Why state froze rate for towns’ share of income taxes

When Pingree Grove’s new population figures were released a few years ago, village officials knew it would eventually result in a small windfall of new state revenue.

That’s because the state carves out a portion of its annual income tax haul for redistribution to municipalities based on population through its Local Government Distributive Fund.

“The village’s $322,578 increase in 2023 LGDF (revenue) over the previous year’s was a direct result of the 2020 census,” said Pingree Grove Clerk Laura Ortega.

Only the increased LGDF revenue received by Elgin, Naperville and Schaumburg last year was higher than Pingree Grove’s, according to Illinois Department of Revenue records. But Pingree Grove’s spike amounted to 25% more than what the village received in 2022, the highest percentage bump in the suburbs.

On average, suburban municipalities received roughly $85,000 more in LGDF revenue in 2023 than in 2022, records show.

While population growth played a large part in Pingree Grove’s fortunes, the village and other towns were also aided by a slight increase in the percentage of income taxes the state was sharing that year. The rate rose from 6.06% in 2022 to 6.16% in 2023. It grew again this year to 6.47%.

However, the recently approved state budget called for the LGDF rate to remain stagnant next fiscal year, which starts July 1, upsetting many municipal leaders who complain the state should restore the rate to the 10% agreed upon in 1969, when a state income tax was introduced.

In 2011, the state slashed the LGDF rate to 6% in an effort to shore up its financial problems.

“Going back to 10% is what we’ve been asking for the past decade or so,” said Mark Fowler, executive director of the Northwest Municipal Conference, a lobbying and purchasing cooperative made up of 42 suburbs in five counties. “The governor’s argument is they’ve increased other fees and taxes that make up any losses municipalities have sustained.”

Only a few suburbs saw their share of income taxes shrink last year despite the rate increase. No town was harder hit than Aurora, which lost $446,911 in 2023, records show. That’s a 1.6% decline from 2022.

“This is one of the reasons we’re actively seeking a special census because we firmly believe the census bureau undercounted in 2020, and it was an error we’re trying to correct,” said Alex Alexandrou, chief of staff to Aurora Mayor Richard Irvin. “The sooner we correct the census number is another way of getting more money.”

But the 2011 rate cut plays a larger role. If municipalities were getting 10% of state income taxes again, Aurora would have received almost $18 million more in 2023.

“We’ve been working with the council of governments for years to increase the rate, unfortunately it hasn’t happened,” Alexandrou said. “Its effects apply to more than just Aurora.”

Rosemont, Wayne and West Chicago also saw less income tax revenue in 2023 than in 2022.

Last year, 93 suburbs received more than $390 million combined from the LGDF. If the rate had been 10%, they would have almost $250 million more, according to state figures.

Statewide, municipalities would have received an additional $1 billion combined if the shared rate was at 10%, records show.

Lawmakers note that since 2011, the state has approved video gambling and recreational marijuana sales, all of which can be taxed locally and result in significant revenue for municipalities.

A spokesman for Gov. J.B. Pritzker points to other initiatives that have helped make up for any lost LGDF revenue.

“Supporting the operation of local governments is a key part of the state’s financial infrastructure,” said Alex Gough. “In the fiscal year 2025 budget alone, local governments are set to receive roughly $400 million in new funding through the retailers occupation tax, a cap on the amount of sales tax retailers are able to keep and a re-renters tax on third-party entities that resell large blocks of hotel rooms.”

Gough also said under Pritzker’s leadership, municipalities are receiving a combined $1.1 billion more annually than they were prior to him taking office.

However, municipal leaders still argue the LGDF rate should be restored to the 10% level, especially with the looming demise of the grocery tax in 2026.

“The local government distributive fund is the fairest way of doing things, because it’s based on population,” Fowler said. “Not every town allows or can sustain video gambling or (marijuana) sales.”

And Alexandrou noted that even with positive results from a special census, it won’t make up for the loss of the grocery tax.

“To say we could make up that grocery tax easily, I wouldn’t agree with that,” he added. “It’s a difficult position to be put in by the state.”

Aurora stands to lose about $5 million annually from the loss of the grocery tax, Alexandrou said.

Statewide, it’s estimated municipalities will combine to lose more than $350 million annually from the loss of the 1% grocery tax. However, those towns can opt to levy their own grocery tax beginning in 2026.