Evaluating Ideas for Homeowner Property Tax Relief

November 11, 2021

The Lincoln Institute of Land Policy (Lincoln Institute) released last week an evaluation of common property tax relief programs used across the United States. The report also makes recommendations for the best practices in promoting a property tax system that is fair and also retains the ability to provide sustainable revenue. The Civic Federation has long supported some of the reforms recommended in the report, such as circuit breakers. For Illinois policymakers, we believe the report is an excellent companion to the Civic Federation’s own recommendations to reform the Cook County property tax system. This blog will look at which of the approaches to property tax relief the State of Illinois uses and how they conform to the best practices outlined in the report and the Civic Federation’s recommendations.

The Civic Federation supports the property tax as an important component in the overall structure of taxes that support local government. The most significant positive features of the property tax are its reliability as a revenue source for local government and its visibility to taxpayers. However, there are also challenges associated with the property tax, such is its lack of a direct connection to current income and impact via capitalization on property values. Homeowner relief programs of various types are therefore common across the U.S. However, as noted by the Lincoln Institute in the report, poorly designed and/or implemented relief programs can “undermine municipal fiscal health and the quality of local services” so evaluating such policies and coming up with a sustainable package is crucial.[1]

Approaches to Property Tax Relief in Illinois and Cook County

Many of the polices that either directly or indirectly affect property taxes explored in the Lincoln Institute’s report are now or have been in use in the State of Illinois. This is unsurprising because Illinois’ local governments have some of the highest reliance on property taxes as a percentage of their revenues, and residents pay some of the highest property taxes as a percentage of personal income.[2] According to the Tax Foundation, in 2019 Illinois had the second highest property taxes as a percentage of owner-occupied housing value. The following sections provide a review of several of the policies in use.

Classification

The purpose of classification is to shift the property tax burden from homeowners to businesses by producing lower effective tax rates on residential properties than on business properties. As the authors of the Lincoln Institute report note, this can make classification politically popular. However, they also note that it can “distort land use decisions, produce incentives for higher public spending, and reduce economic growth.”[3] The report recommends homestead exemptions and tax credits as better alternatives for tax relief.

Additionally, the report notes that if classification is used, it is better to use different nominal tax rates than different assessment ratios because differential assessment levels are more difficult for taxpayers to understand. The report explains that using a 100% assessment ratio for all properties allows taxpayers to better understand their tax bills and assess how accurate the assessment is.

Illinois state statute requires that all real property be valued for the purpose of property taxation at 33 1/3% of its fair cash value in every county except Cook. Cook County is the only county in the State of Illinois that sets different property tax assessment levels for different types of property. Classification is expressly permitted for counties with a population greater than 200,000 by the Illinois Constitution Article IX Section 4. The state constitution also requires that the level of assessment or rate of tax for the highest class of property be no more than 2.5 times the level of assessment or rate of tax for the lowest class of property. The Illinois Constitution permits classification by rate or by class. However, Cook County has elected to implement assessment classification rather than tax rate classification. Cook County has changed differential assessment levels numerous times, most recently in 2017. Currently residential and apartment properties are currently assessed at 10% of full market value and commercial and industrial properties at 25%.

In using differential assessment and a system that is not based on a 100% assessment ratio, the Cook County classification system therefore is problematic, according the Lincoln Institute’s analysis. The Civic Federation takes the position that Cook County real estate should be uniformly assessed according to market value. However, the Federation recognizes that ending classification would be politically difficult because it would create a large tax increase for residential and other property currently assessed at the lowest ordinance level and a corresponding decrease for business and other property types currently assessed at higher ordinance levels. The Civic Federation believes that the current difference between the highest and lowest ordinance levels of assessment (10% and 25%) should be narrowed gradually in order to phase out the Cook County classification system and begin assessing all property at uniform levels of assessment on an ad valorem basis. This would end the Cook County exception and make legal assessment levels consistent statewide.

Another alternative as outlined in the Lincoln Institute report would be—as is allowed by the Illinois Constitution—to classify by tax rate, assigning business properties a higher tax rate than residential properties. Such a move would not make the Cook County property tax system less complicated. However, it could have the advantage of making the relationship between how much residential and commercial properties pay clearer, particularly given recent studies that have outlined serious inequities within the property tax system in Cook County.

Tax Limitations

The Lincoln Institute report examined three types of tax limitations: rate limits, assessment limits and levy limits. Illinois has all three types of limits enacted in law. Tax limitations are intended to constrain growth in property taxes.

