Trends Affecting the Property Tax Burden in Cook County

Trends Affecting the Property Tax Burden in Cook County

May 2008

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Trends Affecting the Property Tax Burden in Cook County authored by Ron Hagaman published by

May 2008 3

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About the Author: Ron Hagaman retired from the Department of Revenue in 2003 after 27 years in property tax administration. During his tenure, he was often involved with property tax legislation and tax policy. He has his Master’s Degree in Economics from Northern Illinois University.

Author’s note: The author would like to thank the staff at the Illinois Department of Revenue for providing the data used here and for their patience when responding to inquiries. The presentation here is believed to be accurate, but it is abbreviated. The property tax system is complex, with many nuances and interrelated issues. A full description of issues would require the introduction and explanation of numerous components not included here.

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Table of Contents Introduction .........................................................................................................................................................i Major Findings ....................................................................................................................................................ii Section 1 - Tax Bills and the Tax Burden ..............................................................................................1 Graph 1 - Cook County Equalized Assessed Value .............................................................................1 Graph 2 - Cook County Extensions .......................................................................................................2 Graph 3 - Cook County Tax Rate ..........................................................................................................2 Graph 4 - Cook County Tax Burden in Strict Ad Valorum System ......................................................3 Graph 5 - Cook County Actual Property Tax Burden ...........................................................................3 Graph 6a - Cook County Percent Ad Valorum Burden .....................................................................4 Graph 6b - Cook County Actual Tax Burden .....................................................................................4 Graph 7 - Cook County Tax Burden Ratio ...........................................................................................4 Section 1 Summary ................................................................................................................................6 Section 2 - Classification and Assessment Levels ..................................................................................9 Table 1 - Cook County Oridinance Levels of Assessments and Measured Adjusted Single-Year Levels of Assessments for 2005 ...........................................................9 Graph 8 - Cook County Adjusted Single-Year Level of Assessments by Class ......................................10 Graph 9 - Cook County Ratio of Adjusted Single-Year Level of Assessments of all Classes to Adjusted Single-Year Level of Residential Class .........................................11 Graph 10 - Cook County Three-year Average Levels of Assessments and Equalization Factors ...................................................................................................................11 Graph 11 - Cook County Coefficients of Dispersion by Class ...............................................................12 Graph 12 - Cook County Reassessment Changes by Assessor and Board of Review (Appeals) ..........................................................................................................................13 Section 2 Summary ...............................................................................................................................15 Section 3 - Homestead Exemptions ...........................................................................................................17 Graph 13 - Cook County Homestead Exemptions .................................................................................17 Graph 14 - Cook County Residential EAV Before & After Homesteads and Total Homestead Exemptions ............................................................................................18 Table 2 - Percent Reduction in Residential EAV Due to All Homestead Exemptions ...............18 Section 3 Summary ..............................................................................................................................20 Section 4 - Conclusion .................................................................................................................................21 Appendix A - Sales Ratio Studies and Equalization .....................................................................................23 Appendix B - The Effect of Market Value Weighting on the Cook County Equalization Factor ........................................................................................................................................25 Table B-1 - Calculation of a Weighted Level of Assessments - Example County ...................................25 Table B-2 - Weighted Average Level of Assessments - Equal Weighting of Class Levels .....................26 Table B-3 - Weighted Average Level of Assessments - Market Value Weighting of Class Levels (Used for the 2006 Equalization Factor) .....................................26 Table B-4 - Weighted Average Level of Assessments - Effect of Increasing Residential Level by 10% ...........................................................................................................27 Table B-5 - Weighted Average Level of Assessments - Effect of Increasing Industrial Level by 10% .......................................................................................28 Appendix C - How Homestead Exemptions Shift the Tax Burden Within the Residential Class .......................................................................................................................29 Table C-1 - Tax Burden Under the Old $5,000 Homestead Exemption ..........................................29 Table C-2 - Tax Burden Under the New Homestead Exemption .....................................................30 Table C-3 - Progressive Effect of a Fixed-dollar Homestead Exemption .......................................31 Table C-4 - Effect of Homestead Exemptions in Cook County vs. Adjoining Counties ................32 Appendix D - Cook County Classification History .....................................................................................33 7

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Introduction There has recently been an increased level of discussion concerning shifts in the property tax burden among classes of property in Cook County. The emphasis of these discussions has been on residential versus non-residential burdens. This report presents and analyzes trends in Cook County tax burdens over the last 20 years and identifies some reasons for the trends. The tax burden is the portion of property taxes paid by each group or class of property. The tax burden affects housing costs and the costs of doing business in Cook County. This report is divided into four sections. Section 1 presents and analyzes historical trends in equalized assessed value (EAV), tax extensions, tax rates, ad valorum tax burden, and actual tax burden. The ad valorum and actual tax burdens are then compared. Sections 2 and 3 identify reasons for the current distribution of the tax burden and for the shifts in burden during the period studied. In addition, Section 2 describes how the Cook County classification system and recent changes in actual class assessment levels have affected tax burdens, and Section 3 describes how trends in homestead exemptions have affected tax burdens. Section 4 provides a summary of the major issues. In addition, four appendices provide details about related topics including 1) sales ratio study and equalization methods, 2) the effect of market value weighting when determining the overall level of assessments and the equalization factor, and 3) the effect of homestead exemptions on the tax burdens of individual residential properties, and 4) a history of the Cook County Classification Ordinance. The data in this paper are grouped into property classes or into residential and non-residential categories. Cook County is the only jurisdiction in Illinois that classifies property and assesses the classes at various percents of market value. Cook County classifies property into six major classes and several incentive classes. Over 99% of the assessed value is in five of the six major classes. Only these five major classes are presented here. These classes are vacant, residential (six units or less), apartments (more than six units), commercial, and industrial. 1 The source of all data is the Illinois Department of Revenue. When source data are available for all five classes, the classes are separated as such. When source data are not available for all five classes, the classes are grouped into residential and non-residential categories. This is the case for the data in Section 1.

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The major class not included is class 4, property of not-for-profit organizations. 1i

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Major Findings of the Study •

Tax rates have plummeted since adoption of the Property Tax Extension Limitation Law in 1994 Graph 3

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The ratio of commercial to residential assessment levels rose as high as 3.6 to 1 in 1992 then fell close to 2.5 to 1 in 2005 - the Constitutionally limited differential - Graph 9

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Relative assessment level changes are a significant cause of the transfer of tax burden back toward residential property rather than differential inflation rate - Graph 4 and 9

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The state multiplier continues to increase as the fair maket value of the most favored property class (residential) becomes a larger portion of total market value of all property and the assessment levels of the least favored classes (commercial/industrial) fall to the Constituionally required ratios - Graphs 4, 9 and 10

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A classification system, which is designed to transfer tax burden from favored classes to other classes, is problematic when the favored class becomes a significant portion of total market value Graphs 4 and 5

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Assessment quality has improved across all classes of property - Graph 11

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The Board of Revew has recently made more significant adjustments to the assessments made by the County Assessor - Graph 12

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While homestead exemptions have increased significantly in the last few years, residential market values have increased more significantly, and the tax burden continues to shift back towards residential property - Graphs 4, 13 and 14

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Section 1 - Tax Bills and the Tax Burden Tax Bills and Tax Rates: This section first presents trends in data that most directly affect tax bills – EAV, tax extensions, and tax rates.2,3 The resulting trends in tax burden are then discussed and the actual tax burden is compared to the tax burden under an ad valorum property tax system.4,5 Equalized Assessed Values. Graph 1 shows trends in EAV for residential and non-residential properties. The graph shows rather consistent growth in the EAV of residential property through 1999 and more rapid growth from 2000 to 2005. This graph also reveals that the EAV of residential property is generally growing much faster than the EAV of non-residential property. In the period shown, the EAV of residential property grew by a factor of 5.1, while the EAV of non-residential property grew by a factor of 3.1.6 Extensions. Graph 2 shows property tax extensions for residential and non-residential properties. Extensions are the taxes billed to property owners and are virtually equivalent to taxes paid. The graph shows extensions for residential property growing much faster than extensions for non-residential property. In the period shown, extensions for residential property grew by a factor of 3.9, while extensions for non-residential property grew by a factor of 2.3.

