Reform Local State Tax Policies intro

Reform State and Local Tax Policy

Taxes have an impact beyond the public revenue they raise — intentionally or unintentionally, they result in incentives that shape our communities.

State and Local Tax Policy

Jul 23, 2013

To create livable communities and keep our region economically competitive, state and local tax systems should encourage effective land use, generate good jobs, and trigger sustainable economic activity. Our tax policies should avoid causing large inequities between households, businesses, and local governments and should be transparent and predictable for taxpayers.

Taxes Influence Key Decisions
Illinois governments rely more on sales and property taxes than other states, which can cause inefficiencies (such as high local tax rates, a host of exemptions and limitations, or counterproductive competition for residential and commercial development) and inequities (such as the widely varying local government tax bases across our region and the regressive nature of the tax system overall). These taxes influence where businesses locate and where housing is built, often distorting land use decisions that could be better shaped by market forces.

Our current sales tax system pushes communities into intense competition to attract retail businesses that generate sales. Such developments, including "big box" stores and auto dealerships, offer fewer economic benefits compared to the high-wage jobs and economic impacts of office developments and industry. An over-reliance on sales taxes can also leave municipalities short of funds when retail sales slump in economic downturns.

Though they are the most important revenue source for local governments, property taxes vary greatly from community to community. If well designed, they can match local service needs with the value of residential and commercial properties and provide a stable source of local revenue that does not dramatically change from year to year. But in other cases, property taxes can create confusion for taxpayers and local governments alike. For example, assessment levels often differ by county, special exemptions apply to some property types but not others, and state-imposed local tax caps set arbitrary limitations on annual local tax levies — all of which can create instability and unpredictability. And our dependence on the property tax for public education creates wide disparities in school funding throughout the region.

Tax Polices to Make Our Region More Competitive
Reforming our tax policies will improve the livability of our region and enhance our business climate by broadening the tax base, limiting land use distortions, and making the system more predictable, transparent, and fair. To guide these needed reforms, GO TO 2040 establishes a task force of local governments, businesses, and tax policy experts reporting to the CMAP Board to recommend action on a small set of state and local tax policy issues.

The GO TO 2040 recommendations intentionally do not focus on raising tax rates or increasing overall revenues for state and local governments. Reforms can be structured to keep taxes level overall. But even without adding new revenue, reforming state and local tax policies will help our region stay economically competitive for the long term.

Big box retail and auto dealerships in metropolitan Chicago generate more local tax dollars but lower-paying jobs and less regional economic output than the office and industrial options. The revenue disparity is driven largely by the sales tax.
Sources: Minnesota IMPLAN Group, U.S. Bureau of Labor Statistics, and S.B. Friedman and Co.

Address Existing State and Local Revenue Sharing Systems
More than $5 billion in state tax revenue, much of it from sales tax, is disbursed annually to our region's local governments. This system of state and local sales tax sharing creates an incentive for local governments to emphasize retail land use (such as auto dealerships and big box stores) at the expense of uses potentially more beneficial to the regional economy (such as offices or industrial development). These revenue sharing structures should be adjusted to support economic efficiency and fairness and to reduce competition among local governments for tax dollars.

Address Property Tax Caps, Classification, and Exemptions
Property taxes provide revenues vital to local government services, yet sometimes their complexities and incentives distort economic decision making and place undue stress on households, businesses, and local governments. Property tax processes need to be simplified and made more transparent and fair through the elimination of some special exemptions, differing assessment classifications, and state-imposed caps on the property tax.

U.S. Personal Consumption Expenditures 
Source: U.S. Department of Commerce, Bureau of Economic Analysis

Address Expanding Sales Tax to Services
Though services make up a much larger and growing portion of the economy, the State of Illinois taxes many goods but only a few services. Services now make up 70 percent of all personal expenditures, while goods make up just 30 percent compared to an even split about 40 years ago. Extending the sales tax to some services will expand the tax base, allow lower sales tax rates without reducing overall revenue, and make the sales tax more progressive because low-income earners consume more goods relative to their incomes than higher earners do.

Address Local Tax Capacity
Some areas within the region have a much larger economic base of property and retail sales than others, which gives them a greater "tax capacity." Extreme divergences make it hard for many local governments to provide essential services and attract new residents and businesses. Even worse, this gap increases over time, as municipalities with strong revenues can keep property tax rates lower while also providing high-quality services and infrastructure. The region must address how tax policies hinder the economic well-being of many of its communities.

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