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School Board Journal
March / April

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Local option income tax for Illinois schools:
A look at the numbers

By DAVID R. OLSON

Illinois State Senator Harry (Babe) Woodyard's proposal to authorize local school districts in Illinois to levy an income tax garnered 18 votes in the State Senate in 1993 during the 88th General Assembly. The current 89th General Assembly has put off action on this and other school finance measures while it awaits a report from a panel headed by former University of Illinois President Stanley Ikenberry. The report is scheduled to be submitted in March.

Most school finance reformers agree that school funding should not rely on the unpopular, regressive property tax, and a local income tax is an attractive alternative to many. But what would a local option income tax actually look like? Table 1 on page 14 offers some specific figures for a sample of 24 school districts. See below for information about how the figures were derived.

History

Like a broken record, the school finance debate in Illinois seems to cover the same ground over and over again. In 1947, the 15-member School Finance and Tax Commission issued a report that said the group:

. . . strongly believes that increased State aid for education is a primary claim on the present revenues of the State. There is an increasing sentiment that state aid should be used to relieve local tax burdens, and that a larger share of the funds for education should be provided on a state-wide basis.

The schools and school children of Illinois have long been burdened by an inadequate and inequitable system of school finance. The quality of public education . . . depends upon an increase in the level of State funding . . .

Analysis

One reason the property tax has persisted is because it has been linked to the desire for local control of local government services, especially schools. Perhaps it is time to separate the question of school finance into two parts:

(1) system of taxation (property vs. income tax), and
(2) level of government (state vs. local).

Agreement is widespread that the property tax is unfair. In his 1965 landmark study, Economics of the Property Tax, Dick Netzer quotes from Jensen's 1931 Property Taxation in the United States:

Should some prosecuting attorney drag the [property] tax as a culpritbefore the bar of justice, he would be embarrassed by the abundance of expert evidence against it. No writer of repute writing on state and local taxation in the United States has failed to offer his bit of derogatory testimony. No commission appointed to investigate any state tax system, which has had time, means, and inclination to secure the evidence, has failed to recommend the abolition of the tax or measures tending toward fundamental modification.

In 1973 the Illinois Economic and Fiscal Commission told the General Assembly about the "many complaints" it had heard about the Illinois property tax and offered this insight:

As the United States has progressed from a rural, land-based economy to an urban, production and service-oriented economy, income from non-property sources has become predominant. Hence the amount of property possessed by an individual, business or community has become a poorer measure of actual taxpaying ability. The present consensus of tax experts seems to be that income is the best measure of ability to pay.

As American society in the nineteenth century grew more diverse, more industrialized and more urban, and as intangible wealth grew, the property tax came under increasing attack as being inequitable, regressive and poorly administered. As early as 1895, writers questioned whether the ownership of property, rather than income, was the appropriate test of a taxpayer's ability to pay.

State vs. local government

Since the local property tax is undesirable and the state government relies on sales and income taxation, it has been assumed that more reliance on state resources is the desirable public policy. In addition, the Illinois Constitution says that:

The State shall provide for an efficient system of high quality public educational institutions and services . . .

The State has the primary responsibility for financing the system of public education . . .

In addition, a more open local political system that offers the poten- tial for experimentation and innovation argues strongly in favor of local government support (and control) of our most important public services, including education.

Illinois' Constitutional mandate can be fulfilled by authorizing the use of modern tax systems at the local level so the goal of efficient educational institutions and services has a much greater likelihood of actually being accomplished. The Woodyard proposal is a significant step in that direction.

Lack of data

Data that would permit a straightforward calculation of local income tax rates needed to replace some or all of the school property tax burden does not exist. The Illinois Taxpayers Federation has used county income tax data to explore this question, but the geographical boundaries for Illinois' 972 school districts do not usually coincide with county lines and so trying to understand how a local option income tax would affect taxpayers in a particular school district has been clouded with uncertainty.

The author, while serving on the school board of Jacksonville School District 117, became interested in this question in 1989 and researched the data available at the Illinois State Board of Education and the Illinois Department of Revenue (DOR). It was expected that since 1986, when the Illinois Tax Form 1040 began to ask for the taxpayer's school district code, income tax information aggregated by school district code would be obtainable. However, DOR officials reported that since including the school district code on the tax form is not mandatory (meaning that the form is not returned to the taxpayer if the code is missing), only about 80 percent of the tax returns actually contained the school code information. As a result, DOR does not record this information when compiling income tax data from the individual tax forms.

Research method

However, income tax data is compiled by taxpayer zip codes. As with county lines, zip code boundaries do not coincide with school district boundaries. But in talking with school and postal officials in Jacksonville's case, it was apparent that using the four zip codes for the principal communities that lie inside the school district, a reasonably good estimate of the state income tax liability for residents in the school district was possible. This strategy was later expanded by the author to estimate similar information for the Lincoln area schools (a dual as contrasted with a unit district) and to the 22 other districts reported in Table 1. For the eight dual districts studied, the property tax extensions for both the high school district and the corresponding elementary districts were combined and an average property tax rate was computed. The result is an estimated average income tax rate that could be shared by the respective high school and elementary districts. There is no suggestion that the dual district arrangement would have to be changed should a local option income tax be adopted.

