Illinois schools are facing a number of financial problems as they
search for ways to meet their expenses. All Districts reliant on
property taxes must face the declining EAV of all property in their
district as employers close down and move away. Further, the
State has made clear that Districts should not continue to rely on
State funding as it seeks to phase out both the Hold Harmless, as well
as the Poverty Grant Baseline used in the current General State Aid
formula. Even further, with high unemployment in the area, local
residents are more likely to “pinch-pennies” and avoid what they see as
unnecessary school expenditures. A combination of these, plus
other additional local factors will make it increasingly more
difficulty to pass any referendum.
One solution to this problem is the implementation of a “Sales Tax
Sharing Arrangement.” As you will see, these funds, originally
taxed and received by local municipalities, can serve as an alternative
revenue source for school districts for specific expenditure.
I. The “Sales Tax”:
The “sales tax” is actually a combination of two taxes imposed by
either home rule or non-home rule municipalities: the “retailers’
occupation tax” and the “services occupation tax.” The retailer’s
occupation tax is imposed upon persons engaged in selling tangible
personal property, while the services occupation tax is imposed upon
persons selling services, which transfer tangible personal property as
an incidence of providing the service. There are numerous
statutory exemptions for types of property exempt from this tax.
See 65 ILCs 5/8-11-1; 65 ILCS 5/8-11-5. These taxes are
called sales taxes because they impose an additional tax on the seller
for each sale falling under the tax requirements. The sellers are
them permitted to pass these taxes on to the purchaser of each item
sold.
A.The Why Would a Municipality Share
its Tax? Municipalities recognize that strong school districts are one
of the most attractive local services to non-residents. This
attraction is beneficial for all taxing bodies involved, as new
residents bring new businesses (or new businesses bring new residents),
ultimately resulting in higher tax dollars for all. Additionally,
these taxes are not necessarily imposed on all local residents
alone. If your municipality has a shopping or business district
area with attractive shops and stores, it is likely that non-residents
from neighboring area patronize these retailers. Thus, this tax
is borne by residents and non-residents alike.
II. Home Rule v. Non-Home Rule:
Municipalities are governed by different methods of interpretation in
relation to determining the extent of their powers to conduct different
actions. In some situations a home rule entity will have
“authority” to conduct a particular act, while at the same time the
non-home rule entity claims to lack such “authority.” This
discrepancy can be answered as a matter of interpretation.
A.Home Rule. In the 1970 Illinois
Constitution, Article VII, §6 granted the following authority to
certain Illinois Municipalities: “[A]ny municipality which has a
population of more than 25,000 are home rule units. Other
municipalities may elect by referendum to become home rule units.
Except as limited by this Section, a home rule unit may exercise any
power and perform any function pertaining to its government and affairs
including, but not limited to, the power to regulate for the protection
of the public health, safety, morals and welfare; to license; to tax;
and to incur debt.” The affect of the previous language has
provided a general proposition that home rule units may enact
ordinances and take actions that are not authorized by statutes, so
long as they are not in contravention of any other statute. For
such entities, the General Assembly must speak in terms of
“limitation.” (Issues arise regarding whether actions are inside
or outside a municipality’s purview of authority granted by home rule,
however, that distinction is beyond our scope here.)
B.Non-Home Rule; Dillon’s Rule. In comparison, non-Home Rule
municipal powers are interpreted under the traditional rule: Dillon’s
Rule. This rule provides a narrow interpretation to municipal
authority. The Rule provides that such entities have only the
authority to act given expressly by the General Assembly, or those
necessarily or fairly implied from expressed authorities. Without
some expressed guidance from the General Assembly, these units are
without authority to act. For such entities, the General Assembly
must speak in terms of “grant.”
III. The Taxes:
A.Home Rule Retailers Occupation Tax;
Home Rule Services Occupation Tax: 65 ILCS 5/8-11-1; 65 ILCS
5/8-11-5. There are a number of steps to impose a Home Rule
Retailers/Services Occupation Tax. The Municipality first passes
an ordinance establishing the tax. The Municipality must then
file the ordinance with the Department of Revenue. The tax may
only be imposed in ¼% increments. There is no indication of
limitation of the amount of tax that can be collected under this
provision. The Municipal Code requires that if either tax is imposed,
the other tax must also be imposed at the same rate. Therefore,
the total increase in taxes will be ½%. (1/4% for each
type). The tax is then collected by the Illinois Department
of Revenue (paid by sellers). The Department of Revenue pays the
municipality for the amount of tax collected. To discontinue the tax,
the municipality follows the same procedures used for the
implementation of the tax; passage of an ordinance and filing the
ordinance with the Department of Revenue.
Of additional significance is the fact that there are no limitations on
usage of the revenues received in the statute. Therefore, once
the tax is imposed, there are no statutory limitations on the types of
projects for which the home rule municipality may use the tax (so long
as it is presumably for the public benefit, i.e. impose tax to pay to
school, to prevent increase in school taxes on residents, to make the
municipality seem more attractive to businesses and future residents).
Once such a justification is made by the municipality it can pay the
funds to a school district to pay for debt service.
B.Non-Home Rule Retailer Occupation Tax; Non-Home Rule Services
Occupation Tax: 65 ILCS 5/8-11-1.1. Because of differing levels
of authority, non-home rule municipalities have to jump through
significantly more “hoops” for the implementation of the tax.