GRAPH 1 Cook County - Equalized Assessed Value ($Billions) $80

$60

Res Non-Res

$40

$20

$0 1985

1990

1995

2000

2005

Graphs 1 and 2 show a steeper growth in residential EAV and extensions beginning in 2000. This could result from a relative reduction in the assessment level of comm/ind property in relation to the assessment level of residential property; from growing residential market value (and assessments) relative to comm/ind property due, in part, to very low mortgage interest rates; and the reclassification in 2000 of large condominium properties from the apartment class to the residential class. 2

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Unless stated otherwise, EAV is the equalized assessed value after application of the equalization factor and after the subtraction of homestead exemptions – the value used to compute tax rates and bills. A tax bill is computed by multiplying a property’s EAV by its aggregate tax rate. The aggregate tax rate is the sum of the tax rates for the individual taxing districts in which the property is located. The tax rates for each taxing district are determined by dividing the levies for the taxing district by the total EAV of property in the taxing district. As used here, an ad valorum (according to value) system is a property tax system where all property is assessed and taxed strictly in proportion to its market value. The Cook County property tax system is basically an ad valorum system, but classification and homestead exemptions are two major variances from a strict ad valorum system. References to tax burden are references to the actual property tax burden, unless the ad valorum tax burden is specified. Trends in the underlying data show that the EAV of industrial property has grown less than the EAV of any other major class during the period shown in the graph. The slow growth in the EAV of industrial property may be the result of the general movement of industrial production out of the United States, causing the lack of demand and stagnant market values for existing industrial property and little new industrial construction. Some believe that manufacturing has moved from Cook County because of the relatively high tax burden on industrial property in Cook County due to the classification system. 1

Tax Rates. Graph 3 shows tax rates for residential and non-residential properties. The trends in this $8 graph were emphasized by limiting the vertical scale. The most noticeable trend $6 is the decrease in tax rates beginning in 1995. The beginning of the downRes $4 ward trend in tax rates Non-Res corresponds to the implementation of the Property Tax Extension Limitation $2 Law (PTELL) for the 1994 extensions. The tax rates for non-residential property $0 are slightly lower than the 1985 1990 1995 2000 2005 tax rates for residential property because taxing districts with high concentrations of non-residential property generally have higher aggregate EAVs in comparison to the cost of government services and, therefore, lower tax rates. GRAPH 2 Cook County - Extensions ($Billions)

Tax Burden: The focus here is on tax burden and shifts in burden among property classes or property groups. The next several graphs compare what the tax burden would be under a strict ad valorum system to the actual tax burden. Ad Valorum Tax Burden. In a property tax system that is strictly ad valorum, the tax burden of a property class is determined solely on the market value of the property class, relative to the market value of all classes combined. For example, if a class of property has a market value equal to 10% of the total market value of all property, its tax burden will be 10% – it will pay 10% of the total property tax. Graph 4 shows for 1985 to 2005 the percents of estimated market value GRAPH 3 for residential and non-resiCook County - Tax Rate dential properties. In an ad valorum system, with no 11% classification and no home1994 was first year of Property Tax Extension Limitation Law stead exemptions, the tax in Cook Co. burden would be distributed 10% according to the market value percents shown. 9%

The percent of market value for residential property has increased slightly over the period, while the percent of market value for nonresidential property has decreased slightly. Graph 4 shows that, without the effects of the classification

Res Non-Res 8%

7%

6% 1985

1990

1995

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2000

2005

system and homestead exemptions, GRAPH 4 residential propCook County - Tax Burden in Strict Ad Valorum System erty would have Percent of Total Market Value 100% 100% shouldered 64% of the tax burden Non-Residential for 1985 and 73% 80% 80% of the tax burden for 2005. This growth may be 60% 60% due to the market value of existing Residential 40% 40% residential property increasing at a faster rate than 20% 20% the market value of non-residential property, a greater 0% 0% proportion of 1985 1990 1995 2000 2005 newly constructed residential property relative to non-residential property, a net reclassification of property into the residential class (e.g. loft conversions), etc.

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Actual Tax Burden. Graph 5 shows the actual percents of property tax burden for residential and non-residential property. This graph indicates that the actual tax burden is shifting toward residential property and away from non-residential property. This shift continued in 2003 through 2005, the first years of the 7% alternative homestead exemption. The graph shows that the burden for residential property increased from 42% for 1985 to 55% for 2005, while the burden for non-residential property decreased from 58% for 1985 to 45% for 2005. A comparison of Graphs 4 and 5 shows that, while the actual residential burden grew faster than the ad valorum residential burden, the actual GRAPH 5 Cook County - Actual Property Tax Burden residential burden Percent of Total Extensions continues to be less 100% 100% than the ad valorum residential burden. 80%

80%

Non-Residential 60%

60%

40%

40% Residential

20%

0% 1985

20%

1990

1995

2000

3

0% 2005

Comparison of Recent Ad Valorum and Actual Tax Burdens. Graph 6a shows for 2005 the distribution of the ad valorum tax burden for residential and non-residential properties and Graph 6b shows the distribution of the actual tax burden. It

is clear that residential property currently pays much less than its ad valorum share. GRAPHS 6a and 6b Tax Burden Ratio. Graph 7 compares the actual tax burden to the ad valorumTax burden using “tax burden Cook County Percent Ad Valorum Burden and Actual Property Burden forthe 2005 ratio.” The tax burden ratio is determined by dividing the percent of actual tax burden by the percent of ad

Residential 73%

Residential 55%

Non-Residential 45%

Non-Residential 27%

6b - Percent of Taxes Paid (Actual Tax Burden)

6a - Percent of Market Value (Ad Valorum Burden)

valorum tax burden. For example, the residential tax burden ratio for 2005 is .75. The calculation is 55% actual burden / 73% ad valorum burden = 0.55 / 0.73 = 0.75. A tax burden ratio above 1.00 indicates that the actual burden for the class is greater than the ad valorum burden. A tax burden ratio below 1.00 indicates that the actual burden for the class is less than the ad valorum burden. For 2005, the tax burden ratio for residential property was .75 – the actual burden on residential property was 75% of its ad valorum burden. In other words, the actual residential burden was 25% less than its ad valorum burden. For 2005, the tax burden ratio for non-residential property was 1.65 – the actual tax burden on non-residential property was 65% more than its ad valorum burden. While the residential tax burden ratio has been less than 1.00 for the period shown, Graph 7 shows that in recent years the residential tax burden ratio has been coming closer to 1.00 – even with the 7% alternative homestead exemption in 2003 through 2005. Also, in recent years, the generally rising residential tax burden ratio and the generally declining non-residential tax GRAPH 7 burden ratio indicate that Cook County - Tax Burden Ratio the actual burden has been Ratio of Actual Tax Burden to Ad Valorum Tax Burden shifting toward residential 2.00 property and away from nonresidential property. Graph 1.75 5 also shows this trend.7 1.50 Tax Burden Ratio

As will be discussed in the next two sections, it has been the intention of the Cook County Board, through the classification system, and the intention of the Illinois General Assembly, through homestead exemptions, to reduce the burden on Cook County residential

Res Non-Res

1.25

1.00

0.75

0.50 1985

1990

4

1995

2000

2005

property relative to its ad valorum burden – to keep the residential tax burden ratio less than 1.00 and the non-residential tax burden ratio greater than 1.00. Market Value Shares and Shifts in Tax Burden. As the percent of residential market value increases and the percent of non-residential market value decreases, it becomes more difficult for any system to shift the burden away from residential property and toward non-residential property. For example, in a county where residential property comprises 90% of the market value and non-residential property comprises 10% of the market value, a minor 5% decrease in the residential burden would require a 45% increase in the non-residential burden. If the portion of residential market value in Cook County continues to increase, it will become more difficult to shift the tax burden to non-residential property. The large portions of residential market values in the collar counties may be a reason that these counties have not chosen to classify property. Tax Burden and Tax Bills. It is important to note that an increase or decrease in tax burden ratio will not necessarily cause an increase or decrease in the dollar amount of tax bills. With total extensions and tax bills increasing as indicated in Graph 2, the taxes paid by a property or class can increase, even while the tax burden ratio for the class is decreasing. However, an increase in the tax burden ratio will tend to increase the tax bill from what it would have been. Tax Burden and Property Value. All other things being equal, an increasing tax burden ratio increases the cost of owning real estate and tends to reduce market value. A decreasing tax burden ratio decreases the cost of owning real estate and tends to increase market value. For residential property, an increasing tax burden ratio is typically translated into more dollars per month in escrow payments – usually perceived by a potential buyer as simply a higher monthly payment. For non-residential property, typically held for economic reasons, an increasing tax burden ratio translates into higher overall expenses and lower net incomes. The benefit or detriment due to a change in tax burden ratio, and the consequent change in market value, will be realized by the owner when the property is sold. Factors Affecting Tax Burden. The next two sections discuss the effects of classification and homestead exemptions on tax burden. However, while classification and homestead exemptions have the most significant effect on the tax burden, the tax burden for a class can also be affected by factors that change the proportion of market value in the class. These factors include significant new construction in a class that does not occur in other classes, a significant market value change in a class that does not occur in other classes, net reclassification of property into or out of a class, etc. The tax burden ratio in Graph 7 accounts for these factors affecting market value by comparing the percent actual burden to the percent of burden under an ad valorum (market value) system.

