September 7, 2011
Today the Civic Federation published an update to its primer The Cook County Property Tax Extension Process: A Primer on Levies, Tax Caps, Tax Bills and the Effects of Tax Increment Financing Districts. The update adds additional years of data when available and provides an enhanced explanation of the effect of tax increment financing (TIF) on local governments and taxpayers in Cook County. This blog summarizes the TIF explanation included in the primer. For more detail and background, please see the primer.
TIF districts do not levy taxes and thus do not have tax extensions or tax rates, only tax distributions.
TIF districts freeze the equalized assessed value (EAV), not the amount of tax revenue originating from a TIF district that is available to taxing districts other than the municipality that created the TIF district. By restricting the denominator of the basic tax rate equation (Levy ÷ EAV = Rate), TIF districts cause property tax rates of overlapping taxing districts (e.g., school districts, park districts) to be higher than they would have been otherwise.[1] The higher tax rate applies throughout the taxing district, so taxpayers both inside and outside of a TIF district pay the same higher rate than if the TIF district did not exist.
Opponents of TIF often claim that TIF districts divert millions of dollars from school districts and other local taxing districts in Cook County. This view overlooks three important aspects of the property tax laws:
- First, the belief that TIF diverts revenue from overlapping taxing districts in Cook County assumes that the affected taxing districts are rate-limited—that is, that they have reached their maximum fund rate limits (see primer page 16) and intend to keep maximizing their revenue under these limits. Prior to the imposition of tax caps on Cook County in tax year 1994, it was true that TIF district creation could restrict revenue available to rate-limited taxing districts in Cook County seeking to maximize their tax extensions. However, as described on page 23 of the primer, tax caps (not rate limits) are now the effective tax limitation for the vast majority of non-home rule Cook County taxing districts.[2]
The tax cap law limits tax extensions to the increase in Consumer Price Index, not EAV, although some additional property tax revenue beyond CPI growth can be obtained from new property as described on primer page 19. Unless rate-limited funds of the taxing district are at or close to their maximum rates, freezing the EAV simply causes tax rates to rise. In other words, the general effect of TIF in a PTELL-limited county such as Cook is to increase taxes paid by all taxpayers, not to limit tax revenue for overlapping taxing districts.
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Second, the belief that TIF diverts revenue from overlapping taxing districts in Cook County assumes that all affected taxing districts seek to maximize their property tax revenues. The Chicago Park District, Metropolitan Water Reclamation District and Chicago Public Schools are all examples of taxing districts that have chosen not request the maximum levy available to them in recent years. If a taxing district has voluntarily chosen not to maximize its property tax levy, it is illogical to contend that it has lost revenue to TIF.
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Third, home rule taxing districts such as Cook County and the City of Chicago are not subject to rate limits or tax caps, therefore home rule taxing districts can never be said to lose revenue to TIF. Any property tax limitation on a home rule taxing district is self-imposed and can be changed by its governing body if it seeks more property tax revenue.[3]
There is one way in which a tax-capped taxing district that is far from its maximum rate limits can be said to lose revenue to TIF. If one believes that the new construction in a TIF district would have occurred even if the TIF district had not been created, then it is true that a tax-capped taxing district seeking to maximize its property tax revenue does lose some revenue during the life of the TIF district.[4] It loses additional revenue it could have received from the new property EAV in the TIF district because new property is taxable outside the tax cap in the first year it is assessed (see page 19 of the primer on what is “outside” the tax cap).
However, TIF also enables tax-capped districts to capture revenue from existing property EAV growth that they could not have captured without a TIF district. Under PTELL, the growth of existing property EAV does not increase revenues to the taxing district—it simply lowers the tax rate. But the growth of existing property EAV in a TIF district becomes part of the increment and is eventually returned to the taxing district’s EAV base outside the tax cap.
The primer includes a conservative model illustrating the effect on a tax-capped school district of a TIF where all new construction projects fail the “but for” test (see pages 32-36).
The City of Chicago’s TIF Task Force also recently released a report with recommendations for improving the efficiency, transparency and accountability of the City’s TIF districts. Civic Federation President Laurence Msall participated on the Task Force. The task force report includes a discussion of the effect of TIF on taxing districts and taxpayers on page 23.