Exclusive insight from the Illinois Policy Institute

This edition of The Policy Shop is brought to you by Adam Schuster, senior director of budget and tax research.

Chicago Mayor Lori Lightfoot shared her budget proposal last month. Now what? City council members now have until Dec. 31 to pass a budget for the city.  City council members now have until Dec. 31 to pass a budget for the city.  Here’s the skinny of what Lightfoot proposed and what Chicagoans and the city we love are up against.
 
Finances are so shaky in Chicago that, even with an infusion of $3.5 billion in federal aid, the mayor still included a $76.5 million property tax hike. That increase comprises $22.9 million in automatic increases after Lightfoot pushed for tying property taxes to inflation last year, $25 million for debt service on bonds for Lightfoot’s $3.7 billion infrastructure plan, and $28.6 million from new property. After deducting new property, the $47.9 million discretionary levy increase would raise property tax bills by an average of $72 to $180 depending on the neighborhood. 

We’re from the government and we’re here to help
 
Seriously, with city officials receiving billions of dollars in federal aid, how are Chicagoans facing a property tax hike? Business leaders don’t get it.
 “With the historic level of federal funding coming to the city we can avoid a property tax increase that impacts all residents and businesses.” – Chicagoland Chamber of Commerce. 
 
The business community is right that a property tax increase is unnecessary considering the $3.5 billion in pandemic-related federal aid. Lightfoot’s proposed budget uses $782 million in federal funds to replace 2021 revenues, $385 million for 2022, and reserves $152.4 million for 2023 revenue replacement. That leaves roughly $581 million in flexible aid currently dedicated to new program spending. The property tax hike could be prevented by using just 2.5% of Chicago’s $1.9 billion in American Rescue Plan funding. 
 
Moreover, while U.S. treasury rules prohibit states from using aid to directly or indirectly offer tax relief, this prohibition does not apply to cities. Lightfoot has the greenlight to help overburdened homeowners, if she wants to. 
 
Spin cycle: No new taxes
 
In her budget address, Lightfoot emphasized that her budget proposal achieves balance “without any new taxes, no reduction in city services, and no layoffs.” Similarly, a press release from the mayor’s office claims the budget has “no new tax or significant fee increases for our residents.” Lightfoot claims the $74.5 million property tax hike doesn’t count as a tax increase because automatic annual inflation increases and the increase for infrastructure were approved last year, but this argument is political spin. The bottom line is that city property owners will pay higher property tax bills next year.
 
Lightfoot could have proposed to use the federal aid to undo last year’s property tax increase, which hit during a pandemic and related economic downturn. This would meet the American Rescue Plan’s goal to “support immediate economic stabilization for households and businesses.” Stopping this year’s tax hike would not require cutting anything, just slightly scaling back some of the new spending.  Taking a small portion from each of the larger new line items could prevent the tax hike while still leaving hundreds of millions of dollars more for Lightfoot’s “community priorities” such as youth job training and affordable housing. 
 
A smaller tax increase is still a tax increase
 
How does this $74.5 million property tax increase compare with recent years?

• Way smaller than the $543 million increase under Mayor Rahm Emanuel in 2015.
• Less than the $94 million property tax hike in Lightfoot’s budget last year.

Still, it is an increase and would add an unnecessary burden to a city economy still recovering from COVID-19. (Did we mention it was also unnecessary given the city is sitting on $3.5 billion in federal aid?!)
 
Illinois’ pandemic restrictions, as well as $655 million in state tax hikes pushed in Gov. J.B. Pritzker’s budget this year, have together contributed to the struggle for Illinois’ businesses to create jobs for workers as fast as the rest of the nation. The state’s unemployment rate remains 35% higher than the national average. Piling on even modest additional tax hikes on Chicago residents and businesses will mean fewer jobs and lower wage growth for residents as the economy recovers from the COVID-19 recession. 

Temporary revenue can’t fund permanent programs 

The budget increases spending by roughly $1.2 billion on a range of city services from the Chicago Police Department, affordable housing, and mental health services to a pilot program for a universal basic income. Unfortunately, that spending is propped up by one-time federal aid that expires by 2024, meaning many programs will have to be cut or financed with significant tax hikes within just two years. > If Lightfoot wants to live up to the rhetoric in her budget address – in which she promised to invest in Chicago’s economic recovery while giving predictability and stability to taxpayers – she needs to develop and execute a plan to match revenues and expenses long-term. Only a long-term balanced budget can give city residents confidence programs will continue and taxes will remain affordable.
 
The elephant in the room 
 
Despite calling pension debt the city’s “biggest problem” in May, Lightfoot’s address did not include any plan for Chicago’s pension crisis. Her predecessor, Mayor Emanuel, endorsed a constitutional amendment to allow pension reform late in his final term. Amending the constitution is the only way to unlock changes to 3% compounding cost-of-living increases Lightfoot has called “unsustainable.” 

