April 17, 2020

· property-tax · public-finance

Over on Twitter, I worked through a how the current COVID-19 pandemic might influence property taxes in the Chicagoland region (see below for a link to that thread if you want to go through it). Twitter is nice for quick thoughts, but this is important so I thought I’d expand upon that a bit. Off we go!

In theory, this is mostly a short-term issue, but there could be long-term implications depending on what happens in the real estate market. To plug my own research for a second, in the long-run, changes in assessed values are dependent on changes in house prices. Typically, it takes some time to translate changes in house prices to assessed value to property tax revenues. In general, this is a 3 to 4 year process. So if COVID-19 disrupts house prices in any way, the revenue impacts for local governments are pretty far off in the future on average.

The short-term is much more dependent on how property tax collections and distributions work and that’s state-specific.

Illinois Property Taxes

For the uninitiated, the property tax is an ad valorem tax. It applies a rate (millage rate) to a tax base (assessed value). In Illinois, the rates are set by the various taxing bodies and the tax base is usually determined by townships (in most things property tax in the state, Cook County (Chicago) is unique). Property is assessed at 33 1/3 percent of the fair market value of that property.

In Illinois, property tax collection is the realm of counties (county treasurers, specifically). The county sends out property tax bills, handles payments, and distributes tax revenues to the applicable taxing bodies. Generally, tax bills are sent out by May 1 with bills being due in two equal parts on June 1 and September 1. There are exceptions, of course. Counties can opt into a four-payment system and Cook County operates on an accelerated time table with 55% of the bill being due March 1 and 45% being due August 1. Failure to make a property tax payment on time incurs a 1.5% monthly interest penalty.

Once tax revenue is collected, it is distributed to taxing bodies beginning on June 1 (including any applicable interest) and then the first day of every month after. In general, counties stick to this schedule; however, there are certain programs that allow for deviations. For instance, counties alter this schedule for activated members of the Illinois National Guard or US military reserves who are deployed outside the United States. Important here is that when the President or Governor declare a disaster in all or part of a county, the rules for how late payments or due dates are treated change. In these situations, counties may adopt ordinances that delay due dates, suspend interest accumulation on late payments, and the like (see 35 ILCS 200/21-40(c)(1) for more information on the potential changes).

As of today, there are a number of collar counties that are trying to decide whether to implement programs that would suspend late penalties. DuPage County and Kendall County are debating. Kane County has already suspended late penalties (Update (2020-04-22): McHenry County has also suspended late penalties). Lake County debated implementing a delay, but ultimately chose not to do so.

So What?

The primary issue in delaying payments (or not assessing penalties on late payments) is this has the potential to disrupt the transfer of tax revenues to taxing bodies and short-term cashflow. An open question is how prevalent delayed payments will be. Among the counties who have decided or are debating whether to adopt a delaying policy, the property tax base is overwhelming residential and heavily skewed toward owner-occupied single family homes. Many of these homes will have their property tax bills paid for through an escrow account managed by a mortgage servicer. At least for the June 1 payment, there’s likely sufficient reserves to pay property taxes; however, if homeowners begin to fail to make payments, there could be an issue.

At the end of the day, this is a big waiting game until the first revenue distribution on June 1. An additional issue is what is likely to play out is taxing body specific. If there are clusters of taxpayers who elect to delay payment, that may influence only a handful of taxing bodies. Or payment delays could be low but widespread, impacting individual local governments very little.

We just won’t know until June 1.

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