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TAX CAPS

Module by: Thomas Kersten. E-mail the author

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Note:

This chapter has been peer-reviewed, accepted, and sanctioned by the National Council of Professors of Educational Administration (NCPEA) as a significant contribution to the scholarship and practice of education administration. This is Chapter 6 of a Collection (text) entitled Taking the Mystery Out of Illinois School Finance, authored by Thomas A. Kersten and co-edited by Theodore Creighton. CLICK HERE to access entire book.

One of the most often misunderstood pieces of Illinois school finance legislation is the Property Tax Extension Limitation Law (PTELL) or as it is usually called – the property tax cap, which was created to slow the escalating growth of property taxes. PTELL which initially included only the collar counties of Chicago (DuPage, Kane, Lake, McHenry, and Will) when it was passed in 1991 was subsequently extended to Cook in 1994 (Illinois Association of School Administrators. 2008). Ultimately, all Illinois counties were given the option to extend PTELL to property in their counties although not all chose to do so. The figure below shows the latest status of the tax cap in Illinois counties (Illinois Department of Revenue, 2012).

Figure 1
PTELL Chart
PTELL Chart (4475dea658268-64-1.png)

Tax Cap Provisions

In order to slow the growth of property taxes, legislators focused the tax cap on the governmental units’ property tax extensions, the amount of property taxes the school district received the prior year. Therefore, under PTELL, a school district’s property tax extension can increase annually up to 5% or the rate of inflation as measured by the All-Urban Consumer Price Index (CPI), which ever is less. Since 1990, the CPI has not exceeded 5%. The history of the PTELL limit (Illinois Department of Revenue, 2012) is shown in the figure below.

Table 1: History of CPI
Year December CPI-U % CPI Increase from Prior Year % PTELL Limit Levy Year Year Taxes Paid
1989 126.1        
1990 133.8 6.1 5.0 1991 1993
1991 137.9 3.1 3.1 1992 1993
1992 141.1 2.9 2.9 1993 1994
1993 145.8 2.7 2.7 (5% for Cook) 1994 1995
1994 149.7 2.7 2.7 1995 1996
1995 153.5 2.5 2.5 1996 1997
1996 158.6 3.3 3.3 1997 1998
1997 161.3 1.7 1.7 1998 1999
1998 163.9 1.6 1.6 1999 2000
1999 168.3 2.7 2.7 2000 2001
2000 174.0 3.4 3.4 2001 2002
2001 176.7 1.6 1.6 2002 2003
2002 180.9 2.4 2.4 2003 2004
2003 184.3 1.9 1.9 2004 2005
2004 190.3 3.3 3.3 2005 2006
2005 196.8 3.4 3.4 2006 2007
2006 201.8 2.5 2.5 2007 2008
2007 210.036 4.08 4.1 2008 2009
2008 210.228 0.1 0.1 2009 2010
2009 215.949 2.7 2.7 2010 2011
2010 219.179 1.5 1.5 2011 2012
2011 225.672 3.0 3.0 2012 2013

To illustrate how the tax cap works, let’s consider an example. If a school district has a property tax extension of $20,000,000 in tax year 2011 and the tax cap for the next year was 2.7%, this means that the school district is only entitled to collect 3.0% more or $20,600,000 for tax year 2012.

Limiting property tax revenues to the CPI or 5% can be especially onerous to growing school districts. Therefore, when PTELL became law, a provision was included which allows school districts to receive increased property taxes beyond the 5% or CPI level for something called “new growth.”

Without some provision for additional revenues with increasing enrollment, this could be a real problem for school districts. For example, what would a school district do if it experienced a substantial increase in enrollment because of a new townhouse development but could only increase its property tax revenue by 3%? Fortunately, legislators recognized this issue when they designed PTELL.

New Growth Provision

Since communities are constantly evolving, legislators recognized that some provision was needed to adjust for changes such as enrollment growth. The provision, commonly referred to as “new growth,” allows school districts to levy additional property taxes for increases in the assessed value related to new construction and other improvements (Illinois Department of Revenue, 2012).

Consider this typical example. Your school district has a large parcel of vacant land. A developer receives approval to build a subdivision, which increases the enrollment of the local school district by 200 students. If it costs $8,000 to educate each student, where would you find $1,600,000 to pay for these children’s education, particularly if your property tax extension was limited to 3%?

Under the new growth provision of PTELL, the school district can capture the additional property tax revenue generated by the new property which is exempt from the tax cap for the first year. This means that new property including residences and business property such as office building, shopping centers, and industrial facilities will generate additional property tax revenues beyond the cap (Kersten, 2008). The property taxes resulting from new growth may or may not be sufficient to pay the costs incurred for the additional children in this instance, but are nonetheless important. However, the school district must levy for it the first year it comes onto the tax roles or permanently loose taxes that otherwise would be attributable to the new growth.

