It is a sad irony that the system that is most antiquated, most corrupt and most insulated from the will of the people is also the system that funds our most cherished institutions. Schools, parks, hospitals, roadways, flood districts, police and fire departments, libraries, village and town governments, special TIF projects and other community development programs, community colleges, mosquito abatement districts, forest preserves, public transportation – basically all of the institutions that directly impact our everyday lives – all draw funding from local property taxes. At the same time, the system of assessing, collecting and distributing property taxes is unfair, inefficient, opaque and undemocratic. Illinois property tax system drives jobs away, imposes unfair burdens on low income residents, and in many cases provides unscrupulous politicians with a constant flow of suspect funds. Property tax reform should be a major agenda item for the Illinois legislature in 2010.
What’s wrong With the Current System?
Property taxes are percentage of a properties appraised value, and fair property taxes depend on accurate appraisals. As it stands now, however, Illinois’ property tax assessors almost never appraise property accurately. To see that this is the case in Cook County, the reader need only go to the Cook County Assessors’ website and look up his own assessment records, and those of his neighbors. With any particular property, the assessor has likely made one or more of the following mistakes: he has under or over stated the building to land value ratio, he has outdated, insufficient or simply inaccurate information regarding the nature of the building on the property, he has appraised adjacent or nearby lands at drastically different rates for no apparent reason or he has appraised buildings far above or below their apparent value. All of these problems lead to drastically different and ultimately unfair taxes levied throughout the county.
These problems with property tax assessments are partly due to the extremely difficult nature of appraising buildings for property tax purposes. In most cases, the assessor can only gather information about a property by looking at the original blueprints submitted to the city, any building permits filed since the building was finished, and whatever is visible from the street. These are poor sources of information regarding actual characteristics of buildings. Property owners regularly submit inaccurate blueprints, or have work done inside their properties without getting a building permit, while actively hiding such activity from the public to avoid paying property taxes. This makes the task of accurately appraising the value of a building next to impossible.
In addition to the variation in property taxes caused by honest mistakes on the part of the assessor, however, there is the variation that is caused by predatory and dishonest behavior on the part of the Assessors’ Office. This includes, but is certainly not limited to intentionally over or under-assessing properties, aggressively and selectively investigating properties and selectively pursuing property owners who are delinquent on their taxes. These sorts of practices are designed to do two things. First, they are designed to create income for politically connected property tax attorneys, and second, they are designed to shift the tax burden away from politically connected property owners and towards the politically unconnected.
Here’s how the scam works: the Assessor increases the taxes on a group of properties, forcing the owners to file an appeal using a tax attorney who is well schooled in the elaborate and convoluted county tax code. This generates huge revenues for tax attorneys who then turn around and use part of that money to lobby for an even more elaborate bureaucracy. At the same time, property owners who are politically connected are more likely to win their appeals than property owners who are not. This is made easy by the fact that the assessments are based on appraisals that are largely fanciful if not downright made up.
You can see that the outcomes of this process are always a win for politicians: if the taxpayer does not appeal his assessment, or if it is turned down, the government pockets the extra money. If the taxpayer appeals and wins, politically connected lawyers pocket a good portion of the winnings. Today, there is a class of people whose income depends directly on a convoluted system of property taxation that encourages obscene over-assessments and regular appeals. Those people work hard to make sure that the average citizen has little chance of understanding the property tax system, and no chance of changing it. This sort of political game is probably what indicted Springfield powerbroker Bill Cellini was describing when he reportedly said “If you lose, they win, if you win, they win. They always win.”
Property taxation in Illinois is completely opaque because transparency would immediately reveal how broken Illinois’ property tax system really is. Of course, the politicians will point to county assessors websites in defense of the system. But a few minutes spent on one of these sites will reveal just how limited they are. Tax assessment information is only available online on an address by address basis, and even then the information only goes back three years and does not list property sales and dates. Residents cannot download the assessment information for, say, an entire city block, or an entire neighborhood. This means that they cannot easily discover how much variation there is from property to property, nor can they easily find properties that are drastically under or over-assessed. And since the information that is available does not show when properties were sold and for how much, there is no way to calculate the accuracy of the assessors’ appraisals. Residents might never know, for example, that properties regularly sell for up to 150% of the market value listed on the assessors’ website.
The short term impact of this system of unequal and unfair tax assessments is a lack of faith in local government, opacity with regard to property tax revenues, and a generally higher tax burden for the politically unconnected. The long-term consequences, however, are even worse. Because the property tax is levied uniformly across land and buildings, and because the assessor habitually under-assesses land in comparison to buildings, residents face unnecessarily high housing costs, low rates of job creation and ever increasing government spending.
A Simple Fix
Every assessor in the state is constitutionally mandated to assess both buildings and land at the same rate. This implies that the value of buildings and the value land should be appraised in the same way by the assessor, and that land and buildings respond in equivalent ways to taxation. That is, the state is pretending that a 5% tax on land values has the same effect on residents, local institutions and the state’s economy as a 5% tax on buildings. This is wrong. Taxes on buildings discourage economic growth and job creation, they impose burdens on low income residents and renters, and they encourage perpetual inflation of government spending. Taxes on land, on the other hand, have almost the opposite effect; they encourage job creation, they relive low income residents of unaffordable housing costs and they encourage fiscal restraint on the part of local governments. Basically, taxes on buildings are bad, taxes on land are good.
The economic effects of a tax on land vs. a tax buildings are too numerous, and frankly too wonky to engage here. For now, let’s look at how shifting taxes away from building values and towards land values would bring fairness and transparency to Illinois property taxes.
Unlike building value, land value is easy to appraise. Because land value is entirely determined by location-dependant variables, its value varies gradually with respect to location. For example, each house on a city block may be worth a different amount based on a million different factors from simple size and number of rooms all the way down to how “open” the floor plan feels. But the land under those homes should be valued at nearly identical levels, since they share 99% of the characteristics that influence land value. Any variation from parcel to parcel would be extremely small and should be based on a readily apparent factor, such as proximity to a nuisance (e.g. the elevated train).
Under the current system, each individual property owner must file a separate appeal, and the success or failure of one property owner’s appeal has little effect on that of another’s. This is largely due, again, to the heavy emphasis on buildings. Since each building is unique, each appeal must be evaluated independently. Under a system based on land values, however, only one property owner needs to win an appeal for all the property owners in a neighborhood to see a reduction in their tax bills. This is so because, again, land values do not vary across short distances. So, if the assessor believes by neighbor’s land is worth $12 per square foot, my land should also worth that.
Finally, a system based on land values would be much more transparent. One of the reasons for the opacity in the property tax system is simply that the assessor has to hide the fact that your property taxes are based on speculation. Under a system based on land values, speculation would play a much smaller role in the appraisal of property for taxation. The assessor could easily post all of the information he has regarding properties without fear of widespread anger on the part of residents.
What Would this do to MY Property Taxes?
Most residents would likely see their property taxes decrease. Suppose your home is worth about $400,000, $100,000 land and $300,000 building. Under such a system, you are assessed at $40,000, 10% of the total value of your property. Under a system where you are assessed at 1% of your building’s value and 20% of your land’s value, you would be assessed at $23,000, nearly half your current bill.
Property owners with a high ratio of land to building value will see their tax bills increase. Those include underutilized urban parcels and properties in neighborhoods with rapidly appreciating land values. But, on the whole, this tax structure would provide much needed tax relief to many struggling Illinois families. Less corruption, more transparency, and more fairness – why wouldn’t Illinois pursue such an agenda?