Recommendation
Develop tax policies that strengthen communities and the region

The region needs a tax system that provides ample opportunity for local governments to generate revenue that supports their plans, goals, and desired development patterns and their ability to adapt to changing local economic conditions. However, the State of Illinois has not taken steps to modernize the tax system for current technologies and economic patterns like online purchasing of goods, rising use of services instead of goods, increased intermodal development, and a growing preference for urban amenities throughout the region. Recent tax reform initiatives have been unable to overcome public concern that the tax burden is already too high. Any successful modernization effort must address this concern head on and make the case that a combination of improved approaches to provision of public services, changed taxes to respond to a modern economy, and appropriately tailored user fees can improve the services that taxpayers care about.

Under the current tax structure, communities without sales tax generating businesses or dense commercial development often have few revenue options sufficient to cover the cost of public services and infrastructure. However, as internet sales expand and consumers increase spending on services, many communities will no longer be able to rely on sales tax revenue to the same extent.  Illinois has a narrow sales tax base focused on tangible goods and few services, which is out of sync with increasing market demand for consumer services. See the Fully fund the region’s transportation system recommendation in the Mobility chapter for a discussion of the potential to reform the sales tax to support the RTA sales tax as well as local governments.  In addition, Illinois’ reliance on MFTs to fund the Illinois transportation system is becoming outmoded as vehicle efficiency improves and fuel consumption drops.  Together, these changing mobility and purchasing patterns call for rethinking what revenues local governments receive to ensure the fiscal stability that local jurisdictions need to provide a strong quality of life.

Retail vacancy in northeastern Illinois is already high relative to other regions, and competition for retail establishments may continue to grow. To further promote retail, some local governments limit space for development that does not generate sales taxes or other major revenues. For example, some communities exclude non-sales tax generating businesses from commercial areas. These choices reflect local preferences, but have large effects on the region’s built environment and ability to support economic activity at the regional scale. While often producing lower revenues, office and industrial development provide support for industries ranging from manufacturing, to goods movement, to business services, to corporate headquarters. Many communities aspire to promote these regionally beneficial industries, but current tax structures do not always offer options for municipalities to recoup the costs of these developments. For example, manufacturing facilities often produce little property tax revenue and generate truck traffic that imposes high wear and tear on local roads.

Regionally, the current tax system does not always support the multijurisdictional nature of many industrial and office employment areas, which often cluster geographically and cross jurisdictional lines. The infrastructure that serves these centers can extend through many communities and is maintained by a complex web of jurisdictions. The region’s municipalities need additional tax structure and transportation funding options to support the service and infrastructure needs of these locally and regionally desired land uses. Additionally, the growing prevalence of internet sales may increase truck traffic on the entire roadway system, including roads serving warehousing and distribution businesses, and residential customers receiving deliveries.

Tax policies have a broad impact on the ability of local jurisdictions to provide services and keep infrastructure in a state of good repair. Individual municipal revenues depend on land use mix, size of the tax base, and state and local tax structure. Local policies on and willingness to match fees and taxes to service costs also play a role. For example, DuPage County consistently implements user fees such as development impact fees and a county-wide MFT. Costs grow from a combination of interrelated factors: locally defined needs, the amount and condition of infrastructure, and long-term debt and obligations.

Local governments do have options to better support their communities through local action, particularly through imposing user fees to support specific services and infrastructure. Since 2013, for example, Downers Grove has generated revenue for stormwater improvements by imposing a fee weighted toward properties that have the greatest impact on that system.

ON TO 2050 sets a target for reducing the number of municipalities that receive comparatively low levels of state revenues.  State statutory criteria for revenue disbursements, like sales or motor fuel taxes, can create wide divergence in revenues among municipalities. State criteria to distribute funds to local governments vary from population, to retail sales, to lane miles, to other factors. These criteria do not take into account municipalities that may have a very low tax base compared to costs for basic services, nor do they account for infrastructure condition. In addition, the state’s own financial situation has caused local governments to experience reduced funding and increased uncertainty. Consistently provided state funds, such as the Local Government Distributive Fund, play a crucial role in local government budgets, but the State has not modernized its tax system nor developed a long-term plan to pay for its obligations.  The following map illustrates the differences in state revenues distributed to municipalities in 2015. ON TO 2050 envisions that all municipalities will receive these state funds at levels greater than 80 percent of the regional median level by 2050.

Communities with a low tax base and limited options for increasing revenue often face a sustained or recurring cycle of disinvestment. Many areas with lower tax disbursements overlap with EDAs, which perpetuates inequities and reduces opportunities for people and places to thrive. Achieving regional growth that includes EDAs may hinge on their residents and businesses having access to programs and services that many communities sometimes take for granted. Communities where revenues are low relative to their needs may struggle to fund municipal operations and infrastructure without imposing high tax rates, which further discourage commercial and residential development and cause the local tax base to grow more slowly than the cost of public services. This cycle of disinvestment is self-reinforcing and also drives the adoption of high tax rates that can be a significant burden on low income residents.  Greater investment in these communities is integral to improving their fiscal health, and the prosperity of the region overall. 

In Cook County, property tax classification is an additional factor that drives up commercial and industrial property tax rates, hurting disinvested communities in particular. This may discourage business investment in Cook County in favor of opportunities elsewhere. By using a higher assessment ratio for businesses than residences, this system allocates a higher share of the property tax burden to businesses -- a policy that does not exist in the collar counties -- deterring reinvestment and hindering resulting growth in the property tax base. In many communities, high commercial and industrial tax rates present a barrier to attracting development, even when infrastructure and infill opportunities are plentiful. By reforming its classification system, Cook County could grow the tax base over time and reduce the tax burden on residents, mitigating potential increased residential rates.

Profile

Julie Lomax says public education is key to working with residents on new tax policies, such as the stormwater utility fee implemented in Downers Grove a few years ago.

Read Julie's story

 

This recommendation appears in the Governance and Community chapters.

The following describes strategies and associated actions to implement this recommendation.

Develop new funding solutions to support the multijurisdictional nature of development and infrastructure