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The decreases in the 2004 non-residential ad valorum tax burden in Graph 4 and in the 2004 tax burden ratio in Graph 7 may be due to a possible anomaly in the underlying data that may have caused an overestimate in the market value of non-residential property. 5

Section 1 - Summary The historical data for EAV, extensions, tax rates, tax burden, and tax burden ratio generally show 1) faster growth in EAV than in extensions, 2) decreasing tax rates, 3) a historical shift in tax burden from residential to non-residential property, 4) the tax burden currently shifting back toward residential property, and 5) a recently increasing residential tax burden ratio and decreasing non-residential tax burden ratio. If the market value of residential property continues to grow in relation to the market value of non-residential property, it will become more difficult to shift the tax burden away from residential property. All other things being equal, an increasing tax burden ratio increases the tax bill from what it would have been. A change in the tax burden ratio will influence the market value of a class of property by increasing or decreasing the cost of owning property in that class. While Graph 5 shows the actual burden on residential property is increasing, it is not close to the burden that residential property would bear in an ad valorum system. In the period studied, the actual residential burden has always been less than its ad valorum burden (tax burden ratio below 1.00), and the actual non-residential burden has always been more than its ad valorum burden (tax burden ratio above 1.00). Sections 2 and 3 show that significant causes of these differences in tax burden ratios are classification, assessment levels, and homestead exemptions.

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Section 2 Classification and Assessment Levels This section describes the Cook County classification system and its effect on tax burdens. The benefits of local equalization are also discussed. Appendix D shows a history of assessment levels under the Cook County Classification Ordinance. The data used in this section are from the Department of Revenue’s sales ratio studies. The data are available for a longer period (1981-2005) than the data in Section 1 and are available for all five major classes. Classification: The purpose of classification is to shift the property tax burden between property classes. The provision for classification in Article 9, Section 4, of the Illinois Constitution provides the legal basis for shifting the tax burden by allowing the county boards of larger counties to adopt a classification system by ordinance.8 This section of the Illinois Constitution also limits the shift in burden due to classification by requiring that the level of the highest assessed class cannot be greater than 2 ½ times the level of the lowest assessed class. Assessment Levels: Ordinance Levels vs. Measured Levels. Table 1 shows, for the five major classes, the ordinance levels legislated by the Cook County Board (column 2) and the most recent measured levels of assessments from the Department of Revenue’s sales ratio studies (column 3). The ordinance level is the target ratio of assessed value to market value expressed as a percent.

Table 1. Cook County Ordinance Levels of Assessments and Measured Adjusted Single-Year Levels of Assessments for 2005

Ordinance Level for 2005 Column Number Calculation Vacant Residential Apartments Commercial Industrial

Measured Level for 2005

(2)

(3)

22% 16% 24% 38% 36%

7.40% 8.15% 8.76% 17.34% 21.33%

Ratio of Ordinance Level for Class to the Residential Ordinance Level (4) col 2 / 16% 1.35 1.00 1.50 2.37 2.25

Ratio of Measured Level for Class to the Residential Measured Level (5) col 3 / 8.15% .91 1.00 1.07 2.13 2.62

The ordinance levels in column 2 demonstrate the intent of the Cook County Board to shift the burden away from the residential class and toward other classes, particularly the commercial and industrial classes.9 The measured levels of assessments in column 3 vary significantly from the ordinance levels.10

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Classification is allowed in all counties with a population of more than 200,000. This includes the collar counties. However, it would be more difficult to shift the burden from residential property in these counties because current residential market values range from 80% to 90% of the total market value, leaving only a small portion of non-residential property to which the burden could be shifted. The residential market value in Cook County for 2005 is 73% of the total market value in the county, up from 64% in 1985. The ordinance also shifts the burden among the four non-residential classes. The measured levels are the adjusted single-year levels of assessments – the best estimate of the actual levels of assessment as determined by the Department of Revenue’s sales ratio studies. 9

The values in column 4, “Ratio of Ordinance Level for Class to the Residential Ordinance Level,” show the relationships between the ordinance levels for the classes and the residential ordinance level. These values are computed by dividing the class ordinance level by the residential ordinance level. For the vacant class, the computation is 22% / 16% = 0.22 / 0.16 = 1.35. This column shows the intent of the Cook County Board that vacant property be assessed at a level 35% higher than residential property, that apartment property be assessed at a level 50% higher than residential property, etc. The values in column 5, “Ratio of Measured Level for Class to the Residential Measured Level,” show the relationships between the measured levels for the classes and the measured level for residential property. This column shows that for 2005, vacant property was actually assessed at a level 9% lower than residential property, that apartment property was actually assessed at a level 7% higher than residential property, etc. With the exception of vacant property, the measured levels show that the shift away from residential property does occur, as intended by the Cook County Board, although the overall shift is less than it would be if all property were assessed at the ordinance levels.11 Trends in Assessment Levels. Much of the remaining discussion in this section involves the adjusted singleyear level of assessments and the three-year average level of assessments. The adjusted single-year level of assessments from the Department of Revenue’s sales ratio study is the measured level that best reflects the actual level of assessments for the year of the ratio study. The three-year average level of assessments is the average level of assessments from the Department of Revenue’s three most recent years’ sales ratio studies, adjusted for any reassessments since the data used in the studies were collected. It is the level used to determine the equalization factor. Details regardGRAPH 8 ing the sales ratio study and Cook County - Adjusted Single-Year Level of Assesments by Class the computation of levels of assessments are provided in 40.0% Appendix A. 35.0%

Adjusted Single-Year Levels. 30.0% Graph 8 shows, for 1981 to 2005, the adjusted single25.0% Vac Res year levels of assessments Apt 20.0% for the five classes of interCom est. The levels shown here Ind 15.0% for 2005 are the same as the 10.0% measured levels in column 3 of Table 1. Graph 8 illustrates 5.0% a general downward trend in levels of assessments for all 0.0% classes over the entire pe1981 1984 1987 1990 1993 1996 1999 2002 2005 riod. More important, Graph 8 shows that, particularly in recent years, the assessment levels of non-residential classes have dropped more rapidly than the level of the residential class. Relative Adjusted Single-Year Levels. Graph 9 is similar to Graph 8. However, instead of showing the measured levels of assessments, Graph 9 shows the measured levels of other classes relative to the measured 11

The measured ratio for industrial property is 2.62, compared to the ordinance ratio of 2.25. This indicates that the shift in burden away from residential property toward industrial property is actually greater than that legislated by the Cook County Ordinance. However, because industrial property represents only 3% of all market value in the county, the actual overall shift away from residential property is still less than if all property was assessed at the ordinance level. 10

GRAPH 9 Cook County - Ratio of Adjusted Single-Year Level of Assessments of All Classes to Adjusted Single-Year Level of Residential Class 4.0

Ratio to Residential Level

3.5

3.0

Vac Res Apts Com Ind

2.5

2.0

1.5

1.0

0.5 1981

1984

1987

1990

1993

1996

1999

2002

2005

level for residential property. For example, if the measured level for residential property is 10% and the measured level for apartment property is 20% (2 times the residential level); the yellow line representing apartment property will be at 2.0 on the graph. The yellow line will also be at 2.0 if the residential level is 8% and the apartment level is 16% (2 times the residential level). The relative levels shown here for 2005 are the same as the relative levels in column 5 of Table 1.