In Illinois rate limits are statutory maximum tax rates applied to each fund (purpose) for which a non-home rule taxing district may levy taxes. The current maximum tax rates by fund and their statutory references are compiled by the Illinois Department of Revenue in one document. Some funds, such as bond and interest funds, torts and liability insurance funds, workers’ compensation, unemployment insurance and certain pension funds have no rate limit. Home rule governments are not subject to rate limits on any fund. If the levy requested by a taxing district for a specific fund exceeds the maximum allowable for that fund, the County Clerk must reduce the levy to the maximum allowable amount. The Lincoln Institute report notes that rate limits as a tax limitation are inflexible and can have a greater impact on low property value areas that might not be able to generate sufficient revenue from the rates set in law.

Illinois also imposes levy limits through the Property Tax Extension Limitation Law (PTELL) or “tax caps” as they are often called, for Cook, the collar counties and 33 other counties that have implemented these limits by referendum.

While rate limits apply to specific funds, PTELL is intended to limit the growth of the overall agency levy to 5.0% or the rate of inflation, whichever is less. It is important to note that the PTELL does not “cap” taxable value of property, property tax bills, or even the total property tax extension of a taxing district subject to the law.

PTELL does not completely limit the total extension of a taxing district because some funds and some equalized assessed value are excluded from the limiting rate calculation. Home rule units of government are not subject to PTELL. Tax levies for purposes including some types of bonds, special service areas, and special education and recreation for persons with disabilities are explicitly excluded, as is the EAV for new property, annexed property and recovered TIF increment. If the district’s levy exceeds the maximum for funds subject to the tax cap, the County Clerk must reduce the aggregate extension accordingly.

The Lincoln Institute notes that levy limits are preferable to rate limits because they “constrain taxes with fewer unintended consequences.” The authors warn against levy limits that are too tight and therefore negatively impact government budgets and services and against perverse incentives under such programs for governments to reflexively tax to the cap so as not to miss out on revenue, whether the government needs it or not.[4]

Rate limits and levy limits are two conceptually different ways of limiting property taxes. By restricting fund tax rates, rate limits attempt to set the maximum tax burden as a percent of taxable value of property. Levy limits like PTELL instead aim to directly limit the dollar amount of revenue a taxing agency can collect. Under rate limits, the tax extension is directly related to EAV, such that taxing agencies can collect more revenue when EAV grows and less when it declines. Under tax caps, the tax extension is largely indifferent to changes in EAV and is limited instead by changes in the rate of inflation.

A third kind of tax limitation—assessment limits—is only currently present in Illinois through two programs: the Senior Citizens Assessment Freeze Homestead exemption program and the Longtime Occupant Homeowner Exemption. Assessment limits set a cap on annual growth in the assessed value of a property. They are intended to prevent significant tax increases when property values are rising.

The “Senior Freeze” in Illinois freezes an eligible homeowner’s EAV at the level of the year prior to a homeowner’s first application. In other words, it exempts all EAV increases over the base amount. To qualify, a homeowner must be 65 years of age and have household income of $65,000 or below. Unlike in other states such as California, the senior freeze assessment limit in Illinois only applies to certain qualifying senior citizen owned property. However, it is still subject to some of the same drawbacks as other assessment limit programs identified by the Lincoln Institute, the most important of which is that it creates large disparities between tax bills for similar properties, can discourage mobility and is more valuable to the owners of properties in areas where property is rapidly appreciating in value.[5]

The Longtime Occupant Homeowner Exemption applies to homeowners who have been in their homes 10 years or longer, have total household income of $100,000 or less and a significant assessment increase that exceeds the limit set by the Illinois Legislature. According to the Cook County Assessor, fewer than 2% of the residential properties in the County qualify.

The Civic Federation believes that the Property Tax Extension Limitation Law has been an effective limitation on local government property tax revenues and has protected taxpayers from larger tax increases that would have been possible without PTELL while the real estate market is rising. The Federation continues to recommend that it be extended statewide.

Property Tax Relief Programs

Four major types of property tax relief programs were profiled in the Lincoln Institute report: homestead exemptions and credits, income-based homestead credits, circuit breakers and deferrals. Three of these programs are currently or have in the recent past been authorized in Illinois.

Homestead Exemptions

Homestead exemptions are the most common form of property tax relief provided to homeowners in the U.S. with programs in 33 states.[6] There is a general homestead exemption in Illinois for all homeowners, as well as special exemptions targeted at senior citizens, disabled persons, veterans and properties recovering from natural disasters. There is also a new program signed into law in July intended to reduce assessments for newly constructed or renovated affordable rental properties.

Homestead exemptions are intended to reduce the taxable value of homeowners’ property. Illinois offers 11 homestead exemptions. The Lincoln Institute notes in their analysis that fixed dollar homestead exemptions can help produce a more progressive distribution of tax since they exempt a larger percentage of lower-value homes. However, they caution that programs for all homeowners are less cost-effective than targeted programs. The Civic Federation’s position on homestead exemptions is that they ought to be reduced or limited in favor of more targeted programs for relief such as a state-level circuit breaker program. Additionally, for the homestead exemption programs that require income verification, the current system of County-administered relief creates an additional layer of application paperwork and audit procedures for a unit of government that is less well-equipped to verify household income.

