November 9, 2009
Under the old state statute that limited the property tax rates of the Chicago Public Schools, Tax Increment Financing directly restricted property tax revenues available to CPS because it froze part of the equalized assessed value (EAV)—the tax base—available for taxation.1 This rate limit statute still exists, but it no longer impacts the school district’s tax levy due to the introduction of the Property Tax Extension Limitation Law (PTELL, often called “tax caps”) in 1995, which limits the schools’ tax extension, not the rate. The amount of property tax revenue CPS can collect is now principally determined by the rate of inflation, not by changes in EAV. Tax caps have become the operative property tax limit for most units of local government in tax-capped counties where inflation has grown more slowly than EAV.
As explained in the Civic Federation’s TIF Issue Brief,TIF does not take away tax revenue from CPS or any other unit of local government in Chicago; instead, it raises property tax rates higher than they otherwise would have been. Taxpayers both inside and outside of TIFs have higher tax rates due to TIF, but it is not quite true to say that we all pay more taxes because of TIF. If TIF did not exist, it is reasonable to assume that most municipalities would raise some other tax revenue to fund economic development and related infrastructure.
If you believe that all of the new construction in a TIF district would have occurred even if the TIF did not exist, then it is true that the school district lost some property tax revenue to TIF because new property is excluded from the tax cap limit in the first year it is assessed. But an interesting side effect of the interaction between TIF and the tax cap is that because TIF increment EAV is excluded from the tax cap limit in the year that a TIF is dissolved, the school district can access EAV it never could have accessed without the TIF. Under PTELL, the EAV growth of existing property is subject to the tax cap so it does not bring more tax dollars to the school district. TIF dissolution brings both new construction and existing property growth back to the school district outside the tax cap, along with a boost in available tax revenue.
At the end of the day, the State of Illinois’ General State Aid formula dampens the effects of any property tax revenue increases for CPS. The State aid formula is offset by local property tax revenues in such a way that CPS only sees a net revenue increase equal to roughly 30% of the property tax increase.
The interaction of tax caps, TIF, and the State aid formula is complex. While it is unclear how much property tax revenue schools would receive in the absence of TIF, it is clear that they have made agreements with the City of Chicago to receive nearly $900 million from TIF.
See the Civic Federation’s TIF Issue Brief for a more detailed description of how TIF affects units of local government and taxpayers.
1. Rate limits are statutory maximum tax rates applied to each purpose (fund) for which a taxing district may levy taxes. Until recently, state statute set a baseline rate for a fund and a maximum statutory rate. The baseline could be increased up to the statutory maximum only by voter referendum. Public Act 94-976 changed this in 2006 by allowing taxing districts to exceed the voter-approved rates and levy up to the statutory maximum. The current maximum tax rates by fund and their statutory references are compiled by the Illinois Department of Revenue in a document for easy reference.