The downward trend of any line in Graph 9 indicates a lower level of assessments for a class in relation to the residential level and the tendency to shift the burden toward residential property. This has generally been the case in the latter years of the period shown. The reduction in assessment levels of non-residential classes appears to be a major cause of the recent shift in burden toward residential property shown in Graph 5 and the recent increase in the residential tax burden ratio shown in Graph 7. The ratios in Graph 9 could also be considered indicators of whether the actual levels of assessment are within the constitutional 2 ½ to 1 ratio referred to in the beginning of this section. A line over 2.5 on the vertical scale could indicate an issue GRAPH 10 Cook County - Three-year Average Levels of Assessments and Equalization Factors concerning the 2 ½ Green Line and Left-hand Scale Shows Level - Orange Line and Right-hand Scale Shows Equalization Factor to 1 ratio. Three-Year Level and Equalization Factor. Graph 10 illustrates the relationship between the three-year average level of assessments (lefthand scale) and the equalization factor (right-hand scale). The trends were magnified in this graph by limiting the vertical scales. Appendix A provides a detailed explanation

18.0%

4.1000

16.0%

3.7000

Three-year Average Level of Assessments

14.0%

3.3000

12.0%

2.9000

10.0%

2.5000

Equalization Factor 2.1000

8.0%

6.0% 1981

1.7000 1984

1987

1990

11

1993

1996

1999

2002

2005

of the computation of the three-year average level of assessments. The equalization factor is computed by dividing 0.3333 by the three-year average level of assessments. Due to this mathematical relationship, one line is the mirror image of the other. This graph shows that the downward trend in the overall level of assessments has caused the equalization factor to increase. The equalization factor is applied to all classes, and if not for homeGRAPH 11 Cook County - Coefficients of Dispersion by Class stead exemptions, equalization would not affect the tax 120% burden. Distribution of Tax Burden within Classes: Graph Res 80% 11 shows trends Apt Com in the quality of Ind 60% assessments for each property class. This graph 40% indicates how equitably the burden is 20% shared within each class. Assessment 0% quality can be mea1981 1984 1987 1990 1993 1996 1999 2002 2005 sured by the coefficient of dispersion (COD).12 The COD is the most commonly used measure of assessment uniformity and is computed as part of the Department of Revenue’s sales ratio studies. The graph reveals a general decline in CODs over the period. This decline indicates that the quality of assessments has been improving and the burden within the classes is shared more equitably. 100%

Reassessment Patterns: Graph 12 shows reassessment changes made by the Cook County Assessor and Board of Review as the percent of the assessed value of all property in the county. Two patterns are most noticeable. The first pattern involves the large increases in overall assessed value by the Assessor, every three years. This pattern is due to the substantial assessment increases in the years the City of Chicago (City) triad was reassessed, most recently in this data in 2000 and 2003.13 Large reassessment increases occur in these years because the City reassessment triad represents the largest portion of assessed value. For 2005, the City reassessment triad contained slightly more than one-half of the total assessed value in the county. This same three-year pattern is in Graph 10. The three-year average level of assessments typically increases and the equalization factor typically decreases in a year when the City triad is reassessed. The second pattern in Graph 12 involves the recent reductions in assessments by the Cook County Board 12

The COD is computed by first summing the differences between each sales ratio and the median ratio. This sum is divided by the number of ratios to determine the average difference of the ratios from the median ratio. Then this average difference is divided by the median ratio to convert the average difference into a percent of the median ratio. CODs for vacant property (not included in Graph 11) have been quite variable over the period studied and have ranged between 61% and 237%.

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The first reassessment of the entire City as part of the current triad reassessment system occurred in 1991. Prior to 1991, property in the City of Chicago was reassessed as part of two or more quadrant reassessment districts 12

Percent Change

of Review. These GRAPH 12 reductions may Cook County Reassessment Changes by Assessor be the result of and Board of Review (Appeals) statutory changes to the appeals 14.0% system beginning in 1996. The 12.0% changes included: 10.0% 1) forming a three member Board of 8.0% Review with memAssessor 6.0% bers elected from Bd of Review districts – previ4.0% ously a two mem2.0% ber Board of Appeals was elected 0.0% at large; 2) reduc-2.0% ing the level of proof for assess-4.0% ment complaints in 1981 1984 1987 1990 1993 1996 1999 2002 2005 court proceedings from “constructive fraud” to “clear and convincing evidence;” and 3) giving Cook County taxpayers access to the state Property Tax Appeal Board (PTAB), where the level of proof is “the weight of the evidence.” These statutory changes made assessment appeals much less difficult and much less costly for Cook County taxpayers. As the PTAB began to lower assessments on many complaints, it appears that the Cook County Board of Review in 2000 began making assessment reductions that might otherwise have been made by the PTAB.14 Although the effect on burden is very small, because the highest aggregate dollar reductions are for non-residential property, these reductions tend to shift the burden minimally toward residential property. The Benefits of Local Equalization: Eliminates the Temporary Shift in Burden to Reassessed Triad. In times of increasing property value, there is a temporary shift in the tax burden to all property classes in the reassessed triad. Assessments are increased in the reassessed triad and then, except for any change in the equalization factor or homestead exemptions, are left virtually unchanged until the next reassessment, three years hence. In the next reassessment year, values are again increased to account for the increases in market value over the intervening three years. The levels of assessment in the reassessed triad are typically higher than the levels in the non-reassessed triads, resulting in a small, temporary shift in the tax burden toward the reassessed triad. This shift occurs only for that portion of taxes paid to districts that overlap the reassessed triad and one of both of the non-reassessed triads. This shift might not occur if the Cook County Assessor and/or the Cook County Board of Review had the authority to equalize assessments, as is the case for the chief county assessing officers and the boards of review in all other counties. With this authority, assessments in the non-reassessed triads could be factored to levels equal to those in the reassessed triad. This would keep assessments equitable between the triads and avoid the small temporary shift in tax burden toward property in the reassessed triad. Local equalization

14

Where assessment reductions are made by the Board of Review rather than by the PTAB, taxing districts have a more predictable and higher revenue stream from the property tax. When the reduction is made at the Board of Review, the tax rate is computed using the reduced EAV. The tax rate is higher during the extension process, because the EAV is reduced, and the district will receive the amount of its levy (subject to rate limits and the Property Tax Extension Limitation Law). Assessment reductions by PTAB occur after taxes have been extended and paid. The taxing district initially receives the amount of the levy, but later, revenue is reduced when the district must make up the refunded taxes. There is a statutory provision to make up some of this lost revenue to school districts. 13

could also increase the overall level of assessments, reduce the equalization factor, reduce variances in the equalization factor, reduce CODs, and allow for the adjustment of class assessment levels, in both the reassessed and non-reassessed triads, so they are closer to the ordinance levels. Limits the “Summer Surprise.” Local equalization could also limit the “summer surprise” that occurs when taxpayers in the reassessed triad receive the second installment of their tax bills. The “summer surprise” is due to the following events. In the reassessment year, assessments in the reassessed triad are adjusted up for three years of market value growth. Except through changes in the equalization factor and homestead exemptions, these assessments typically do not change until the next reassessment year, three years hence. Because the first installment of the tax bill for the reassessment year is estimated at one-half of the previous year’s bill, the entire increase in the tax bill due to the three-year reassessment is in the bill for the second installment that has historically been mailed in late summer – an unpleasant surprise for the taxpayer. Local equalization among the triads would provide for adjustments in assessments in the non-reassessed triads between reassessment years and limit the “summer surprise.”

14

Section 2 Summary The Cook County classification system is generally designed to shift the tax burden away from residential property by assessing residential property at a lower level than other properties. The measured levels of assessment indicate that this shift is occurring. Levels of assessment for all classes have declined over the period studied. More important, the levels of assessment of non-residential properties have been declining at a rate faster than that of residential property. This appears to be a major factor causing the shift in burden back toward residential property. The accuracy of assessments has generally increased, indicating that the tax burden is shared more equitably within classes. With assessment appeals much less difficult and less costly and the greater part of the resulting dollar reductions going to non-residential property, the changes in the appeal process have tended to minimally shift the burden toward residential property. Finally, the lack of equalization authority for the Cook County Assessor and Cook County Board of Review tends to 1) lower overall assessment levels, 2) increase the equalization factor, 3) annually shift a small portion of the tax burden between the reassessment triads, 4) increase CODs, and 5) cause the “summer surprise.”

