four years. More frequent reassessments are common. Specific parcels which have been improved by construction are reassessed immediately; certain areas of a county may be reassessed more quickly than others if rapid fluctuations in prices are suspected. In any event, every taxable piece of property should have a fairly recently assessed value.
Multiplier for equalization
A strange twist is added at this point. The "assessed value" of property in Illinois is by law declared to be 33 1/3 per cent of the actual market value of the property. An exception is Cook County where various classes of property are assessed at different levels — some above 33 1/3 per cent, others below. In most of the state though, a $30,000 house will be listed for tax purposes as having a value of $10,000.
But, that's not the last step. A state agency, the Department of Local Government Affairs, has been assigned the task of assuring that all counties assess at the same level. The purchase price is determined by using the property transfer tax on the sales price of every real estate transaction. This actual market value is compared to the assessed value multiplied by three. This comparison is done for urban and rural property in. each county. The department can then calculate a tax "multiplier" to equalize the assessing variations from county to county.
The main purpose for the multiplier arises from the state school aid formula. This formula is designed to apportion state education funds on the basis of local effort. This local effort is measured by the school tax rate. If the school tax rate drops below a minimum figure set by the state, state aid is reduced. The opportunity for chicanery arises in assessing local property. Intentionally low assessments, such as 25 percent of market value instead of the required 33 1/3 per cent, would allow raising the tax rate without actually raising the amount of taxes paid. The equalization multiplier makes this dodge more difficult. The equalization process also can help spot inequities between townships and between urban and rural property. Finally, the multiplier gives the assessors a continual review of the accuracy of their work.
Typical multipliers are between 0.900 and 1.500, but some are even smaller and others much higher. A multiplier of 1.050 would raise the assessed valuation of a $30,000 home from $10,000 to $10,500. If the local elementary school tax rate was 1.5 per cent, expressed as .0150, the annual tax on the owner of this hypothetical home would be $157.50 for the elementary schools. The high school district tax might well be about the same.
The two most important variables in determining how much property tax is levied are the tax rate and the total equalized assessed value. Increases in the tax rate can generally only be accomplished by referendum. The school referendum allows the aggrieved taxpayer to express complaints about high taxes and government profligacy. These referenda come in two types: proposals to raise tax rate ceilings and bond issues requiring voter endorsement. in these elections the taxpayer can say "no" not just to the question at issue but — at least symbolically -- to increased taxes and expanding government in general. Unfortunately, for the school children this approach often means that they must bear the brunt of public ire over the excessive appropriations of legislators in. Springfield and Washington whose tax proposals are
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not directly tested by election.
Has the stinginess of taxpayers caused the school financing woes? Statewide data shows that from 1967 to 1973 the average tax rate for schools, weighted according to property and students, rose from .0287 to .0362 — a 26.1 per cent rise. The cost of living index rose 33 per cent during that same period and the per capita disposable income rose 50 per cent. At first glance the voters' performance may appear wanting, but remember that this tax rate rise was three-fourths of the inflation rate and one-half of the increase in income, without considering reassessment.
Factors of inflation
From 1967 to 1973 the total Illinois equalized assessed value of taxable property rose 19 per cent, from $42.1 billion to $50.2 billion.* Combined with the 26.1 per cent rise in the tax rate, this increase meant a rise in elementary and secondary school property tax extensions of 50 per cent: from $1.21 billion in 1967 to $1.82 billion in 1973. This 50 per cent rise in local school property taxes is equal to the 50 per cent rise over the same period in per capita disposable income.+ Therefore, the property tax payers cannot be accused of being stingier with the schools. In fact, when the sums generated for public schools by state and federal taxes are added to the local property taxes, the data for Illinois shows that from 1966 to 1972, the percentage of per capita income that was paid for schools rose from 3.8 per cent to 5.5 per cent. This 5.5 per cent figure has remained fairly constant through 1975.
The rise in total assessed valuation, however, is less than might be expected. A tax based primarily on the value of real property would seem to provide an excellent hedge against inflation. Farmers know that the prices paid for Illinois farmland have been skyrocketing. Builders and would-be homeowners have watched dramatic increases in construction costs hike the prices of both new and old buildings. These price rises result from two economic factors: general inflation and expansion of the economy. General inflation particularly raises land prices because the supply of land is constant and new technologies cannot make it cheaper or outmoded.
Anyone familiar with realty knows that an investment in real property will usually retain its value relative to other investments despite use to earn income or derive other benefits. Furthermore, the expansion of both population and per capita real income are accompanied by new construction and repair and remodeling to provide more housing and business space. In an expanding economy, therefore, the total value of real property should increase at a rate greater than inflation. An examination of the most recent Illinois property statistics fails to show this.
From 1960 to 1970 the total Illinois equalized assessed value of property increased 33.3 per cent. Over the same period the consumer price index rose 31 per cent — about the same rate. But from 1970 to 1975 the assessed value — adjusted to negate the influence of the abolition of the personal property tax on individuals — rose only 17 per cent. In the same period the consumer price index rose nearly 40 per cent — over twice as fast.
The most distressing figures are the most recent. Assessed value from 1972 to 1975 rose only 6.6 per cent while inflation raced ahead 29 per cent. Since statewide property assessment data since 1975 is not yet available, one can only speculate whether assessed values have risen at inflation rates. Even optimistic estimates, however would be well below the 1976-77 annual inflation rates of 8 - 12 per cent.
Statistics of average purchase prices for used homes in the Chicago metro politan area from 1967 to 1976 show increases slightly larger than those of the consumer price index. This tends to support the hypothesis that existing property appreciates at or above the inflation rate. The further assumption that new construction and increased demand for land by a growing economy will add enough value to total property values to keep up with total disposable income is not verified. However, growth and expansion surely do occur and must amount to a large sum.