In order to get an idea about what rate of local income tax would be desirable, a simple question was framed:

What would the local income tax rate need to be in order to replace one-half (50 percent) of the current property taxes imposed by a particular school district?

Twenty-four school districts (16 unit districts and 8 dual districts) were chosen based on the membership of the 88th Illinois General Assembly. Every attempt was made to include at least one school district in the sample that would be of interest to members of the Democratic and Republican leadership, as well as members of the education and revenue committees in the House and Senate. Although the sample is not random, it does have a good cross section of urban, suburban and rural districts and a balance of upstate and downstate districts.

The amounts presented in Table 1 are estimates. In order to provide better information about the local income tax proposal, legislation is needed to require Illinois taxpayers to include the school district code on their Illinois tax returns so that the Illinois Department of Revenue can compile accurate and reliable data on taxable income and tax liabilities. This would be the first (and long overdue) step in allowing a more complete analysis of the local option income tax idea.

It is readily apparent that the local income tax rates needed to replace one-half of the current property tax burden are quite reasonable. In 20 of the districts studied, the income tax rate increase needed is smaller than the rate decrease in the property tax. In only four cases (Jasper County District 1, Chicago District 299, Palatine Township High School District 211 and Zion-Benton Township High School District 126) would the estimated income tax rate exceed the rate reduction for the property tax.

Even so, under the Woodyard proposal, it would be up to the local school board and the voters to decide if the change (or some other mix of property and income taxation) was desirable. Given the advantages of a local income tax over the property tax, the author would expect most school boards (and most voters) to prefer a substantial realignment away from the property tax in favor of a local option income tax. Some districts may want to go further and completely replace the property tax with the local income tax. The percentages in column four would simply be doubled. Other districts may want to go beyond replacement and impose higher taxes via a local income tax while still other districts may wish to stay with the current property tax system and not impose any local income tax.

David R. Olson is associate professor of accountancy at the University of Illinois at Springfield. He is willing to compute tax replacement figures for other communities. You may reach him at 217/786-6541.

Property tax reduced by 50 percent
replaced by local income tax

Table 1 presents four information items for each of 24 school districts:

(1) the total amount of property taxes levied by the school district (for all funds) in 1991 (and collected in 1992), an amount that is compara- ble across districts and in most cases very close to the actual amount of taxes collected in fiscal year 1992:

(2) one-half of (1), the amount of property tax revenue to be replaced (hypothetically) by the local option income tax;

(3) the amount of property tax rate reduction (expressed as a dollar amount per $100 of assessed valuation) that would be implied by a 50 percent reduction in the property tax; and

(4) the rate of local income tax needed to replace only the amount of the property tax reduction in column 2.

Unit Districts (see above for description of numbered columns.)

County          District            1              2          3       4

Jasper        Jasper Co. 1  $    3,827,478  $  1,913,739  $1.4644    2.3%
Cook          Chicago 299    1,212,383,894   606,191,947   2.2124    2.3
DuPage        Elmhurst 205      35,742,043    17,881,025   2.0394    2.0
St. Clair     Cahokia 187        4,712.936     2,356,468   2.5604    1.9
Dekalb        Sycamore 427       7,227,766     3,613,883   2.5102    1.8
Kane          Batavia 101       13,738,344     6,869,172   2.2510    1.8
Macoupin      Carlinville 1      3,129,440     1,564,720   2.5818    1.7
ChampaignUrbana 116             12,663,198     6,331,599   2.2912    1.6
Henry         Geneseo 228        4,170,017     2,085,009   1.9070    1.4
Brown         Brown County 1     1,011,701       505,850   1.8614    1.3
Vermilion     Danville 118      10,715,842     5,357,921   2.4347    1.2
Rock Island   Rock Island 41    12,540,494     6,270,247   2.6014    1.2
Peoria        Peoria 150        28,043,564    14,021,782   2.2138    1.2
Madison       Alton 11          12,185,485     6,092,743   1.9038    1.1
Morgan        Jacksonville 117   6,499,315     3,249,658   1.9061    1.1
Knox          Knoxville 202      1,412,693       706,347   1.7488    1.1
Macon         Decatur 61        14,231,458     7,115,729    1.6316   0.6

Dual Districts

(Includes the high school district listed and the corresponding elementary districts. See above for description of numbered columns.)

County      District            1            2           3         4

Cook      Palatine 211     232,302,843   116,151,422   3.1440      3.5
Lake      Zion-Benton 126   24,372,099    12,186,050   2.5560      3.4
Cook      Thornton 215      30,105,939    15,052,970   3.2944      2.0
Cook      Palos Hills 230   90,735,442    45,367,721   2.6300      1.8
Logan     Lincoln 404        7,057,838     3,528,919   2.6019      1.8
LaSalle   LaSalle-Peru 120   9,649,005     4,824,503   2.3617      1.5
Lake      Lake Forest 115   32,544,520    16,272,260   1.3585      0.9