15

16

Section 3 - Homestead Exemptions In the following discussion, the 7% alternative homestead exemption is grouped with the general homestead exemption, because these exemptions were reported together in the source data. Homestead exemptions provide a substantial reduction in the EAV and tax burden of homestead property.15 For 2005, an estimated 27% of the EAV of homestead properties in Cook County was exempt from taxation. Homestead exemptions affect the tax burdens of all classes of property because they generally shift the tax burden from homestead property to all other property. As used here, “homestead property” refers to residential property that receives a homestead exemption. Growth in Homestead Exemptions: Graph 13 illustrates substantial growth in homestead exemptions from 1985 to 2005. In addition to the overall growth, the most noticeable patterns in this graph are 1) the increases in the general and senior homestead exemptions GRAPH 13 for 1991, 2) the decrease Cook County - Homestead Exemptions ($Billions) in the general homestead $14.0 exemption for 2002, and 3) the large increases in the $12.0 general homestead (7% alternative) exemption for $10.0 2003 through 2005. The increases in the general and senior exemptions for 1991 are due to statutory increases in the limit of the general homestead exemption and in the amount of the senior exemption. The drop in the general homestead exemption for 2002 appears to be the result of an 11% drop in the number of parcels receiving this exemption.

$8.0 General Senior Sr Freeze

$6.0 $4.0 $2.0 $0.0 1985

1990

1995

2000

2005

Data for Senior Freeze not available for years 1994, 1995, and 1998. 7% Alternative Homestead included with General Homestead (2003 through 2005 only).

The increases in the general homestead (7% alternative) exemption for 2003 through 2005 are primarily due to the implementation of the 7% alternative homestead exemption in the City reassessment triad (begin15

When considering the effects of homestead exemptions on residential property, one should recognize that only qualified (typically owner-occupied) residential property receives the benefit of homestead exemptions. In addition to the owner-occupied qualification, there is an additional age qualification for the senior homestead exemption. There are additional age and income qualifications for the senior freeze homestead exemption. Two additional types of homestead exemptions, the veterans’ and the homestead improvement, are not considered here. In 2004, these accounted for less than 1% of all homestead exemptions (data not available for 2005). Public Act 95-644, in addition to extending the 7% alternative homestead exemption, adds the long-time occupant homestead exemption and several other new homestead exemptions. It will be interesting to see how these new exemptions affect the relative tax burden of the Cook County property classes. By statute, homestead exemptions are removed by the county clerk after the application of the equalization factor to the assessed values certified by the Board of Review. The equalization factor is computed using sales ratios, from which the exemptions have not been removed. The computations of the three-year average level of assessments and the equalization factor are not affected by homestead exemptions. 17

ning in 2003), the northwest reassessment triad (beginning in 2004), and the southwest reassessment triad (beginning in 2005) – with a small additional bump in 2004 due to the increase in the limit for the general homestead, from $4,500 to $5,000, in all reassessment triads.

GRAPH 14 Cook County - Residential EAV Before & After Homesteads and Total Homestead Exemptions ($Billions) $100

$90

$80

$70

$60

Before Hmstd Ex After Hmstd Ex Total Hmstd Ex

$50

$40

$30

2003 is the first year of the 7% Alternative Homestead Exemption

$20

Another significant $10 trend in Graph 13 $0 is the rapid growth 1985 1990 1995 2000 2005 of the senior freeze homestead exemption shown in the lower right-hand corner of the graph. There are breaks in this line because no amounts were reported for this exemption for 1994, 1995, and 1998. The senior freeze includes an income qualification and shifts the tax burden from properties of lower income seniors to all other properties. Once a senior freeze is granted, provided all qualifications continue to be met, the EAV is frozen at the base year value. The exemption is the difference between the base year EAV and the current EAV before subtracting any homestead exemptions.16 The total reduction in EAV due to the senior freeze exemption increased more than 1300%, or thirteen-fold, over the nine years from 1996 to 2005. This growth occurred while the number of senior freeze exemptions increased by only 31% over the same nine-year period. As baby boomers begin to meet the age qualification, this exemption should grow more rapidly. EAV Reductions Due to Homestead Exemptions: Graph 14 shows the effect of combined homestead exemptions on the EAV of all residential property. While Graph 14 shows that the value of homestead exemptions has increased, the percent reduction in residential EAV due to homestead exemptions has not always increased. Table 2 shows the percent reduction in residential EAV due to all homestead exemptions. The percents of

Table 2. Percent Reduction in Residential EAV Due to All Homestead Exemptions Year 1985 1986 1987 1988 1989 1990 1991 16

% of Reduction in EAV 18% 17% 17% 16% 15% 14% 15%

Year 1992 1993 1994 1995 1996 1997 1998

% of Reduction in EAV 15% 15% 14% 14% 14% 13% 13%

Year 1999 2000 2001 2002 2003 2004 2005

% of Reduction in EAV 12% 12% 11% 10% 13% 17% 18%

A property cannot receive both the senior freeze and the 7% alternative homestead exemptions. 18

EAV reduction decrease from 1985 to 1991, the year that the limit of the general homestead and the amount of the senior homestead were increased. From 1991 to 2002, the percents of EAV reduction again decrease. The decreases in both of these periods are due to inflation in residential property values without corresponding increases in homestead exemptions. Beginning in 2003, the percents of EAV reduction increase due to the implementation of the 7% alternative homestead exemption. The average effect of homestead exemptions on eligible residential property is much greater than indicated in Table 2 and Graph 14. The EAV of all residential property is included in the computation of the values in Table 2 and Graph 14, not just the EAV of residential property receiving homestead exemptions. About twothirds of Cook County residential properties receive a homestead exemption, so the effect on eligible residential properties can be roughly approximated at 1.5 times that shown in Table 2 and in Graph 14. For example, in Table 2 the reduction in the EAV of all residential property due to homestead exemptions for 2005 is 18%. When one considers just the EAV of residential property receiving homestead exemptions (estimated at 2/3 of all residential EAV), the estimated reduction in EAV for residential property receiving homestead exemptions is 18% ÷ 2/3 = 27% (1.5 times 18%).17 This results in a considerable shift in tax burden away from homestead properties and toward all other properties, including non-homestead residential properties. Effect of Recent Reductions in Non-Residential Levels of Assessments: The recent substantial reductions in the non-residential assessment levels shown in Graph 9 in Section 2 have tended to increase the equalization factor, which in turn, tends to increase the residential EAV prior to the subtraction of homestead exemptions. This makes fixed-dollar homestead exemptions, such as the general and senior homestead exemptions, less effective in reducing the burden on homestead property because the exemption is a smaller percent of the EAV of homestead property.18 The senior freeze and 7% alternative homestead exemptions are more effective in these conditions. Homestead Exemptions and Tax Rates: Homestead exemptions also increase tax rates over what they would otherwise be. The amount of the tax rate increase depends on the EAV reduction due to homestead exemptions, relative to the EAV of all classes of property in a taxing district. With the frozen EAVs of those receiving the senior freeze homestead exemption, higher tax rates due to all homestead exemptions tend to increase the tax bills of those receiving the senior freeze.

17

18

When making this estimate, it is assumed that the average EAV of homestead properties is equal to the average EAV of nonhomestead residential properties. While the general homestead exemption is not technically a fixed-dollar exemption, it is essentially a fixed-dollar exemption in practice. This exemption is the difference between the 1977 EAV of a parcel and the current year’s EAV, currently limited to $5,000. However, it is essentially a fixed-dollar exemption because the difference between the 1977 EAV and the current EAV is almost always greater than $5,000. 19

Section 3 - Summary Homestead exemptions are used to shift the tax burden from homestead properties. Homestead exemptions generally shift the tax burden to non-residential property and to non-homestead property within the residential class. The dollar amount of homestead exemptions has grown substantially over the period studied, but as shown in Graph 5, homestead exemptions have not grown so much as to prevent an increase in the tax burden on all residential property. However, the residential burden would have increased much more without the substantial growth in homestead exemptions. Homestead exemptions also tend to reduce the residential tax burden ratio. However, as shown in Graph 7, homestead exemptions have not grown so much as to offset the effects of substantial increases in residential assessed value and decreases in the assessment levels of other property classes. As a result, the residential tax burden ratio has been increasing. The senior freeze homestead exemption is growing dramatically. It will be more significant in the future, as baby boomers begin to meet the age qualification. Appendix C shows how fixed-dollar homestead exemptions are progressive in nature and tend to shift the burden more from lower-value homestead properties than from higher-value homestead properties. Appendix C also shows how, due to the lower level or assessments in Cook County, a dollar of homestead exemption reduces the EAV of a homestead property in Cook County by a greater percent than that of a homestead property in an adjoining county.