Calculating New Growth

To illustrate how the new growth provision increases revenues, let’s consider an example below. For illustration purposes, we will assume that the school district had a property tax extension for FY2009 of $20,000,000. The CPI (tax cap rate) for the next year is 3.0%. As we discussed earlier, under PTELL, the school district can only receive $20,600,000 in property taxes for the coming year (an increase of 2.7% over the prior year) even if actual property values increased more than the 3.0%.

However, during the year, a new hotel was placed on the tax roles. After completing the tax assessment process, the tax extension office calculated that hotel would generate another $200,000 in additional property taxes based on the district’s tax rate. Because of the new growth provision, the school district was eligible to receive both the $20,600,000 plus the additional $200,000. As a result, the new extension base for the following year would be $20,800,000. As you can see, this provision is very important to tax capped school districts especially in property poor school districts, which most need every possible tax dollar available.

Table 2: Extension with New Growth
2009 Tax Extension $20,000,000
2009 CPI (3.0%) X 1.03
Maximum Collectable Taxes $20,600,000
Hotel Property Tax Revenue + 200,000
New Extension Base $20,800,000

Home Improvement Exemption

Not all new growth is immediately available to taxing bodies. Under Illinois law, the first $25,000 of EAV on new residential property is tax deferred for four years (Illinois Department of Revenue, 2012). After the fourth year, though, the $25,000 is included in the new growth figure for the following year. If a residential improvement exceeds the $25,000 figure, the amount over the exclusion is treated as new growth immediately (Kersten, 2008).

What is especially important to understand is that school districts make their property tax levy requests in December, months before assessments are finalized and the new growth figure is calculated. Since school districts do not know the amount of new growth, they must make their best guess on what amount to levy the prior December. As a result, school administrators often advise school boards to “balloon” levy, that is, ask for more property taxes than they think they are likely to receive, so that when the property tax extension is ultimately finalized, the district receives every property tax dollar permitted under PTELL, including the amount that results from new growth.

Common Misconception

The most frequent misconception about the tax cap is that it caps individual property owners’ tax bills. It does not. What it actually does is slow their rate of growth. PTELL caps the district’s property tax extension (amount of property taxes the school districts is entitled to receive), which actually caps the revenue growth.

To understand this difference, let’s consider how an individual’s residential property tax is determined (See table below). The process begins with the county tax extension office calculating the total amount of Equalized Assessed Valuation (EAV) within the boundaries of the school district. For our sample school district, the total EAV is $500,000,000. In our scenario, the individual homeowner has an EAV of $50,000. This means that the homeowner’s EAV is 0.0001% of the total district EAV. Therefore, the individual property owners would pay 0.0001% of the amount of property taxes due the school district. If the school district’s property tax extension was $20,000,000, the homeowner would receive a bill for $2,000 or 0.0001 of $20,000,000.

Table 3: Proportion of EAV Calculation
Total District EAV $500,000,000
Homeowner’s EAV $50,000
Homeowner’s EAV Portion of Total EAV 0.0001
Total School District Property Tax Revenue $20,000,000
Homeowner’s Property Tax Bill $2,000
Tax Calculation $20,000,000 X 0.0001 = $2,000

However, some property owners could actually pay higher taxes if their proportion of the overall EAV goes up faster than someone else’s (See table below). For example, if you added a home addition or made some other improvement, which increased your EAV, you would own a higher proportion of the overall EAV. Therefore, when the county extension office calculates your property tax bill, because your portion of the overall EAV is larger due to the building addition, you would pay more property taxes.

In our example, if we assume that the overall EAV remained at $500,000,000 and the homeowner’s EAV increased to $65,000, the individual now has a higher percent of overall EAV (0.00013) and will pay a higher percentage of the overall property tax requested by the school district or $2,600.

Table 4: Proportion of EAV with Homeowner Addition
Total School District EAV $500,000,000
Homeowner’s EAV $65,000
Homeowner’s EAV Portion of Total EAV 0.00013
Total School District Property Tax Revenue $20,000,000
Homeowner’s Property Tax Bill $2,600
Tax Calculation $20,000,000 X 0.00013 = $2,600

Homeowners could also see their property tax bills increase due to a decrease in the overall EAV. The most common reasons that the overall EAV would decrease are either a reduction of EAV due to a business property tax appeal or a decrease in the multiplier (primarily in Cook where unlike other counties, the multiplier is traditionally more than 1.0 and tends to vary from year to year).