Reasons for tax loss
We can estimate how much money is involved in the imbalance between assessed values and inflation and between assessed values and personal incomes. If the taxable property in 1968 had been maintained and replaced so that similar land, buildings and personal property were in existence in 1973; and if the prices of the property had inflated at the same rate as consumer prices as measured by the consumer price index, the equalized assessed dollar value in 1973, excluding the individual personal property, would have been $55.0 billion, rather than the actual $50.2 billion. The difference is a $4.8 billion shortfall
*Source: "Illinois Property Tax Statistics," 1966-1975. Department of1 Local Government Affairs. +Source: U.S. Department of Commerce figures.
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which if taxed for schools at the 1973 average rate of .0362, means $ 174 million less for the schools in 1973, It the 1968 property had been expanded and enhanced in value at the same rate as the growth of real disposable personal income in Illinois. the equalized assessed dollar value would have been (64 4 billion -- $14.2 billion more than the actual 1973 total assessments. If the average school tax rate is applied against this sum, the amount that would be raised is a staggering $511 million. The $174 million is about 8 per cent of total school property tax revenues in 1973; the $511 million is nearly 25 per cent.
The recent failure of assessed values of property to keep up with inflation, much less with personal income growth. is something of a mystery. One factor was the abolition of the personal property tax on individuals in 1970. Although hard data is not available, an estimated $1 billion, or 2 percent, was dropped from the tax rolls. The data used above, however, was corrected to eliminate the influence of the end of this tax, so the question remains. One explanation is that a larger portion of wealth is being spent on personal property than in the past. This may be a factor in the growing gap between income growth rates and assessed valuation rises, but it does little to explain the sudden leap ahead of inflation rates over assessed valuation figures.
Another hypothesis points to the lag in the assessment, taxation and disbursement process as the critical factor. Indeed, the procedure followed in laying the Illinois property tax is ill-suited to inflationary times. The levy for a given year is based upon the equalized assessed values for the preceding year. If reassessment occurs every four years as state law requires as a maximum, the average age of assessments on the tax rolls will be two years old- Already the tax collected is three years behind inflating costs. Over a period of time when the inflation rate is fairly constant. the increase in assessed value will be fairly constant. However, when inflation really leaps ahead, the effect will not be seen in the taxes until the reassessment process catches up a couple of years later. This hypothesis Provides a fairly good explanation for the years 1960 to 1972, but fails to deal with the slowdown in assessed valuegrowth from 1972 to 1975.
Another theory has been put forward to explain the mystery of these recent years. The assessors in the 1960's were slowly adjusting the assessed valuations toward the unenforced statutory requirement that assessments be equal to 50 per cent of actual market value. When legal action created an immediate threat that this 50 per cent level would be enforced, the legislature passed a bill in 1971 reducing the requirement to 33 1/3 per cent, effective 1975. Assessors immediately, so the theory goes, began a
| The property tax has begun to fall out of favor because it often fails to satisfy a principle of taxation: apportion the burden of taxation on the basis of ability to pay |
slow readjustment of values backdown toward 33 1/3 per cent. This resulted in small increases in assessed value from 1972 to 1975 despite accelerating inflation, Unfortunately, this hypothesis defies verification and cannot alone account for all of the observed shortfall in these years.
Debate on the tax
Over the years the property tax has begun to fall out of favor because it often fails to satisfy a principle of taxation: apportion the burden of taxation on the basis of ability to pay. Ability to pay is the touchstone of the income tax, and it is in comparison to the income tax that the property tax fails to measure up. Especially hard pressed are the family farmers and the retired. The latter, often living in appreciating homes on fixed incomes, find it increasingly hard to make ends meet. For them the homestead and circuit breaker tax relief provisions are available. Farmers are in a business requiring huge capital investments in land, and the concomitant property taxes become a major business expense. Some relief has recently been provided by a state law directing assessment of agricultural land to be based upon value as used rather than value derived from potential for more lucrative uses. Thus a farm in the path of urban development will not be taxed at actual market value until the potential is actually realized.
Another principle often invoked by framers of tax legislation is that the burden of the tax should be apportioned to those receiving the benefits of the tax funds. For a drainage district or a fire protection district a property tax thereby makes some sense, but for a school district there is little relationship between property taxes and education benefits. Therefore it comes as no surprise that, with the advent of a state income tax, many favor shifting education expenses to the state.
One more line of argument against the school property tax points out that although federal grants and the state aid allocation formula have gone a long way toward equalizing per pupil expenditures in different districts, the wealthy districts are still capable of spending more than the poorer districts. In order to further equalize educational funding, many support a continued shift to state and federal financing. These people maintain that every child in the state should have an equal educational opportunity regardless of the circumstances of the school district in which the student happens to reside.
On the other side of the discussions on school taxes are those who see a threat to liberty. With the continuing transfer of funding from local sources to state and federal sources, some fear a loss of local control over schools. It is bad enough that decisions on matters such as number of school days and safety requirements are made from afar, but the specter of complete state regulation of curriculum, books, teacher salaries and discipline codes raises strong opposition among many.
Another reason given for retaining the local property tax for schools is more pragmatic. The schools need all the money they can get, and this is one source that is sure to be there next year. A new legislature can change the allocation formula; Congress can cut education funds; but the property tax will continue to provide a big chunk of money. It is hard to get people to accept taxes; but old, familiar taxes like the property tax are likely to resist the winds of change.
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We have applied the bold and italic emphasis ourselves to illustrate what we believe has not changed since 1977 and what needs fixing.
ur "representatives" in State government continue to fiddle while Rome burns and we are fed up with it.