20

Section 4 - Conclusion The Cook County property tax system has historically shifted the property tax burden from residential property to other property classes. In the period studied, the tax burden has been slowly shifting back toward residential property. The two major causes of the historical shift in tax burden away from residential property are the Cook County classification system and homestead exemptions. Graph 7 shows that, while residential property has historically not paid its proportional share of its ad valorum burden, the residential tax burden ratio has been increasing over time. This increase appears to be due to two major factors. The first factor is the decreasing levels of assessments of non-residential properties relative to the residential level as shown in Graph 9. The second factor is the slower growth in homestead exemptions relative to the growth in residential EAV (before the subtraction of homestead exemptions). Even though there have been significant increases in homestead exemptions, they have not kept up with the more significant growth in residential EAV. Although the burden is shifting toward residential property, with 73% of the market value for 2005 (taxes paid in 2006), residential property owners paid only 55% of the property taxes, much less than they would have paid without the effects of classification and homestead exemptions. If the market value of residential property continues to grow in relation to that of non-residential property, it will become more difficult to shift the tax burden away from residential property. There is a temporary shift in tax burden toward the most recently reassessed triad. This can be mitigated by allowing the Cook County Assessor and the Cook County Board of Review the equalize assessments. This authority is available in all other counties. These factors and their effects on tax burden should be considered when contemplating changes in policy.

21

22

Appendix A: Sales Ratio Studies and Equalization This appendix includes brief descriptions of 1) sales ratio study methods, 2) the computation of the adjusted single-year level of assessments, 3) the computation of the three-year average level of assessments, and 4) the equalization process. Sales Ratio Study: The major purpose of the sales ratio study is to annually determine the assessment levels, first for each class of property and then for the county as a whole. The assessment level is the average ratio of assessed value to market value. A sales ratio uses a property’s sale price for the market value portion of this assessed value to market value ratio. A sale price is a good proxy for market value when a transaction is arm’s-length. For virtually all sales, the Department of Revenue receives a Real Estate Transfer Declaration containing information supplied by the buyer and seller. The information on the declaration allows the Department to determine if the transaction is arm’s-length and if the property was physically changed between the assessment date and the date of the sale. If the sale is not arm’s-length or the property was not in the same condition when sold as when assessed, the sale is not used in the study. Computation of Adjusted Single-Year Level: Each year, individual sales ratios of assessed value to sale price are computed for all usable sales. These sales ratios are grouped by property class and the median ratio for each class is determined. The median ratio for each class is the unadjusted single-year median level of assessments for the class. Because the sales ratios are computed using assessed values for the year prior to the year of the sale, the unadjusted single-year median level is adjusted for any reassessment that took place during the year of the sale.19 For example, assume that a property class has an unadjusted single-year median level from the sales ratio study of 8.0%. In the year of the sale, the assessor increased the assessments for this class by 10%. The ratio study’s indicated level of assessments for the class would be adjusted up by 10% from 8.0% to 8.8%. The adjusted single-year level would be 8.8%. The adjusted single-year level is the best estimate of the actual assessment level in the year of the sale. Computation of Three-Year Average Level: More adjustments are necessary to conform to the statute, which requires adjustments for “any changes in assessment levels implemented since the data for the studies were collected.” The sales ratio studies are used to equalize assessments for the assessment year following the year of the sale, so additional adjustments are made to the adjusted single-year level of each class for any reassessment in the most recent assessment year – the year following the year of the sale. These same adjustments are also made to the two previous single-year studies, to account for the most recent year’s reassessments. The two previous single-year studies would have already been adjusted for reassessments in prior years. After all reassessment adjustments are made to the levels of all classes, an aggregate single-year weighted average level of assessments for all classes combined is determined by weighting the single-year level for each class (after all adjustments) by the market value of property in the class. This same computation is completed for the single-year levels for the two previous years’ studies, after adjustments are made for all reassessments. The three-year average level of assessments is the simple (unweighted) average of the single-year adjusted weighted averages from the most recent sales ratio study and the two previous studies. The three-year av19

The assessment for the year prior to the sale is used in the ratio studies to insulate the study from the potential effect of the purposeful reassessment of sold properties in the year of the sale (sales chasing), which could artificially increase or decrease the measured assessment levels. 23

erage level is used to compute the equalization factor. As an example, 2004 assessments and 2005 sales were used for the 2005 sales ratio study. Class levels for the 2005 study were adjusted for reassessments that occurred in 2005 and 2006. The 2003, 2004, and 2005 ratio studies (all adjusted through 2006 reassessments) were used to compute the three-year average level of assessments for the 2006 equalization factor (for taxes paid in 2007). The use of a three-year average level of assessments is required by statute and is part of the definition of 33 1/3% in Section 1-55 of the Property Tax Code.20 Equalization: The goal of equalization is to bring the three-year average level of assessments for all classes combined to 33 1/3% of market value, as required by statute. Equalization is necessary to provide a uniform basis for the distribution of school aid, to provide a consistent tax base for tax rate limits and bonded debt limitations, and to allow the equitable distribution of the tax burden in districts that lie in more than one county.21 The equalization factor is computed by dividing 0.3333 by the three-year average level of assessments. By statute, the equalization factor is applied by the county clerk to the assessed values of all property, other than farmland, state assessed railroad and pollution control property, and other minor property types.

20

21

The definition reads: “33 1/3%. One-third of the fair cash value of property, as determined by the Department’s sales ratio studies for the 3 most recent years preceding the assessment year, adjusted to take into account any changes in assessment levels implemented since the data for the studies were collected.” Paraphrased from Findings of the 1991 Assessment/Sales Ratio Study published by the Illinois Department of Revenue. 24

Appendix B: The Effect of Market Value Weighting on the Cook County Equalization Factor Due to classification and homestead exemptions, the residential property tax burden is not near the 73% burden it would be under an ad valorum system. However, the fact that residential property comprises 73% of the market value of all property in Cook County greatly affects the equalization factor. This fact must be considered when contemplating the effect of changing the class levels of assessments, either by ordinance or in a de facto manner. Because of its significant market value, a change in the residential level will have a substantial effect on the overall level of assessments and the equalization factor. When computing a weighted average level of assessments for the purpose of equalization, market value weighting is used to give a proportionate weight to the individual level of assessments for each class, based on the proportionate market value of the class. This gives more weight to the assessment level of a class with a higher proportion of market value and less weight to the assessment level of a class with a lower proportion of market value. Market value weighting provides the best estimate of the overall level of assessments for all classes of property combined. The simple example in Table B-1 illustrates the effect of market value weighting when computing a weighted average level of assessments. Table B-1 shows two classes of property in the example county. Class A property is assessed at a 30% level and comprises 5% of the total market value in the county. Class B property is assessed at a 10% level and comprises 95% of the market value in the county. It is clear that 20%, the simple average of the two class levels, is not a good indicator of the average level for the two classes combined. Because 95% of the market value is in Class B property, which has a 10% assessment level, the average level of assessments in the example county should be closer to 10% than to 30%. Table B-1 shows the computation of the weighted average level of assessments for Classes A and B combined.

