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Study: The party’s over for Corporate Personal Property Replacement Tax revenues

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Illinois

* The full study is here. From Melcher+Tucker Consultants…

Hi Rich and Isabel,

Corporate Personal Property Replacement Tax Revenue and K-12 Education Funding in Illinois: Volume II, the newest report released today from the Center for Tax and Budget Accountability (CTBA), finds that revenues from a tax on all Illinois businesses have surged in recent years, helping fund local government services, including education, but now are expected to decline sharply, “with important implications for state funding of K-12 education.” The report from the nonprofit, nonpartisan research organization, finds that revenue from the Corporate Personal Property Replacement Tax (CPPRT) more than tripled between fiscal year 2019 and fiscal year 2023, jumping from $1.33 billion to $4.54 billion. But the Illinois Department of Revenue is expecting a fall of nearly 29% in FY2024. The revenues have been an important contributor to the state’s Evidence Based Formula for Student Success Act (EBF), and current projections show that CPPRT revenue to school districts in fy’25 will be $400 million less than they are in fy’24. “As CPPRT revenue begins to decline in the coming years, the educational services previously funded by some of the unexpected growth in CPPRT revenue will have to be funded with other revenue sources or be cut,” the report says.

The rise in CPPRT, according to the report, is due to a number of relatively unique economic circumstances: the release of pent-up consumer spending that occurred after pandemic restrictions were eased, higher than normal rates of inflation, and many corporations taking advantage of inflationary trends generally and supply chain issues specifically to price gouge and thereby generate record profit. The spike “was a mixed blessing. On the one hand, it did help close the statewide Adequacy Gap (in education funding) at a faster rate than anticipated—which is good. On the other hand, the CPPRT is a local revenue source, so the spike that occurred during the Surge Years effectively shifted more K-12 funding to local rather than state level resources, which is not ideal in Illinois, which already relies more on local revenue to fund K-12 education than any other state in the nation.” As CPPRT revenue growth reverts back to historical levels, the statewide Adequacy Gap will begin to worsen annually if the state maintains its current approach of increasing its year-to-year Tier funding by [$350] million, the report says. “Hence the amount of time it takes to fund the EBF fully will lengthen past current projections—which is an undesirable outcome to say the least.”

According to the report, Corporate Personal Property Replacement Tax revenue shot up from $1.3 billion in Fiscal Year 2019 to $4.5 billion in Fiscal Year 2023. It’s projected to drop down to $3.2 billion this fiscal year.

* Impact on the Chicago Public Schools budget…

(H)istoric highs in CPPRT revenue help explain why CPS moved into the next higher funding Tier under the EBF over the last two fiscal years. Also… other factors—including a reduction in total [Average Student Enrollment ] as well as a reduction in low-income student count, played a role in bumping CPS from Tier 1 into Tier 2. This change in Tiers for CPS was consequential. When CPS moved from a Tier 1 district to a Tier 2 district in FY 2023, the district lost just over half—52 percent—of its anticipated share in new, year-to-year state Tier funding.

* And this is just crazy…

A major fiscal complication that arises from using CPPRT as a part of local resources is that it allocates revenue to school districts in accordance with their respective collections of Tangible Personal Property Tax revenue in either 1976 or 1977, depending on whether or not the district is in Cook County. Much has changed in the Illinois landscape over the last half-century, demographically, industry-wise, and economically.

Which means the allocation formula used in the CPPRT is outdated and no longer representative of where businesses exist geographically in Illinois. For example, in FY 2024, CPPRT revenue made up nearly 65 percent of the total Final Resources for Monticello CUSD 25 (“CUSD 25”). Part of the reason CPPRT revenue comprises such a significant portion of CUSD 25’s revenue is that, in 1977 large businesses like Illinois Power and General Cable were sited in CUSD 25’s community—allowing it to collect significant revenue from its assessment of the Tangible Personal Property Tax. Those industries have gone, yet the district’s CPPRT revenue share is determined as if they still exist.

Other districts that did not have as strong of a business or industrial presence in 1976 or 1977 are likely receiving significantly lesser shares of CPPRT revenue, even if they are now home to bigger business entities. This effectively means that CPPRT taxes paid by a business sited in one community are being transferred to the benefit of a school district sited in a different community, based on antiquated allocation design. Fixing these distortions will not be easy—as certain districts would stand to lose significant funding for their schools through any modernization of the CPPRT allocation formula, and should be held harmless by the state to ensure their financial condition is not impaired.

Yikes.