If the overall EAV goes down but a homeowner’s EAV remains the same, the property owner has a higher percentage of the overall EAV. The table below provides an example of this scenario.

Table 5: Effect of Lower Overall EAV
Total School District EAV $480,000,000
Homeowner’s EAV $50,000
Homeowner’s EAV Portion of Total EAV 0.0001041
Total District Property Tax Revenue $20,000,000
Homeowner’s Property Tax Bill $2,083
Tax Calculation $20,000,000 X 0.0001041 = $2,083

The opposite is also true. If, for example, the county re-assesses all property in the area and raises other property owners’ assessments faster than yours, you now have a smaller proportion of the overall EAV and may be taxed less.

Although the actual property tax increase or decrease in this instance would be small, it does demonstrate how the concept of ownership of a proportion of EAV affects an individual’s property tax bill.

Tax Cap Referendum Options

Since the passage of PTELL, tax capped school districts are limited to specific options when requesting an operating rate increase. These are discussed in more detail in Chapter 9.

Business Property Tax Appeals

Other factors can also affect a taxpayer’s proportion of overall property taxes. The most significant are business property tax appeals. You have probably heard that large businesses regularly appeal their property tax assessments. Many negotiate lower assessment levels through the county assessor or take their case to the Board of Review before the extension is set. Property owners who choose challenge their assessments may further appeal to the county Property Tax Appeals Board (PTAB) or the circuit court (Illinois Department of Revenue, 2012). Some, of course, study their assessments and realize that they are not likely to win a reduction.

What the public does not understand is that under the tax cap, when a business receives a tax assessment reduction, this translates into a tax increase for other taxpayers including many residential property owners. This is because a reduction in a business’ property assessment means that the business now owns a smaller proportion of the overall EAV. Other property owners now have higher proportions of the overall EAV and must pay a greater percentage of property taxes.

Effect of the Tax Cap

From any school district’s perspective, the property tax cap law is detrimental because it substantially limits school district revenues. Other sources of revenue such as state aid do not offset the limiting effects of PTELL. The reality is that school districts must operate with their major source of revenue, property taxes, artificially capped while their costs often increase faster than the rate of inflation and are uncapped.

Consider the following questions to appreciate this point.

  • How much did your healthcare premiums increase last year?
  • Have your utility costs risen faster than inflation?
  • How much has a gallon gasoline increased in recent years?
  • What has happen to the cost of a jar of peanut butter in the past year?
  • Have teacher salaries increased more than the rate of inflation?

These questions illustrate how difficult it is to manage a school district under the tax cap, particularly if you hope to maintain current levels of programs and services, when revenues are restricted and expenditures are not. This is probably the most significant factor contributing to school district deficit spending and financial stress in Illinois.

Tax Cap and Politics

When was the last time you heard an Illinois politician say, “Let’s raise property taxes” or “Let’s eliminate PTELL” when presenting their campaign platform? We all know that it is popular to be anti-tax. As educational stakeholders, we understand the realities of school funding and cannot understand why our political leaders do not. We need to recognize that one of a politician’s goals is re-election. With this goal in mind, politicians tend to be particularly sensitive to all aspects of the political process, especially constituent views. As a result, it is wise to anticipate that politicians will typically act in a political manner. If taxpayers believe that property taxes are too high and that the tax cap is a plus, you can be assured that the cap will not be repealed.

Similarly, at the district level, a substantial percentage of local residents have no direct vested interest in schools. Some never had or no longer have children in schools while others are on fixed or low incomes. These groups have little incentive to increase property taxes. School board members and administrators must recognize these realities and be prepared to respond whether at school budget and tax levy hearings or during school board elections and school referendum campaigns.

Monitoring Legislation

Recently, Illinois legislators have proposed limiting the cost of living (Consumer Price Index - CPI)increases provided under PTELL for school district that have overall EAV decreases from the prior year. Such legislation would further erode limited school district revenues at a time when vendors' costs remain unrestricted. Although this legislation has not yet gather sufficient legislator support, it continues to be a topic of legislative discussion.

Summary

In Chapter 6, we have explored the legal requirements of the Illinois Property Tax Extension Limitation Law in order to understand how the tax cap impacts public school funding at the district level. In particular, we examined how it limits school district property tax revenues and learned that its main purpose is to slow the rate property owners’ tax increases rather than set an actual cap on an individual’s property tax. We also considered the impact of PTELL’s new growth provision as well as political issues which all educational stakeholders must consider in the tax cap era.

School administrators, school board members, and other public education proponents, should closely monitor all legislative initiatives. Because school funding is at the forefront of everyone's political agendas, those with a vested interest in public education must become informed advocates for schools. They must help legislators understand the pragmatic implications of any potential legislation.

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