Daily Herald | Which suburbs are income tax givers and takers?

TUA President Jim Tobin was quoted by the Daily Herald about Illinois income taxes and local government.
Since municipalities and counties share in the income taxes collected by the state, how much is coming back home?
That depends on where you live.
Some suburban workers pay a lot more to the state than what comes back through what’s known as the Local Government Distributive Fund.
But some places get much more back from the state — in one case, as high as 25 percent of what residents paid in.
As a whole, the suburbs are more giving than Chicago and much of downstate when it comes to redistribution of income taxes, but individually the suburbs are a mixed bag, based on a Daily Herald analysis of Illinois Department of Revenue and U.S. Census Bureau data.
That’s because taxes are paid to the state based on wages earned, but the amount returned from the state is a fixed amount per resident.
Each year, a chunk of the income taxes collected by the state is given back to municipalities and counties.
In recent years, that chunk has been 6 percent of the state’s total income tax haul, and in 2012 it amounted to more than $1 billion for the state’s towns and counties, according to state revenue figures.
The money then gets split among the local governments based on population. In 2012, each town got $87.85 per person, according to state revenue department records. For residents living in unincorporated areas, the county received those funds, state officials explained.
This state’s income tax redistribution policy means some suburban areas like parts of Aurora got back more than 25 percent of what residents paid in income taxes, while other areas like Oak Brook and Barrington received less than 2 percent of the income taxes workers there paid.
Despite the disparity, tax policy experts said the state’s income tax redistribution formula is doing what it’s supposed to do. “It may be the one and only thing that is OK with the state’s current tax policies,” said Ralph Martire, executive director of the Chicago-based Center for Tax and Budget Accountability, a bipartisan government finance think tank.
“Normally, per capita distributions are not the best thing to do. However, in this instance, because the cost of providing local government assistance is most closely tied to the number of people you serve, it’s the best way of doing things,” he said.
Taxes on higher incomes cover not only the local share but also a bigger portion of the cost of operating the state. The distribution of the income taxes helps ensure all parts of the state have the resources to operate effectively, experts said.
“The state’s interest is in providing basic services and support for all, not just those that have the highest ability to pay,” said Laurence Msall, president of the Chicago-based Civic Federation, a government finance research organization.
The state’s current policy is basic economics, Martire said.
“You remedy the inequality of riches by relieving the poor and burdening the rich,” Martire said. “That’s straight out of ‘The Wealth of Nations’ by the father of capitalism, Adam Smith. As a resident and a taxpayer, you have an interest in ensuring all local governments throughout the state have the capacity to have core services at an adequate level.”
Yet, critics argue income taxes returned to local governments go too much toward salaries and benefits for public employees instead of infrastructure and services.
“It’s happening because our state pushed down onto local governments a lot more responsibilities than other states have done,” said Carol Portman, president of the Taxpayers Federation of Illinois, a Springfield-based public finance efficiency organization.
Staffing costs are the majority of expenses for all of the state’s nearly 7,000 units of government, critics said.
“Eighty percent of their spending is on salaries and fringe benefits like pensions,” said Jim Tobin, president of Taxpayers United of America, a Chicago-based anti-tax group that fights tax hike proposals. “Most of us are going to have to work into our 70s to pay taxes so these guys can retire in their 50s and live the life of Riley.”
Roughly 1,400 municipalities and counties received income tax funds from the state in 2012, according to revenue department records. Chicago received the most, at more than $235 million. That amounted to 7.3 percent of the $3.2 billion of income taxes paid by the city’s residents.
By comparison, roughly 100 suburban governments in parts of Cook, DuPage, Kane, Lake, McHenry and Will counties received 5.4 percent of the $4.7 billion in income tax revenue collected from the workforce that year, according to the analysis. Those local governments split nearly $255 million among them, according to state financial reports.
“Every municipality hopes to receive more than it currently does,” said Art Osten, Oak Brook’s interim village manager. “The reality is that the distribution of taxes collected by the state is a political question. We hope the determination of need and reallocation is done in a reasonable and equitable manner and that Oak Brook receives its fair share of what its residents contribute.”
The future of the local governments’ share of income tax revenue is murky. Legislative leaders have threatened to shrink or eliminate the local funding since the income tax rate is set to drop from 5 percent to 3.75 percent next year. Under the current proposed budget, the local share would remain roughly the same.
State Rep. David Harris, an Arlington Heights Republican who sits on the House Income Tax subcommittee, said there hasn’t been much talk of changing the state’s income tax funding policy and he wouldn’t support it.
“To my mind, it’s a fair way to do it now,” he said. “I don’t want to go complicating the formula. The more complicated the formula gets, the more people play games with the money.”