There are additional steps to impose a Non-Home Rule Retailers/Services
Occupation Tax including the Municipality passing an ordinance calling
for a referendum on the question of whether such a tax should be
imposed. If the majority of electors vote in affirmative, then
tax shall be increased. After voter approval, the Municipality
passes an ordinance to implement the tax. Like the Home Rule Tax
the Non-Home Rule Tax can only be imposed in ¼% increments.
However, unlike the Home Rule Tax, the total amount of the tax is
limited; it cannot be imposed at more than 1%. To discontinue the
tax, the municipality follows a slightly different procedure; passage
of an ordinance and filing the ordinance with the Department of
Revenue. (No referendum is necessary for discontinuance.)
One of the most important points regarding the non-home rule taxes is
the statutory limitation on their usage. The sections authorizing the
implementation of these types of taxes provide that they may only be
imposed for “expenditures on public infrastructure or for property tax
relief or both as defined in 8-11-1.2 . . . .” 65 ILCS
5/8-11-1.3. Section 1.2 defines the terms used in the Non-Home
Rule taxes.
a.Property Tax Relief. The term
“property tax relief” is defined to include “the action of the
municipality to reduce the levy for real estate or avoid an increase in
the levy for real estate taxes that would otherwise have been
required. Property tax relief or the avoidance of property tax
must uniformly apply to all classes of property.” 65 ILCS
5/8-11-1.2. This term provides for an expansive use of such tax
revenue for municipalities, but cannot directly assist schools because
the focus is on the impact of property taxes levied by the
municipality.
b.Public Infrastructure. The other statutory definition has been
extended to provide relief to schools located in non-home rule
municipalities. The term “public infrastructure” is defined to
include such things as roads and streets, sidewalks, and water and
sewer lines. 65 ILCS 5/8-11-1.2. However, the statute
provides forms of “special legislation” for two particular
municipalities. For the City of DeQuoin and for the Village of
Forsyth, the statute provides that the term “public infrastructure”
includes “public schools.” In these two situations, the Cities
involved petitioned their local legislators to have the statutory
language changed to provide specific exceptions for their particular
municipalities. Because both municipalities are non-home rule
units, they could only use the tax for purposes expressly provided by
statute. The legislation provided them with express authority to
spend municipal revenue for public school expenditures. In both
situations, the School’s involved issued bonds for the new school
construction. The cities involved agreed to increase their sales
tax revenue by the permitted ½% for payment to the school to pay the
required debt service on the bonds.
There is one potential limitation to this type of use: “school
facilities.” The use of these revenues for any other purpose,
salaries, improvements, or other expenses, has not yet been
specifically provided. However, home rule units of
government do not have any limitation on their authority to pay these
funds to a school district for these other types of purposes.
IV. Intergovernmental Cooperation:
Most of your districts have likely entered into an Intergovernmental
Agreement with other units of local government. Like non-home
rule municipalities, School Districts are also constricted by the
precepts of Dillon’s Rule. As such, the Schools need expressed
statutory authority for all of their actions. The authority for
Intergovernmental Cooperation is found in the 1970 Illinois
Constitution which provides the following:
(a) Units of local government and
school districts may contract or otherwise associate among themselves,
with the State, with other states and their units of local government
and school districts, and with the United States to obtain or share
services and to exercise, combine, or transfer any power or function,
in any manner not prohibited by law or by ordinance. Units of local
government and school districts may contract and otherwise associate
with individuals, associations, and corporations in any manner not
prohibited by law or by ordinance. Participating units of government
may use their credit, revenues, and other resources to pay costs and to
service debt related to intergovernmental activities.
(b) Officers and employees of units of local government and school
districts may participate in intergovernmental activities authorized by
their units of government without relinquishing their offices or
positions.
(c)The State shall encourage intergovernmental cooperation.
Article VII, §10, of the Illinois Constitution.
These authorities are supplemented by and are consistent with the
Intergovernmental Cooperation Act. 5 ILCS 220. The General
Assembly has not acted to limit the contractual or associational
authority defined in these sections. See Kanellos v. County of Cook, 53
Ill.2d 161, 290 N.E.2d 240, 243 (1972),
V. Sales Tax Agreements:
These Agreements, whether Home Rule, or Non-Home Rule, have the
following key provisions which often control the negotiations between
the parties:
A.Amount of Funds: The parties must
describe amount needed, either by using a formula for debt service
necessary, or by listing the total amount of the bonds issued, plus any
accumulated debt service.
B.Dispersal of Funds: The parties must describe the method for
dispersal of funds from the municipality to the school district;
including the number of days after the municipality receives the funds
and the duration of such payments.
C.Additional Tax Revenue: The parties must describe what happens to the
amount of the increase in sales tax above the amount needed monthly for
debt service. It must be clear whether the City keeps the money,
the money is retained by the City in a fund for future City payments,
or the City pays money to a District to retain in a fund for future
payments.
D.Interest Received On Funds: The parties must clearly describe what
happens to any interest received on the funds after paid from the
municipality to the school district. It must be determined
whether that amount will be credited against future payments by the
City, paid back to the City, or used by the District for any other
purpose.
As with most contract negotiations, the possibilities are
endless. However, in this context, it is important to keep
constant attention to the provisions of the bond resolutions for the
underlying bonds paying for school construction to avoid any
inconsistency.
VI. Conclusion: Municipalities and School Districts have some of
the same goals in mind. The use of sale tax sharing arrangements
can strengthen this bond by avoiding some of the necessary property tax
increases that come with new school construction. If your
District foresees necessary infrastructure improvements, consider your
relationship with your local municipality and whether these additional
“non-school” revenues are a possible option.