How are Local Governments Able to Access Extra Property Tax Revenue from Expiring TIF Districts?

November 27, 2013

Over the last several years, several local governments in the Chicago area have taken advantage of a provision of the Property Tax Extension Limitation Law (PTELL or “tax caps”) that allows governments to increase their revenue beyond what normally would be allowed under the law by levying for expiring tax increment financing (TIF) increment. This post will explain how this maneuver works.

To understand how governments can gain more revenue by taxing expiring TIF increment equalized assessed value (EAV), first it is important to understand the basics of how TIF and PTELL themselves work. The following is a very brief summary of both followed by a description of how taxing for expiring increment works. For more detailed descriptions of TIF and PTELL, please see the Civic Federation’s primer on the Cook County property tax extension process and our issue brief on TIF.


Tax Increment Financing

Tax increment financing (TIF) is a financial mechanism that is widely used by municipalities and other governments to promote economic development and redevelopment. The use of TIF is intended to generate economic development activity that would not have occurred “but for” the incentives offered. In Illinois, both counties and municipalities may utilize TIF financing and TIFs can receive property, sales or utility tax revenue.

In property tax TIF districts, the EAV of the district at the time of creation is measured and established as a baseline, which is often called the “frozen” EAV. Tax revenues from the incremental growth in EAV over the frozen amount are used to pay for redevelopment costs such as land acquisition, site development, public works improvements and debt service on bonds to fund improvements within the district. Once the redevelopment project is completed and has been paid for, the TIF district is dissolved and the increment EAV is added to the tax base accessible to all eligible taxing districts. Crucially, the dissolved TIF increment value is treated as new property under PTELL when it is added back into the tax base. In Illinois, TIF is authorized for a period of up to 23 years, with the possibility of renewal for an additional 12 years.

TIF districts do not levy taxes and thus do not have tax extensions or tax rates, only tax distributions. The property tax revenues received by TIF districts are the result of applying the tax rates of other taxing agencies to the TIF increment EAV. The same property tax rate is applied to all property in the TIF, both the frozen EAV and the increment EAV. Revenue generated from the frozen EAV amount goes to the taxing districts (schools, parks, etc.) while revenue generated from the increment EAV amount goes to the TIF district.


Property Tax Extension Limitation Law

The Property Tax Extension Limitation Law (PTELL) is intended to limit the growth of the overall agency levy to 5.0% or the rate of inflation, whichever is less. PTELL is often called “tax caps.” PTELL was passed in reaction to rapid growth in the collar counties and was applied to those counties beginning with tax year 1991. When PTELL is applied to a county, all non-home rule taxing districts in that county are subject to it. The non-home rule taxing bodies in Cook County were made subject to PTELL beginning in tax year 1994. Both the City of Chicago and Cook County are home-rule jurisdictions, so they are not subject to PTELL. However, both have adopted self-imposed tax caps.

Tax caps are intended to limit the dollar amount (not the rate) of property tax revenue that a taxing district may receive. However, the dollar limit must be converted into a tax rate in order to be billed to taxpayers. The PTELL tax rate for a district is called the “limiting rate”. It is important to note that the term “tax cap” can be misleading because the PTELL limiting rate does not “cap” taxable value of property, property tax bills, or even the total property tax extension of a taxing district subject to the law.

Tax caps do not completely limit the total extension of a taxing district because some funds and some EAV are excluded from the limiting rate calculation. Tax levies for purposes including some types of bonds, special service areas, and special education and recreation for persons with disabilities are explicitly excluded from the “aggregate extension” of a taxing district subject to PTELL (35 ILCS 200/18-185). The EAV for new property, annexed property, recovered TIF increment and expired incentive value is also excluded from calculation of the PTELL limiting rate. When governments take advantage of their ability to access revenue from expiring TIF increment, it is sometimes said that the property is available “outside of PTELL” or “outside the tax cap.”


Taxing Expired TIF Increment

A final tax rate for a taxing district is calculated by dividing the dollar amount of the levy for each property tax fund by the current year equalized assessed value of all property in its jurisdiction. The sum of the final tax rates for all of the government’s funds is the total final tax rate of the taxing district.

The year after a TIF district expires or is dissolved, a government overlapping the district is allowed to apply its tax rate (which was calculated without including the increment EAV in the tax base EAV, making the tax rate higher) to the increment EAV in order to generate additional revenue for the government that would have previously gone to the TIF district. This expands the amount of money the government is able to access through its aggregate extension without increasing the taxes paid by taxpayers because the taxpayer previously paid the revenue to the TIF District and now pays it to the overlapping government instead.

In 2011 Mayor Emanuel’s TIF Reform Panel recommended that the City of Chicago consider adjusting its General Fund levy in order to capture the property tax revenue associated with the expiration of TIF districts. Governments that have levied for expiring TIF increment in recent years include tax capped districts like the Chicago Public Schools and Chicago Park District that use it to expand their levies beyond the maximum allowed under PTELL as well as home rule districts like the City of Chicago and Cook County that use the mechanism to generate extra revenue without increasing taxes paid.