Lots more, so go read the rest if you’re interested.

posted by Rich Miller
Tuesday, Jun 25, 24 @ 1:15 pm

Comments

Of course the Ctba says this is because of those bad corporations “price gouging” recently. As if those same corporations didn’t want to make profits before, they just recently did and now they price gouge.

And they totally gloss over one huge factor by saying “Illinois policy makers recently eliminated certain state-level corporate tax expenditures” - that’s a big one. The cap on net operating loss deductions aligns with what they observe in the data.

As the taxpayers federation predicted “ Once data for these years is available, we are likely to see a repeat of the fiscal consequences from a decade earlier: a drop in (net operating loss) claims and spike in tax collections at first, and then the reverse. In other words, the temporary suspension of the net operating loss deduction will likely be a mere timing shift in tax revenues from one year to another, helping shore up budgets in the short-term while adding to the holes in future years.” https://www.illinoistax.org/index.php/net-operating-losses-in-illinois-and-around-the-country-matching-taxes-to-the-business-cycle-carol-portman/

Exactly what happened here. Hidden in a footnote because Ctba wants you to think we need to raise taxes, instead of saying the very bubble they’re complaining about is due to this other tax increase.

Comment by Grasshopper Tuesday, Jun 25, 24 @ 1:45 pm
It is an interesting report, but unless I missed it the report doesn’t address one material reason PPRT revenues “spiked” in recent years, and why PPRT revenues are set to decline this year. Apparently, there was a misallocation by IDOR between PPRT receipts and “regular” corporate income tax receipts. See the statement issued by IDOR in May: https://tax.illinois.gov/localgovernments/localtaxallocation/may-2024-pprt-statement.html

As IDOR explained:

“The reallocation in fund distributions, which state statutes require, resulted in an increase in FY’24 LGDF allocations and a reduction in FY’24 PPRT allocations to taxing districts. The same will occur for the upcoming FY’25. This reallocation will result in a PPRT reduction for FY’25 of $1.021 billion compared to the $818 million reduction that occurred in FY’24.”

Comment by Facts Matter Tuesday, Jun 25, 24 @ 1:50 pm
To elaborate on one of Grasshopper’s points. The FY 2024 estimate from IDOR was premised in part on the end of the $100,000 cap on net operating losses.

IDOR stated:
“Also, a decrease in collections is expected as the $100,000 net operating loss limitation expires. This expiration will result in corporate taxpayers applying larger-than-normal losses against positive income, which will reduce estimated tax collections starting in calendar year 2024.”

Keeping the cap on net operating losses at $500,000 will lessen the reduction in PPRT revenues that formed the basis of the IDOR estimate.

As the report states that allocation formula is definitely outdated. As I recall from looking at this issue in detail years ago, one problem with the allocation formula is that it relied on how local assessors taxed things as personal or real property at the time of the enactment of the replacement tax and local assessors were not consistent. For example, my recollection is that Grundy county tended to treat certain industrial property (machinery permanently mounted) as real property vs. tangible property. That would have meant that Grundy county collects less under the PPRT than a similar county that treated the same machinery as tangible property subject to the old personal property tax.

Comment by Facts Matter Tuesday, Jun 25, 24 @ 2:17 pm
==This change in Tiers for CPS was consequential.==

But accurate. Chicago is not Chicago Heights. We need to stop pretending Chicago doesn’t have other revenue sources just because its student population is not a true representation of the city’s overall population.

Comment by City Zen Tuesday, Jun 25, 24 @ 2:32 pm
I don’t love agreeing with CZ but he ain’t wrong.

=in accordance with their respective collections of Tangible Personal Property Tax revenue in either 1976 or 1977,=

So few people understand CPPRT it isn’t even funny. Most school boards don’t know it exists.

That revenue growth was very unexpected so most schools were budgeting for a much lower number and it was an unexpected windfall. But then budgeting became more accurate so that may be a challenge as that revenue stagnates or falls. I have always been very conservative with my estimate. Back in the Quinn days the state used it to pay the ROE’s after trying to cut them off.

The Monticello case is wild. The percentage of their budget funded by CPPRT was much higher according to past admin. I think (I don’t know for sure) they are the only district like that in Illinois.

Comment by JS Mill Tuesday, Jun 25, 24 @ 4:34 pm
JS Mill wrote:

–So few people understand CPPRT it isn’t even funny. Most school boards don’t know it exists–.

and –The Monticello case is wild–.

When I was a school bus driver and our super at the time was puzzled about Monticello (where GTE and Illinois Power were incorporated), I told her, “lemme save you a call”, and educated HER on CPPRT.

Jeeze.

Comment by Stix Hix Tuesday, Jun 25, 24 @ 7:19 pm