By James Regan

As published by Midwest Real Estate News, October 2006

“When an appeal reaches the level of the Illinois Property Tax Appeal Board or Circuit Court, a favorable decision for the taxpayer creates hardship for the taxing districts.”

As our lives have become more and more complicated and we seek to solve those complications, the presence of unforeseen consequences begins to affect every facet of our lives. This was readily apparent in the living wage ordinance recently vetoed by Mayor Daley. The proposed ordinance guaranteed a minimum wage of $10.00 per hour and an additional $3.00 for essential health services for each worker. This attempt to improve the incomes of retail workers would cause the unforeseen consequence of big box retailers abandoning Chicago for the suburbs, reducing jobs and tax revenues for the city.

Unforeseen consequences in taxation 
Local government have been forced to become increasingly dependent on revenues generated by real estate taxes. Most communities contribute 60 percent of their general real estate tax revenues, excluding capital funds, to education services, which include elementary schools, high schools and community colleges. The Chicago Public Schools’ 2005 budget amounted to $4.3 billion. Just under $2 billion, or 46 percent, is funded directly from local revenues, 37 percent comes from the state and 17 percent from federal funds. Real estate taxes are the major engine supporting local services. They have also become the most important source for development.

The lat 25 years offers an interesting study of “unforeseen consequences” in the real estate tax arena. The 1949 federal Housing Act provided federal funds to cities for urban redevelopment in the post-World War II period. The act made money available to either private developers or public housing agencies for assembling and reselling or leasing land for predominantly residential uses. Many state legislatures created housing authorities to act as urban renewal agencies to manage this program. The earliest urban renewal projects were often characterized as “slum clearance” and generated the most controversy because of the widespread displacement of residents and businesses and the demolition of historically significant buildings.

In 1972 the Nixon administration adopted a revenue sharing program, which gave federal funds to state and local governments for their unrestricted use. It was adopted on the rationale that the Federal Government had preempted the strongest and most effective tax revenue sources and had a far more secure financial base than state and local governments.

In the early ‘80s, the Federal Government’s Revenue Sharing Program provided local unrestricted federal financing in the amount of approximately $7 billion. By 1985, the federal budget deficit had risen to $222 billion. President Nixon’s well-intentioned 1972 program fell victim to the unforeseen consequence of $222 billion deficit.

TIFs: Another Victim

Tax increment financing (TIF) became a viable means for local municipalities to foster development and growth in declining areas. The theory behind TIF is relatively straightforward. Public improvements in a designated area can be financed by the increase in property taxes generated by private development. The theory holds that redevelopment of blighted areas can be stimulated, raising property values and increasing commercial activity, thus, providing an incremental increase in tax revenues. TIF allos a municipality to capture this tax increase to pay off the debt incurred for items such as land acquisition, sight development, environmental cleanup and infrastructure upgrades. Through TIF, local governments can borrow and spend against future incremental tax revenue increases brought about by the development.

In 1977, Illinois adopted TIFs with the passage of the Tax Increment Allocation Act, which authorizes money to finance eligible project costs with incremental property tax revenues.

By May 2002, the TIF program in Illinois had grown from one TIF district to 782 districts located in 74 counties. In August 2006, the Cook County Clerk issued his TIF District Annual Report which shows the following:

Within Cook County, 375 Districts are listed on the report for the 2005 tax year. Of those 136 (36.2 percent) are within the city of Chicago; Total Countywide TIF incremental value is more than $10 Billion, 152,383 or approximately 9 percent of the county’s total 1.7 million properties are within TIF districts for 2005.

No one denies that TIF programs have their critics, but it has to be admitted that the institution of TIF districts has revitalized the central business district as well as many neighborhoods in Chicago. A ride on any commuter train in northeastern Illinois documents the new village centers made possible by TIFs.

While a growing body of literature exists which critiques and evaluates TIF contributions to the overall community, one area must be addressed because it creates broader consequences for the general community.

Special taxing districts such as school, water, and fire districts are extremely concerned with the effects of TIF on the local community. The growth related to TIF increases the need for public services, but there is no corresponding growth in tax revenues to accommodate these needs. One critic states:

“Concerning schools specifically, advocators of TIF in Illinois argue that the state-supported funding for schools in TIF districts increases when growth occurs due to TIF, but Illinois is presently ranked 48th out of 50 states for the amount of funding the state provides for public education. Combined with the extraordinary amount of TIF Districts that exist in Illinois, schools see a significant decrease in available funds during the life of the TIF, yet the essence of the TIF is economic and community growth resulting in a much higher demand for educational services. As a result, Illinois schools have lost an average of $83 Million annually to the TIF authority.”

The Cook County Clerk in his 2005 TIF District Report notes that with Countywide TIF incremental value now at a little over $10 billion, the increment represents about 7.5 percent of the county’s total current equalized asset value of approximately $133 billion.

If that increment were available for calculating tax rates, the County’s overall tax rate and that of the Forest Preserve District would each be about 7 percent lower and the special taxing districts, including schools, would receive a larger share of the taxes collected.

Since approximately 60 percent of the real property tax bill goes to education, schools feel the loss of revenue more than any other service provider. Their struggle for adequate funds has led to new strategies, including aggressive efforts to protect their budgets. Now normal operating practices see school districts intervening in property tax litigation. Some explanation is necessary.

Before the late ‘80s, real estate tax budgets for commercial and industrial properties were not a significant factor on an owner’s bottom line. As local government relied more on real estate taxes, owners have taken notice. Class A office properties in Chicago can pay as much as $10-$12 per rentable square foot on real estate taxes. Hotel properties can easily pay $4,000-$5,000 per room in taxes, and shopping malls will pay $20 per leasable square foot. In addition, in recent years as residential properties have doubled in value, their taxes have grown proportionately.

As a result, valuation complaints to the assessment appeal boards and the courts by both homeowners had commercial and industrial property owners have proliferated. Pressure is place on local governments to rearrange the proportion of tax burden borne by industrial properties, homeowners and businesses. As these appeals have grown, the taxing districts, and especially the school districts, have become more aggressive in opposing reductions in assessments. In some states such as Ohio, the school districts practically control the whole appeal process. Over the last few years, the city of Chicago, as well as the Chicago Public Schools, has joined the fray.

When an appeal reaches the level of the Illinois Property Tax Appeal Board or Circuit Court, a favorable decision for the taxpayer creates hardship for the taxing districts – especially the school districts. Currently no special funds have been created for the refunds granted by real estate tax litigation; they have to be paid out of the operating funds for later years. That money had already been budgeted for specific areas, not for tax refunds.

The process and mechanisms of government were created to promote growth and, in turn, revenues. Unforeseen in that process was the ensuing struggle between taxpayers and government. Government seeking the participation of business in its growth strategy is easily perceived as anti-business and, therefore, suspect.

James P. Regan is the managing partner of the Chicago law firm of Fisk Kart Katz and Regan, Ltd., the Illinois member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys.