Illinois disburses various state revenues to local governments based on criteria outlined in state statute. Additionally, the state collects many locally imposed sales and excise taxes on behalf of local governments. Public Act 100-0023 includes several changes that will reduce the revenue available to the local governments that rely on those sources.
Municipalities and counties in Illinois receive a share of the state's income tax revenues through the Local Government Distributive Fund (LGDF) based on their population relative to the state's total population. Municipalities and counties will continue to receive 10 percent of all income tax generated under the rates in effect before January 2011; thus, the additional revenues generated by the income tax increase will all accrue to the state. In addition, Public Act 100-0023 implements a temporary change to LGDF disbursements, reducing payments by 10 percent for revenues generated during FY18.
Under the Act, local income tax disbursements will no longer pass through the GRF, and will instead directly go to the LGDF. The change is intended to result in municipalities and counties receiving these funds during the month they are collected, rather than two months later. To the extent that the Illinois Office of the Comptroller has sufficient cash at hand, August disbursements will include revenues generated from both June and August 2017, and September disbursements will include revenues generated from both July and September 2017. In subsequent months, disbursements will return to normal.
Statewide, 6,545 local governments (such as counties, townships, municipalities, school districts, community colleges, and special districts) receive personal property replacement tax disbursements based on statutory criteria. The disbursements totaled $1.5 billion in FY17. The FY18 budget appropriates $103.5 million for community college operating costs out of these revenues, thereby reducing the remainder available for disbursement to local governments under the regular criteria.
Furthermore, starting in FY18, the state will begin charging a 2 percent service fee for collecting the RTA sales tax, home rule and non-home rule sales taxes on behalf of counties and municipalities, Metropolitan Pier and Exposition Authority sales tax, several other local taxes, as well as state sales tax disbursements to the RTA. Previously, the state had charged various administrative fees on a smaller set of taxes collected on behalf of local governments, such as the county motor fuel tax, municipal telecommunications tax, and automobile renting tax. The new fees, which the Illinois Department of Revenue estimates at $60 million per year, will be transferred to the Tax Compliance and Administrative Fund. Due to the service fee, local governments and the RTA will receive less of the sales tax revenues they generate.
Most of these provisions affecting local governments result in a reduction in revenues, thus further constraining local government resources, particularly at the municipal level. However, Public Act 100-0023 includes a provision that allows home rule municipalities to issue bonds backed with state disbursements. This opportunity will likely lower borrowing costs for municipalities able to take advantage of the provisions. Home rule municipalities could issue these bonds in lieu of general obligation bonds, or use the provision to refinance general obligation bonds.
Overall, many of these policy changes make reductions to state disbursements to local governments, while failing to enact reforms to disbursement criteria to enhance the efficiency and the equity of the system and facilitate positive regional economic outcomes. Home rule municipalities now have a new statutory tool to lower financing costs, but many small non-home rule municipalities that already face significant resource constraints will not be able to take advantage of this development.