Circuit Breakers

Circuit breaker programs are designed to provide relief when a person’s property tax liability exceeds a certain percentage of their annual income and are meant to prevent homeowners from being overburdened by property taxes. Some of these programs provide property tax credits and others provide relief from income taxes.

The Lincoln Institute report says circuit breaker programs are more cost-effective than other property tax relief programs, and particularly exemptions available to all homeowners, because they are targeted to provide “significant assistance to the most heavily burdened households at a lower cost overall.”[7] The Civic Federation strongly supports a means-tested circuit breaker program administered by the State of Illinois through the state income tax as a more efficient and effective means to provide property tax relief to low-income homeowners and renters.

The State of Illinois used to administer a circuit breaker program for seniors and people with disabilities, but funding for it was eliminated to help balance the state’s budget in 2012.

Deferrals

Property tax deferral programs allow a homeowner to defer all or part of their property tax and special assessment payments on their principal residence, usually until the home is sold or transferred. Property tax payments with interest are then due and can be paid from the selling price of the property. The Lincoln Institute notes that deferrals can directly help homeowners with liquidity problems and do not push taxes on to other property owners because the property tax payment is made by the government running the program as a loan to the homeowner.

The State of Illinois has a Senior Citizens Real Estate Tax Deferral Program in which the deferred amount of tax up to $5,000 is borrowed from the State, which makes the property tax payment on behalf of the homeowner. A lien is then placed on the property and interest of 6% per year accumulates until the loan is repaid. The program is limited to seniors 65 years of age and older with household income of no more than $55,000 and have owned their home for at least three years. The Lincoln Institute recommends that deferral programs charge interest that is not too high and varies with market rates, because otherwise the government is making money from the program, and that lower age limits should be considered.

The fourth program the Lincoln Institute reviews that is not in place in Illinois is income-based homestead credits, where the amount of property tax relief is tied to the applicant’s income, with the relief decreasing as income increases. The upside of such programs is that they are more cost-effective since they are more targeted, but they also involve increased administrative burdens.

Overall Recommendations

In addition to evaluating the common property tax relief programs the report makes five key recommendations, including one that has not been widely tried in Illinois and could hold significant promise as an option that would not shift tax burden while providing relief to homeowners: monthly property tax payments.

The Federation generally agrees with most of the recommendations in the report:

1. Quality assessment practices with regular revaluation;
2. Well-designed state aid formulas to assist low property value communities;
3. Targeted and cost-effective property tax relief from circuit breakers and deferrals; and
4. Monthly payments.

Approximately half of all property tax bills in the United States are paid once or twice a year.[8] Illinois is no exception, with the property tax in Illinois due in two installments, according to State statute.[9] This makes the property tax a very visible tax, since property owners are billed for it, but it also can create financial challenges for households that “struggle to save for large, infrequent expenses.”[10] In Illinois, late property tax bills are first subject to an interest penalty and then eventually might be subject to a tax sale. According to the Lincoln Institute, there are two approaches to more frequent property tax payments that are used in the U.S.: monthly payments or prepayment programs. In a prepayment program, advance payments are deposited into an escrow account and then applied to the property owner’s tax bill when it comes due. Prepayment programs are in place in Indianapolis, New York City and large counties in Ohio.[11] Certain counties in Illinois, including DuPage, St. Clair and Jackson, have established monthly prepayment programs for property taxes. Milwaukee implements a program whereby all taxpayers have the ability to pay in full or monthly, with automatic enrollment for monthly payments once the first monthly payment is made. The Lincoln Institute notes that some jurisdictions may require significant changes to their computer systems to implement monthly payments, but ongoing administrative costs are usually small.[12] Such a change to how property taxes are billed in Illinois would be worth studying.

However, the Federation does not completely agree with the report’s fifth recommendation about avoiding tax limitations. We understand the drawbacks associated with tax limits, and particularly with assessment limits, but the Federation continues to support the Property Tax Extension Limitation Law and that it be expanded state-wide. PTELL has been successful in moderating property tax increases during times of strong growth in property values while also maintaining important exceptions for priority areas of spending such as bonds. Additionally, taxpayers have the ability to decide to tax themselves at a level higher than the cap via referendum.

In all, the Lincoln Institute report is a great resource for policymakers and taxpayers alike. There is great deal more to the report than could be contained in this blog post, so we urge our readers to take a look and then also review the Federation’s recommendations to improve the Cook County property tax system.