Pension costs will consume more than $2.3 billion of the city’s budget, or 21.4% of its own source revenue, meaning local collections excluding state and federal grants. That’s $461 million more than last year, a spike that accounts for 63% of the $733 million 2022 budget deficit reported by Lightfoot in August.

Chicago’s pension spending is up nearly $1 billion just during the three years Mayor Lightfoot has been in office and nearly 500% since 2004 in nominal terms. Lightfoot bragged that this is the first year the city is making “actuarially determined” pension payments, but that does not mean they are “actuarially sufficient.” Chicago’s rapid and unsustainable growth in pension spending still won’t be enough without benefit reforms.
 
Springfield must let the people vote on a constitutional amendment to control rising pension costs. Lightfoot needs to use her platform as a public official to push the General Assembly into doing the right thing if Chicago is going to reverse its economic stagnation and provide residents with quality services at a reasonable cost.
 
Read a full rundown of the problems in the proposed Chicago budget here.

 

Illinois Policy: Not Again!

Bryce Hill Senior Research Analyst Illinois Policy

Illinois Gov. J.B. Pritzker tried once to cancel federal tax relief for small businesses, and failed. Now, state lawmakers are using a shell bill to advance the governor's unpopular idea once more, even as small businesses continue to struggle and many Illinoisans remain out of work.

On March 17, the House Executive Committee voted 9-6-0 to pass Senate Bill 217, which insiders believe will be the vehicle for the $1 billion small business tax hike the governor has championed since February. The bill is primed to be amended, pass the House and Senate, and be sent to Pritzker for his signature, all in one day.

2020 was one of the worst years on record for the state's economy, and Illinois, 440,000 small businesses felt this pain more than most. Luckily, up to $1 billion in state tax relief is on its way thanks to Illinois automatically adopting a federal tax break intended to help struggling businesses.

Leading up to and during his State of the State and budget address on Feb. 17, Pritzker pushed to close what he dubbed "corporate loopholes" in the state's tax code. One was a provision in the Coronavirus Aid, Relief and Economic Security Act, which Illinois tax code would typically adopt automatically, that would essentially allow struggling small businesses to get an advance on their future tax returns.

Pritzker in January was encouraging state lawmakers to eliminate this provision for S corporations, limited liability corporations and partnerships, the most common tax filing statuses for small businesses. His plan quickly drew opposition from 11 business groups as kicking them with a tax hike as they struggled through a pandemic.

Pritzker failed, but on March 17 was again pushing the change that would effectively strip these small businesses of tax refunds they would be owed by the state of Illinois. The provisions were already eliminated for C corporations, the most common designation for large businesses.

It has been reported that 440,000 small businesses would be impacted by this change. These businesses are set to receive an estimated $500 million to $1 billion in tax refunds from the state. They also create 69% of all new jobs in Illinois.

Illinoisans can contact their state lawmakers to oppose any tax hike on small businesses. Illinois jobs are at stake.

Here's how to contact your state representative.

P.S. Click below to contact your state representative to tell them to oppose Pritzker's $1 billion tax hike

CONTACT YOUR STATE REPRESENTATIVE 

 Our mailing address is:

Illinois Policy

190 S La Salle St Ste 1500

Chicago, IL 60603-3489

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Illinois Policy Institute: Property Taxes

Hilary Gowins Vice President of Communications Illinois Policy Institute

 

Vincent Mazzaferro is an engineer. He can see the potential in things  even when they're falling apart. So, when it came time to buy a home, he picked a fixer-upper in Elmwood Park where he lives today with his fiance.

Mazzaferro's love of refurbishing unloved properties also led him to the opposite end of Cook County in 2019, when he decided to buy a five-unit property in Thornton, Illinois, population 2,338. He bought the place for $125,000, hoping to turn it into high-quality, affordable rental units. 

Mazzaferro knew the property would require a lot of work and lacked the basics, such as good flooring, drywall or proper plumbing. He estimated each of the units would need at least $20,000 in repairs to catch up on years of neglect. So he was stunned when he got his property tax bill or $20,000, or 16% of the purchase price. 

 "$20,000 annually in property taxes is what you pay for on a mansion," Mazzaferro said. "This is not a mansion."

  

His monthly payment on the property is $3,030. The principal is $600 and the interest is $400, but his taxes are $1,650. That means taxes make up more than half of what he's paying each month. 

How does a person end up with a $20,000 property tax bill on a $125,000 house? It defies logic and the answer is complicated. "My recourse is asking them to assess it fairly," Mazzaferro said. "And they're just throwing my appeal out the window like it doesn't exist."

 Over 60% of Mazzaferro]s property tax bill goes toward two school districts and costs $11,534.

 

Thornton Township High School District 205 serves 4,722 students in three schools in grades 9-12. Thornton School District 154 serves just 226 K-8 students in one school.

This isn't an efficient way to run four small schools.

