Regional Economy: Tax Policy

Modernizing revenues and encouraging sustainable economic growth

Under the current tax structure, communities that lack sales tax-generating businesses or dense commercial development often have few options to cover the cost of public services and infrastructure. Tax policy that relies on property tax or retail sales causes communities to strongly value development that favors revenue from those sources. This reliance can come at a cost when it leads to:

• An overdevelopment of retail in some communities
• A lack of resources in communities that want other types of development
• A cycle of disinvestment for places with weaker markets

ON TO 2050, the region’s long-range plan, recommends reforms that modernize tax policy and encourage sustainable economic activity.

Benefits of different development types

Retail development can result in high local revenues for a community. But other types of development have benefits as well:

• Retail revenue: Building retail generates significant revenue compared to what it costs municipalities to provide those services and infrastructure.
• Additional jobs: Office and industrial development supports more local and regional employment growth than retail.
• Economic impact analysis: Some communities want development that generates higher public revenues, but there are opportunities to pursue land uses that have stronger economic impact.

Cycle of disinvestment

Communities where revenues are low relative to their needs may struggle to fund municipal operations and infrastructure without imposing high taxes. This can discourage commercial and residential development, and cause the local tax base to grow slower than the cost of public services.

Municipalities with a low tax base and limited options for increasing revenue often face a sustained or recurring cycle of disinvestment. Many areas with lower tax disbursements overlap with economically disconnected areas, which perpetuates inequities and reduces opportunities for people and places to thrive. The cycle of disinvestment is self-reinforcing and drives high tax rates that can burden residents with low income.

Modernized state tax policy

Illinois needs modern tax policies that address systemic issues affecting communities’ ability to adapt to changing consumer preferences, technology, and mobility. A reformed state tax system that offers communities more revenue options could better support regional economic development and our communities’ goals. It could also provide better support for infrastructure investment and promote long term fiscal sustainability in the transportation and land use decisions that local governments make.

Tax policies and land use trends explores the extent to which municipalities are able to support desired land uses with the disbursements of state revenue they receive from the State of Illinois.

ON TO 2050 recommends that the State of Illinois modernize and expand its sales tax base to include additional services. Doing so would generate needed revenue for transit and help communities to create a more balanced land use mix. These reforms would also ensure that similar consumers are taxed in similar ways, minimize the influence of taxation on consumer purchases, and mitigate the cascading nature of sales taxes. Discover other benefits of adding more services to Illinois’ sales tax base.

State tax policies can also create wide divergences in revenues among municipalities. As explored in Municipal capacity, municipalities with strong revenue levels are better able to maintain their fiscal condition, which leads to greater capacity to achieve local and regional goals.

Informed local reform efforts

Cook County’s elected leaders are taking an in-depth look at how the property tax system affects taxpayers and the communities that need services to thrive. To support this work, the Chicago Metropolitan Agency for Planning (CMAP) and the University of Illinois Chicago (UIC) Government Finance Research Center have partnered with the Office of the President to analyze the use of property tax relief tools in Cook County, including homestead exemptions, incentive classifications, and the foreclosure and sale of delinquent taxes. These are important tools for lowering tax bills and encouraging local development, but they can have drawbacks — especially in areas that already have greater need for private investment and jobs. Through this multi-year project, CMAP and UIC are applying their research expertise to inform discussions about the disparate and often-inequitable outcomes across the county.

CMAP and UIC analyzed how exemptions (which reduce a home’s taxable value) can affect taxpayers and taxing districts differently as well as options to mitigate some unwanted effects and enhance homeowners’ savings. The report, Current and future use of homestead exemptions in Cook County, shows that taxpayers in some areas — particularly in the south suburbs — save much less from exemptions than what proponents may anticipate and what is currently reported on their tax bills. View a summary of the findings.

Improved local development incentives

Local governments use many types of incentives to encourage development, but there can be drawbacks like high costs, diminishing returns, heightened competition, and inequitable outcomes. To enhance northeastern Illinois’ economic and fiscal position, ON TO 2050 calls for governments to reform local development incentives within a larger program of smart, regional economic development.

Cook County property tax classification

In Cook County, property tax classification can drive up commercial and industrial property tax rates, hurting disinvested communities. This policy does not exist in the collar counties. Using a higher assessment ratio for businesses than residences, this system shifts a higher share of the property tax burden to businesses. By reforming its classification system, Cook County could grow the tax base over time and eventually reduce the tax burden on residents. This would reduce the need for potential increases in residential rates.