Illinois local governments have been denied more than $10.9 billion in state income tax revenue since fiscal year 2012 because state lawmakers cut their share.
Illinois local governments lost out on more than $10.9 billion in state income tax revenue since fiscal year 2012, thanks to state lawmakers cutting the share of income taxes promised to municipalities and counties – and keeping the difference.
An Illinois Policy Institute analysis found state lawmakers’ decision to reduce local governments’ share of net income tax collections from 10% to less than 7% has cost municipalities over $9.49 billion and counties nearly $1.44 billion since fiscal year 2012. That meant fewer dollars for programs and services, infrastructure and boosted property taxes.
The analysis compared what local governments received through the Local Government Distributive Fund with what they would have received had the state kept its commitment to share 10% of net income tax revenues. The bottom line: Illinois communities lost an average of $851 per resident.
Brad Cole, chief executive officer of the Illinois Municipal League, which represents 1,294 cities, towns and villages across the state, said this loss in the revenue share has had a dramatic impact on local budgets. It particularly hurt smaller municipalities.
“When they cut LGDF, there were only two things that could really happen for a community of any size, large or small,” Cole said. “That is cut their expenses, meaning cutting programs and services, or raise their revenues, which means raising taxes.”
Sharing state income taxes with local governments on a per-person basis is an equalizer. But when smaller communities lose that money, he said they have fewer ways to make it up.
“In those large communities, LGDF is still very important, but they might be able to come up with a different revenue source to offset reductions and that’s what most of them have done,” Cole said.
He said roughly half of Illinois’ municipalities have fewer than 1,000 people, so their tax and retail bases are small. It is particularly true in the south suburbs of Cook County, where property tax rates are among the state’s highest.
Chicago lost more than $2.3 billion as a result of the cut – that’s nearly double what it needs to cover its projected 2026 budget deficit. Even for Illinois’ smaller communities, that meant thousands or millions less in funding each year.
You can view how much your municipality lost below:
Income revenue shares for counties are based on the number of residents living in unincorporated areas.
Why local governments are getting less
Local government sharing was created in 1969 as part of the deal to enact Illinois’ first state income tax. In exchange for giving up the ability to levy their own local income taxes, municipalities and counties were promised one-twelfth of all income tax revenue, distributed by population.
In 1970, lawmakers reduced that to one-twelfth of net income tax collections, the money available after refunds, shrinking the total funds available to local governments. The share stayed around 8.3% until rising to 9.1% in 1994 and 10% in 1995.
Local governments received 10% for over 15 years until 2011, when lawmakers cut the share to 6% while temporarily raising income tax rates to address a budget shortfall. This allowed the state to keep all new revenue from the tax hike, with the higher tax rates later becoming permanent in 2017.
Cole said this cut in 2011 left local governments with few options for funding given their existing obligations to maintain services and programs, as well as service debt. This forced municipal leaders to make hard decisions about what to prioritize.
“Immediately we saw people cut services and programs or increase sales taxes. If you look at it over the last decade, you can see how municipal budgets have grown, but they’ve come up with the money elsewhere,” Cole said. “Or they just couldn’t do the things their residents want them to do. A big piece of that is every dollar into a municipality has to go to local government programs, services or obligations, and that’s where we see the pension crisis.”
He said municipal leaders have had to choose between police pensions or current police protection. The stability and per person sharing of the Local Government Distributive Fund is what made it so key to local finances.
State lawmakers made the cut with the understanding Illinois would increase local governments’ share back to 10% after the budget hole was addressed. Fourteen years later, state leaders have yet to make good on that promise.
Impact on local government budgets
According to the Metropolitan Mayor’s Caucus, most of their members’ rely on their share of state income taxes to cover more than 25% of the day-to-day services their local governments provide. They pay for police, fire, road repairs and maintenance.
Municipal leaders echoed Cole’s concerns about the shrinking revenue forcing them to become more reliant on raising property taxes to maintain services.
“Though the reduction was a reduction in the rate, the General Assembly has often said, ‘We kept your dollar amount the same, so you didn’t lose any actual money,’” Cole said. “But we haven’t gained any, either, with the natural growth in income tax revenue.”
He said the state has kept all the revenue growth. It has also added unfunded mandates, increasing the stress on local budgets.
“Now they just don’t have the dollars. They have nickels and dimes,” Cole said. “If the share was at 10%, they could fully fund their pension obligations, or in some of the communities that don’t have those problems, they could cut their other taxes and reduce the property tax burden.”
Illinois has already introduced at least 70 tax and fee hikes since 2011, with more than two-thirds of those tax hikes taking effect under Gov. J.B. Pritzker. These higher taxes have cost Illinoisans more than $110 billion.
Even with state revenue collections rising to an all-time high, Illinois’ property tax rates have continued to climb. Illinoisans now pay the highest property tax rate in the nation, amounting to $4,583 per year on the median-priced home.
Illinois homeowners need substantive property tax relief. One mechanism for providing it to residents would be to gradually increase the share of state income taxes promised to local governments back to 10%.
For the city of Chicago alone, a 10% share of income taxes would have meant nearly $250 million in additional funding in fiscal year 2024 that could have been used to keep down property tax rates and support local services.
Cole said the Illinois Municipal League wants state leaders to share the full 10% again. Making that change could create some of the property tax relief Illinoisans have been asking for.