Table B-1. Calculation of a Weighted Level of Assessments Market Value Weighting for class as a Percent

Class Assessment Level Column Number Computation Class A Class B

Level Times Weight

(2)

(3)

30% 10%

5% 95%

(4) col 2 * col 3 0.015 0.095

Weighted Level of Assessments

0.11 or 11%

The values in column 4 (Level Times Weight) result from the multiplication of the values in column 2 (Class Assessment Level) times the values in column 3 (Market Value Weighting for Class as a Percent). The values in the column 4 are then summed for all classes to obtain the weighted average level of assessments. In Table B-1, the weighted average level of assessments for Class A and Class B combined is the sum of the values in column 4 (0.015 + 0.095 = 0.11 = 11%). Tables B-2 and B-3 further illustrate the effect of market value weighting, using more realistic assessment levels in both tables and more realistic weighting in Table B-3. The assessment levels used in both tables mirror those levels used in the calculation of the 2006 equalization factor (taxes paid in 2007). The weighting

25

used in Table B-3 mirrors that used for computing the 2006 equalization factor.22 Table B-2 shows the computation of the average level of assessments when giving equal weight to the assessment levels of each class. Table B-3 shows the same computation using market value weighting.

Table B-2. Weighted Average Level of Assessments Equal Weighting of Class Levels

Class Assessment Level Column Number Calculation Vacant Residential Apartments Commercial Industrial

(2)

Equal Weighting for for Class as a Percent

Level Times Weight

(3)

11% 10% 13% 20% 22%

(4) col 2 * col 3 0.0220 0.0200 0.0260 0.0400 0.0440

20% 20% 20% 20% 20% Weighted Average Level

0.1520

Equalization Factor

2.19

In Table B-2, the equal weighting of class levels produces an overall weighted level of assessments of 0.1520 or 15.20%. The result is the same as taking a simple average of the levels in column 2. The equalization factor of 2.19 is 0.3333 divided by the weighted average level of assessments.

Table B-3. Weighted Average Level of Assessments Market Value Weighting of Class Levels (Used for the 2006 Equalization Factor)

Column Number Calculation Vacant Residential Apartments Commercial Industrial

Class Assessment Level

Market Value Weighting for Class as a Percent*

(2)

(3)

11% 10% 13% 20% 22%

2% 73% 5% 16% 3%

(4) col 2 * col 3 0.0022 0.0730 0.0065 0.0320 0.0066

Weighted Average Level

0.1203

Equalization Factor

2.77

Level Times Weight

* Weights do not total 100% because of rounding.

22

The Class Assessment Level column of Tables B-2 through B-5 shows the three-year average level of assessments for each class – the levels used in computing the 2006 equalization factor. These differ from the adjusted single-year levels in column 3 of Table 1 and in Graphs 8 and 9. The computations in these tables are simplified, but they adequately reflect the actual computations. 26

In Table B-3, market value weighting produces a weighted average level of assessments of 0.1203 or 12.03% and an equalization factor of 2.77. These values are very different from those in Table B-2. With its 73% weighting in the calculation, it is clear that the assessment level of residential property is very significant in the computation of the weighted average level of assessments and the equalization factor. The significance of residential property in the computation of the weighted average level of assessments can be further illustrated by showing the effect on the level and equalization factor of a 10% increase in the assessment level of residential property, which has 73% of the market value in the county, and comparing that to the effect of a 10% increase in the level of assessment of industrial property, which has only 3% of the market value in the county. Entries in the Tables B-4 and B-5, which are different from those in Table B-3, are shown in blue.

Table B-4. Weighted Average Level of Assessments Effect of Increasing Residential Level by 10% Market Value Weighting for Class as a Percent

Class Assessment Level Column Number Calculation Vacant Residential Apartments Commercial Industrial

(2)

(3)

11% 11% 13% 20% 22%

2% 73% 5% 16% 3%

Level Times Weight (4) col 2 * col 3 0.0022 0.0803 0.0065 0.0320 0.0066

Weighted Average Level

0.1276

Equalization Factor

2.61

The 10% increase in residential level in Table B-4 increases the residential class level from 10% to 11%. For residential property the computation for the “Level Times Weight” column is 11% * 73% = 0.11 * 0.73 = 0.0803, an increase of 0.0073 from the comparable cell in Table B-3. The weighted average level increases from 0.1203 in Table B-3 to 0.1276 in Table B-4, and the equalization factor decreases from 2.77 in Table B-3 to 2.61 in Table B-4.

27

The 10% increase in the industrial class level in Table B-5 increases the industrial level from 22% to 24.2%. For industrial property the computation for the “Level Times Weight” column is 24.2% * 3% = 0.242 * 0.03 =0.0073 (rounded), an increase of 0.0007 from the comparable cell in Table B-3. The weighted average level increases from 0.1203 in Table B-3 to 0.1210 in Table B-5, and the equalization factor decreases from 2.77 in Table B-3 to 2.75 in Table B-5.

Table B-5. Weighted Average Level of Assessments – Effect of Increasing Industrial Level by 10%. Market Value Weighting for Class as a Percent

Class Assessment Level Column Number Calculation Vacant Residential Apartments Commercial Industrial

(2)

(3)

11% 10% 13% 20% 24.2%

2% 73% 5% 16% 3%

Level Times Weight (4) col 2 * col 3 0.0022 0.0730 0.0065 0.0320 0.0073

Weighted Average Level

0.1210

Equalization Factor

2.75

Due to the 73% market value weight of residential property compared to the 3% market value weight of industrial property, the effect of a 10% increase in residential level on the weighted average level of assessments and on the equalization factor is significantly greater than the effect of a 10% increase in the industrial level. The 10% increase in the residential level increased the weighted average level by 6%, while the 10% increase in the industrial level increased the weighted average level by only 0.6%. When considering the effect of changes in class assessment levels on the weighted average level of assessments and the equalization factor, one should consider of the effect of market value weighting and the substantial influence of the residential level of assessments on the weighted average level of assessments and the equalization factor.

28

Appendix C: How Homestead Exemptions Shift the Tax Burden Within the Residential Class This appendix includes several examples that illustrate 1) how a change in a homestead exemption can affect the distribution of the tax burden, 2) how fixed-dollar homestead exemptions can be progressive, and 3) how a homestead exemption can benefit a Cook County homeowner more than a homeowner in an adjoining county. As used here, a homestead property is a property that qualifies for a homestead exemption. Effect of a Change in Homestead Exemptions on Tax Burden: The addition of a new homestead exemption or a change in an existing homestead exemption not only affects the distribution of the tax burden among classes of property, but also affects the distribution of the tax burden within the residential class – including the distribution of the tax burden among the subclass of homestead properties. These effects are illustrated in the following example. Tables C-1 and C-2 depict a taxing district with only three properties and show the resulting shift in tax burden and increase in tax rate when there is a change from an “old” $5,000 homestead exemption to a “new,” more generous, homestead exemption. Two of the properties in the tables are homestead properties and receive both the old and new homestead exemptions. The third property does not qualify for a homestead exemption. The levy and taxes billed for the district total $1,000 in both tables. The tax burden in column 5 is determined by dividing the EAV of the individual property (after subtraction of the homestead exemption) by the total EAV of all property (after subtraction of all homestead exemptions) in the taxing district. This is the same as dividing the property’s tax bill by the total tax bill.

Table C-1. Tax Burden Under the Old $5,000 Homestead Exemption

Column Number

EAV Equalization Factor But Before Homestead

Old Homestead Exemption

(2)

(3)

EAV After Equalization and Old Homestead Old Exemption Tax Burden

Computation

Old Tax Rate

Old Tax Bill (7)

(4)

(5)

(6)

col 2 – col 3

col 4 / total of col 4

levy / total of col 4

col 4 * col 6

Homestead Property A

$20,000

$5,000

$15,000

15.0%

1.000%

$150

Homestead Property B

$40,000

$5,000

$35,000

35.0%

1.000%

$350

Non-Homestead Property C

$50,000

$50,000

50.0%

1.000%

$500

-

Totals

$100,000

$1,000

Under the old $5,000 homestead exemption in Table C-1, the tax burden is shown in column 5 as 15.0%, 35.0%, and 50.0%, respectively, for Homestead Property A, Homestead Property B, and Non-Homestead Property C. The new homestead exemption in Table C-2 increases the homestead exemptions for both Homestead Property A and Homestead Property B. However, the new homestead exemption for Homestead Property B

29

Table C-2. Tax Burden Under the New Homestead Exemption

Column Number

EAV After Equalization Factor But Before Homestead

New Homestead Exemption

(2)

(3)

Computation

EAV After Equalization and New Homestead Exemption

New Tax Burden

New Tax Rate

New Tax Bill

(4)

