November 29, 2006

Property Tax Caps: Better Than Nothing?

There is widespread and bipartisan agreement among Illinois policymakers that the state's property taxes are too high-- and that the solution to the state's fiscal imbalance has to include a tax shift, away from local property taxes and towards some other source. The most obvious candidate for this alternative revenue source is the state's income tax, which is among the lowest in the nation.

But implementing such a tax shift has been a task beyond the abilities of Illinois lawmakers so far. A few years ago, lawmakers have enacted a temporary, stopgap solution for Cook County (which contains Chicago and counts for close to half of all the property value in the state), which puts a 7 percent cap on the amount by which a homeowner's taxable value can grow each year.

Sounds like a tax cut for homeowners, right? But since it's not funded by the state, Cook County has to make up the revenue loss by hiking property tax rates on what's left of the tax base. That means businesses and renters pay more. It also means that Cook County homeowners whose home values aren't increasing by 7 percent a year pay more-- hardly a defensible tax reform strategy.

But there's one arguably good thing about the 7 percent cap: people whose homes are worth a lot more from one year to the next will see a smaller resulting property tax hike than they otherwise would. Of course, the cap gives this break to everyone who's in this boat, from the poorest to the wealthiest. But it does undeniably restrict the impact of the real estate boom on certain homeowners.

It's also undeniable that a tax cap is a pretty blunt instrument for achieving this goal. And you can question whether "tax cuts for every homeowner whose home is worth a lot more" is the right goal to begin with.

So is the 7 percent cap better than nothing? The Illinois Civic Federation thinks so. In a November 27 press release, they recommend extending the temporary cap when it expires next year. To their credit, their release states prominently that the cap "is not a replacement for comprehensive property tax reform," and that in the long run it should be allowed to expire. But for now, they think that "the benefits of the [cap] outweigh its costs in terms of the portion of the tax burden shifted to non-homestead and slowly-appreciating homestead properties."

Anyone who was around for the state tax revolts of the late 1970s and early 1980s (and I wasn't among them) will tell you that short-term legislative inaction in the face of rapidly growing property taxes is a recipe for long-term dumb tax policy solutions. And it's entirely possible that absent the temporary caps that have been in force since 2004, Illinois homeowners would have broken out the pitchforks by now in a way that would make the state's already-abysmal education funding system even worse.

But I think the real outcome has just been that Illinois leaders have been able to avoid dealing with the property tax issue altogether. Newly re-elected governor Rod Blagojevich clearly just wishes the issue would go away. This "not on my watch" mentality is making things easier for those Cook County homeowners who are lucky enough to live in the right neighborhood-- but is making things worse for low-income families who already were coping with one of the most regressive tax systems in the nation.

It's time for Illinois lawmakers to stop treading water and come up with a real property tax swap solution.


At 10:29 PM, Anonymous Anonymous said...

Chicago homeowners should see the legislation which was passed last week in Springfield. The 7% tax cap was renewed but now it only applies to the low end. Result......when those 2d installment tax bills come out in the Fall of 2007, there will be anger and resentment among the middle-class homeowners. They will be getting hit the worse.

At 2:08 PM, Anonymous Anonymous said...

The only thing I ever see missing out of almost every statement about the 7% cap, is the fact that the Cap, has a Cap. The 7% cap max's out at 20,000 of Equalized Assessed Value (2003-2005). That means if you're taxes increased by more then $5,000, the 7% will give you a break of approximately $1,200, but you, as the tax payer, are responsible for anything above that, which in this example would be an additional $3,800.

The original 7% expired in 2005, and the new 7% is currently at the Senate. The new and old 7% are drastically different, and the new law adds approximately 5 additional exemptions that weren't available from 2003-2005.

However, in my opinion, when your taxes are increased by $3,000 in lower areas, to as much as $25,000 in other areas, the $1,500 exemption isn't going to do a darn thing.

These massive increases should have NEVER been done in a ONE YEAR period.... they should have been done gradually. No matter what tax exemptions, or cap is passed and pt in play, the increases are going to be more then a lot of people can handle, or even accept, and will cause, anger, heart ache, bankruptcy, foreclosures or just people are just going to move out of Cook County, and Illinois all together.

What these people don't understand, is that there are still some people out there that have actually been able to afford a home, but are living paycheck to paycheck, and these increases are going to hit really hard to the general population.

The Senate is NOT expected to pass this new 7% as easily as the house did, because there is a power play going on, and one person wants this and another wants that. They've already passed the deadline to pass by a majority, now they will need a SUPER majority to pass this.

There is NO WAY that the 2nd installment bills will be ready anytime before November or December.


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