Revenue Impacts from COIVD19 on Illinois Municipalities

The financial impacts from COVID on municipal governments are just beginning to be felt, and civic leaders are concerned by the uncertainty of how large these impacts will be. Most Illinois taxing bodies rely on some combination of four main revenue sources: property tax, CPPRT (Corporate Personal Property Replacement Tax), state grants and sales taxes. What reasonable assumptions can be made at this point?

Property Tax: The largest portion of revenue for many municipalities is property taxes. Property tax impacts can occur in a number of ways: property owners’ failure to pay taxes because of economic hardship, delays in tax due dates or forgiveness on late fees, a reduction in taxes owed due to lower property values, or maximum tax rates being reached due to lower property values.

The good news is that unpaid property taxes are a lien against the property and should be recovered eventually, if not through the homeowners’ payments then through a tax sale. However, counties may be unwilling to enforce property tax liens or may delay tax sales, exacerbating the problem. The longer taxes go unpaid and accumulate, the more difficult it may become to enforce the lien.

Communities with low property tax collection rates may be more vulnerable than those with near 100% rates. More homeowners in these communities, already struggling, may find it impossible to keep up with payments, and delays in due dates simply cause them to get further behind. Therefore, municipalities with low collection rates may want to assume their collection rate is affected more than better off communities.

Upcoming tax distributions may not be as telling of the impact as the fall distributions and early next year, when prolonged financial hardship may take its real toll. Close-to-normal current collections may give a false sense of comfort. Communities with low collection rates may want to start making budgetary adjustments now, although others can likely afford to take a wait-and-see approach.

An even bigger impact may be felt next year, as changes in property values impact tax extensions. Tax capped entities will see their tax rates rise, in some cases pushing the levy above maximum statutory rates and causing extensions to be reduced. Municipal governments not subject to caps may likewise see tax rates pushed above statutory maximums, while those targeting a tax rate will generate less revenue from lower property values.

Corporate and Personal Property Replacement Tax. CPPRT is derived directly from income taxes paid by corporations. Obviously, income taxes are expected to decline significantly due to COVID, the only question being how much and for how long. As a guideline, the State of Illinois is projecting an 11% decline in income taxes for its fiscal year 2021, starting in July. May 2020 CPPRT distributions were 54% of last year. It may be prudent to trim your budgeted revenue for this line item to match the State’s expectation, and then monitor these revenues closely.

Per Capital Grant. As this line item is subject to appropriation by the State, it is the most difficult to project. Fortunately, for many governments it is the smallest of their revenue sources. Payment of the Per Capita Grant is dependent on the State’s willingness to continue discretionary funding in times of increasing economic hardship. For its 2021 budget, the State has increased its budget for per capital, equalization and area grants by 20%.

Sales Taxes. Of all the COVID impacts, sale taxes are the most difficult to estimate and the most locally variable. Consider how much retail activity you have within your boundaries and the type of activity (essential services, hotel, general retail, etc.). Talk to the local chamber of commerce regarding the pace of economic activity and their projections. Fortunately, sales taxes are distributed by the State monthly, giving you some ability to see very quickly trends as they develop. After delays for payment, collection and distribution, June appears to me the first month for which sales taxes have been impact, being down 17% year over year overall. However, as noted, there is a wide range of impacts across communities.

So, how can you better estimate your governmental unit’s revenues for next year? Here are a few thoughts:

· Talk to your county assessor and see how property values are being measured for next year

· Keep an eye on property tax collections and watch for any decline in collections

· Consider matching the State’s assumption for income tax declines for your projection of Corporate and Personal Property Replacement Tax: -11%

· Watch for reductions in discretionary State appropriations that might have an impact, such as for Per Capita Grants.

· Talk with your chamber of commerce and see what they are projecting for declines in sales and income

Finally, look at your current resources available to weather a reduction in revenues: cash balances that you can draw on temporarily or permanently reduce, and costs you can safely lower to help cushion soften a reduction in services.

Disclaimer: Meristem does not provide, and information in this report is not intended as, tax, legal, accounting or engineering advice. Meristem makes no representation, guarantee or warranty that any projections, analysis or recommendations will come to pass as presented, and Meristem neither assumes nor bears any responsibility regarding, nor liability for, the accuracy of any projections, analysis or recommendations herein.