(5)

(6)

(7)

col 2 – col 3

col 4 / total of col 4

levy / total of col 4

col 4 * col 6

Homestead Property A

$20,000

$6,000

$14,000

15.2%

1.087%

$152

Homestead Property B

$40,000

$12,000

$28,000

30.4%

1.087%

$304

Non-Homestead Property C

$50,000

$50,000

54.4%

1.087%

$544

Totals

-

$92,000

$1,000

is now significantly more than that of Homestead Property A. This shifts the burden away from Homestead Property B and toward the other two properties. Similar shifting can occur under the 7% alternative homestead exemption. Effect on Homestead Property A: The new homestead exemption increased the burden of Homestead Property A, even though the homestead exemption for this property increased from $5,000 to $6,000. The tax burden of Homestead Property A increased slightly from 15.0% ($15,000/$100,000) under the old homestead exemption to 15.2% ($14,000/$92,000) under the new homestead exemption. Effect on Homestead Property B: The homestead exemption of Homestead Property B increased from $5,000 to $12,000. The tax burden of Homestead Property B decreased from 35.0% ($35,000/$100,000) to 30.4% ($28,000/$92,000). Effect on Non-Homestead Property C: Without the benefit of either the old or the new homestead exemption, the burden of Non-Homestead Property C increased from 50.0% ($50,000/$100,000) to 54.3% ($50,000/$92,000). Note that Non-Homestead Property C could be a residential property that does not qualify for a homestead exemption. This example illustrates two types of shifts in tax burden due to homestead exemptions. One is the shift in burden to properties not receiving the exemption, and the other is the shift in burden among properties receiving the exemption. A change in homestead exemptions will cause a shift in burden among homestead properties unless the percent of EAV reduction for each homestead property is unchanged. In Table C-2, the overall reduction in EAV caused the tax rate to increase from 1.000% to 1.087%. If the tax rate was limited to less than 1.087% by a statutory maximum, all tax bills would be proportionally reduced. This would not affect the distribution of the tax burden, which can be determined solely by comparing the properties’ EAVs after the homestead exemptions are removed. Progressive Effect of Fixed-dollar Homestead Exemptions: Fixed-dollar homesteads are progressive in nature. Fixed-dollar homesteads reduce the EAV and tax bill for homestead properties with lower market

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values by a larger percent than for homestead properties with higher market values.23 Table C-3 shows the progressive effect of a fixed-dollar homestead. This table details the effect of a fixed-

Table C-3. Progressive Effect of a Fixed-dollar Homestead Exemption

Column Number Calculation

Market Value

Assessed Value Before Homestead

(2)

(3) col 2 * (10% level of assessments)

% Reduction EAV After 2.5 EAV in EAV Due Equalization Homestead After to Factor Exemption Hmstd Homestead (4)

(5)

col 3 * (2.5 equalization factor)

(6)

(7)

col 4 – col 5 col 5 / col 4

Tax Burden Before Hmstd

Tax Burden After Hmstd

(8)

(9)

col 4 / total col 6 / total col 4 col 6

Homestead Property D $100,000

$10,000

$25,000

$5,000

$20,000

20%

14.3%

12.5%

Homestead Property E $200,000

$20,000

$50,000

$5,000

$45,000

10%

28.6%

28.1%

Homestead Property F $400,000

$40,000

$100,000

$5,000

$95,000

5%

57.1%

59.4%

Totals

$175,000

$160,000

dollar homestead on three homestead properties. A comparison of columns 8 and 9 reveals that, under this fixed-dollar homestead exemption, the tax burden of Homestead Property D, the property with the lowest market value, decreases from 14.3% ($25,000/$175,000) without the homestead exemption to 12.5% ($20,000/$160,000) with the homestead exemption. The tax burden of Homestead Property F, the property with the highest market value, increases from 57.1% to 59.4%. Unless a homestead exemption is a fixed percent of EAV, it will shift the burden within the class of homestead properties from homestead properties receiving a larger percent of EAV as exemptions to homestead properties receiving a smaller percent of EAV as exemptions.24 Homesteads in Cook County vs. Other Counties: An often overlooked but interesting consequence of classification on the effect of homestead exemptions is that, dollar for dollar, for equally valued properties, homestead exemptions reduce the EAV by a larger percent in Cook County than in adjoining counties, and can thereby shift the burden to property in the adjoining counties.

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There is a presumption that the market value of a home is a general measure of the owner’s income and wealth. An assessment level of 10% and an equalization factor of 2.5 are used in the example in Table C-3 for ease of computation. The use of actual levels and actual equalization factor would not alter the conclusion that fixed dollar homestead exemptions are progressive.

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The 7% alternative exemption is not a fixed percent exemption, as the name implies. It is based on EAV growth, not on a percent of EAV. The amount of the exemption is the current EAV minus the adjusted base year EAV. The adjusted base year EAV is the base year EAV increased by 7% for each year that the exemption is in effect. This exemption is currently limited to a maximum of between $20,000 and $33,000 and a minimum of $5,000. 31

Table C-4 shows, for comparably valued properties, how, dollar for dollar, homestead exemptions provide a higher percent reduction in the EAV of a homestead property in Cook County than a homestead property in an adjoining county. This occurs because the lower level of residential assessments in Cook County (even after application of the equalization factor) produces a lower EAV and a consequent higher percent reduction in EAV for each dollar of homestead exemption. This is significant if the parcels are both in a taxing district which overlaps Cook County and the adjoining county. Column 9 shows that the $5,000 homestead exemption reduces the EAV of the Cook County homestead property by 11.6% and reduces the EAV of the adjoining county’s homestead property by 8.3%.

Table C-4. Effect of Homestead Exemptions in Cook County vs. Adjoining Counties

Column Number

Market Value

Assessment Level

(2)

(3)

Computation

Assessed Value (4)

EAV Equalization Before Factor Hmstd (5)

col 2 * col 3

(6)

Hmstd Exemption (7)

col 4 * col 5

EAV after Hmstd

% Reduction in EAV

(8)

(9)

col 6 – col 7

col 7 / col 6

Homestead Property in Cook County $200,000

8%

$16,000

2.7

$43,200

$5,000

$38,200

11.6%

Homestead Property in Adjoining County

$200,000

30%

$50,000

1.0

$60,000

$5,000

$55,000

8.3%

Totals

$400,000

$103,200

$93,200

The assessment levels in Table C-4 are representative of the adjusted single-year levels of assessment of residential property in Cook and the adjoining counties. The equalization factors are also representative. When one looks at this example from the perspective of relative tax burden in an overlapping taxing district, the burden of both homestead properties, based on their equivalent market values in column 2 should be equal, with each property paying an equal amount of the overlapping district’s taxes. The effect of the Cook County classification system can be discerned from column 6, the equalized assessed values before homestead exemptions. The classification system changes the burden of the Cook County parcel from 50% ($200,000/$400,000) to 41.9% ($43,200/$103,200) and the burden of the non-Cook parcel from 50% ($200,000/$400,000) to 58.1% ($60,000/$103,200). Column 8 shows the additional effect of the homestead exemption. The homestead exemption changes the burden of the Cook County parcel to 41.0% ($38,200/$93,200) and the burden of the non-Cook parcel to 59.0% ($55,000/$93,200).25

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The favorable treatment of the residential parcel in Cook County may be somewhat less favorable if the tax burden of the overlapping taxing district is apportioned by the Department of Revenue. 32

Appendix D: Cook County Classification History Major Changes 1973 Original Ordinance Class 1 – Vacant – 22% Class 2 – Residential – 22% Class 3 – Apartments – 33% Class 5 – Commercial and Industrial – 40%

1976 Class 2 from 22% to 17%

1977 Class 2 from 17% to 16%

1986 through 1989 Class 5a – Commercial phased from 40% to 38% Class 5b – Industrial phased from 40% to 36%

2003 through 2004 Class 3 – Apartments phased from 33% to 26%

Source: Cook County Assessor’s Office

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The Illinois Tax Foundation is a 501(c)(3) organization. ITF provides strong research and communication support to the Taxpayers’ Federation of Illinois. The Foundation’s mission is to anticipate future public issues with long-term implications for the state of Illinois, rather than to focus on contemporary matters that may be attracting political debate or headlines in the daily papers.

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