EAV Fluctuation has little effect on property taxes under Tax Caps

Most people in Rockford and around the state believe that when property values increase in a taxing district due to a real estate market turnaround, Tax Increment Finance (TIF) districts expiring or new construction, the tax base increases and the net result will be lower property taxes in that district.

It doesn’t work that way under current Illinois property tax laws.

Taxes do not decrease simply because the Equalized Assessed Valuation (EAV) increases in a given tax district since Winnebago County is subject to the Illinois Property Tax Extension Limitation Law (PTELL) or Tax Caps.

Once tax caps were approved by county voters, they applied to all taxing districts within the county except Rock Valley College, which totally or partially services students within six counties, one of which is not subject to Tax Caps!

Property values of all taxable property countywide have risen for the first time in six years, an increase of 1.66%. In addition, Rockford’s three oldest TIF districts will expire in December after 35 years, resulting in an $11M dollar increase in EAV.

New construction has also increased the EAV in Rockford and when added to Rockford’s expiring TIFs result in an increase of $27M, or approximately 2% of EAV, to $1.43 billion in 2016.

However, excluding inflation, which most area taxing districts have not levied in years, the City of Rockford is forced by tax caps to collect the same tax levy as the previous year, no more and no less, even though the EAV has increased $27M due to TIF expirations and new property constructed within the district’s boundaries!

The formula used to calculate the property tax due in any given taxing district is (Tax Levy) equals (EAV) multiplied by the (Tax Rate), other variables being held constant.

Therefore, if the property values (EAV) increase by 2%, the city must decrease the (Tax Rate) by 2% to maintain the (Tax Levy) at its previous level under the law. The reverse is also true – as property values drop, the tax rate increases, as we have seen for the past several years.

Tax caps, combined with the five year recession of decreasing property values, were a double hit to Rockford’s TIF’s tax increment. As a result, the $11M added to the Rockford city tax base is a poor return on investments made by existing taxpayers and the taxing districts within the city boundaries.

The taxing districts, having given up any increased tax increment for 35 years, expecting to receive a windfall when the TIFs expire or for new construction expanding their tax base, are in for a rude awakening when they discover that to raise their tax levy above the rate of inflation, the district would have pass a referendum.

In other words, because the taxing districts can’t receive a larger tax levy than they did the previous year, without voter approval under tax caps, the tax rate must drop if the EAV increases. Emphasis added – “Only the tax rates will be reduced, not necessarily the taxes.”

For the individual property owner’s taxes in PTELL taxing districts, with a now decreasing tax rate, an individual’s tax levy will only decrease if the property’s value remains the same as the previous year or increases less than 2% in our current example.

If the property increases by more than 2% in our current scenario, then the property owner’s taxes will actually increase, even though the tax base is also increasing.

In conclusion, if the total EAV of a taxing district increases due to rising property values or new construction, even three TIFs expiring under tax caps, the taxing bodies receive what they levied the previous year, excluding inflation, no more, no less.

Increases in EAV are offset by a decreasing property tax rate calculated by the county clerk’s office, not the taxing districts and the districts do not receive any more than they did the previous year without voter approval.

There is little effect on property taxes for existing taxpayers due to overall EAV tax base fluctuations, whether increasing or decreasing!