If those two school districts were consolidated and the savings were passed on to local homeowners, Vincent could see his property tax bill cut by nearly $4,200.

Illinois has 859 school districts and 25% of them serve just one school. Florida, which serves over 700,000 more students than Illinois, has 75 districts. Florida averages 38,000 students per district.

In addition to Illinois being home to the second-highest property taxes in the country, one of the most painful facts about owning a home here is that tax dollars don't go to the services people expect and value.

Consider the situation in Elmwood Park, where Mazzaferro lives and paid $10,373 in property taxes in 2019.

Roughly 41% of property tax dollars for the village of Elmwood Park went to fund pensions. The police pension fund is less than 30% funded and the fire fund is less than 40% funded. Elmwood Park leaders cited police and fire directly as the reason why taxes went up in 2019.

Most attention surrounding Illinois' pension crisis focuses on the $144 billion hole Springfield is staring down. But the pension crisis is a local problem, too, worth $63 billion that causes property taxes to rise each year.

For Mazzaferro, with two property tax bills costing him over $30,000, he can't make the numbers work in Thornton.

"I see potential in fixing [up that property] because I want to add value to the community, but I'll have to sell it," he said. "I can't afford it because I can't raise rents enough to cover the renovations and the taxes."

"High taxes drive the money out. And I can't reinvest. I can't reinvest in the property, or the community, and no one else can afford to, either."

Illinois is a Mess

Bryce Hill Senior Research Analyst Illinois Policy Institute  Via E-mail

 

Illinois lost 423,300 jobs during 2020, a history-making drop with nearly half of the losses in the leisure and hospitality sector thanks to repeated COVID-19 restrictions. The state saw 6.9% of its jobs evaporate, the worst year on record. Jobs losses were felt in every sector of the state economy, except for construction employment which saw a December surge that recouped the year's losses.

Leisure and hospitality jobs were hurt the most, losing 198,100 (-31.7%) jobs during the year, nearly half of all job losses, the Illinois Department of Employment Security reported. Suffering the next largest job losses was the mining sector, which lost 1,000 (-12.3%) jobs; the information sector shed 9,100 (-9.5%) jobs; educational and health services payrolls declined by 58,300 (-6.1%); other services payrolls dropped by 17,200 (-6.7%); government lost 48,700 (-5.9%) jobs; manufacturing jobs fell by 23,100 (-4.0%); professional and business services lost 35,600 (-3.8%); financial activities shed 9,800 (-2.4%) jobs; and trade, transportation and utilities lost 23,400 (-1.9%) jobs. The newest data from mid-November to mid-December shows Illinois' final full month of 2020 saw 2,500 (-0.04%) jobs lost, marking the second consecutive month of job losses. Meanwhile, the national economy also stalled in December, shedding 140,000 (-0.1%) jobs, the first month of national job losses since April.

Hardest hit during the past month in Illinois was the leisure and hospitality sector, which lost 40,900 (-8.8%) jobs during the first full month of the reinstated ban on indoor dining. Only two other sectors of Illinois' economy shed jobs in December: the information sector lost 1,300 (-1.5%) of its jobs, while "other services" payrolls shrank by 800 (-0.3%). Some sectors of the state economy continued to recover in December. Construction added 8,300 (+3.8%) jobs; mining gained 200 (+2.9%) jobs; professional and business services payrolls increased by 13,000 (+1.5%); trade, transportation and utilities grew by 10,100 (+0.9%) jobs; educational and health services added 4,500 (+0.5%) jobs; manufacturing gained 2,400 (+0.4%) positions; financial activities grew jobs by 1,400 (+0.3%); and government added 600 (+0.1%) jobs. Although it looks like there may be some hope with a COVID-19 vaccine being dispersed, Illinois still has a painful economic recovery ahead. Making matters worse for already-struggling businesses, Gov. J.B. Pritzker is continuing to pursue new taxes, even after voters soundly rejected his progressive income tax hike Nov. 3. The governor has suggested he may now be in favor of raising the state's flat income tax 20% or closing "loopholes" to raise more revenue. He recently failed to get the lame duck legislature to cancel a pandemic recovery tax credit for small businesses that would have taken from $500 million to $1 billion more from them as they struggle. Pritzker has vowed to pursue the money again in March with the new legislature. As the state's economy continues to struggle with the COVID-19 downturn, and to a much greater extent than the rest of the nation, it is imperative lawmakers work to avoid the harm to businesses and jobs that tax hikes would create. Economists argue against raising taxes during a recession. Instead, Illinois can improve its finances and continue to provide core services mainly by implementing constitutional pension reform. There is also the additional possibility of the state receiving federal aid by reforming state finances, if Congress adopts the Taxpayer Protection Act. Instead of just throwing more money at pension debt and deficits, constitutional pension reform and the Taxpayer Protection Act would offer overburdened Illinois taxpayers a path to declining debt, lower taxes and more effective state government. The measures would build a more sustainable recovery rather than posting more historic job losses.