Property Tax versus Income Tax
(for school funding its a no-brainer)

Over a century ago, when property tax began, land (and improvements) was the primary form of wealth, so it was much nearer to being a duty on prosperity than it is today.  Many of the other federal taxes, such as taxes on electrical energy and telephone calls were for nominal amounts and often unknown to consumers.

Property taxes, on the other hand, required taxpayers to make an unequivocal tax payment of considerable size from which the taxpayer could not avoid without losing what was often their most significant piece of property and wealth.

During the Great Depression property tax went from being a state and local tax to being mainly a local tax, as the federal government and most states moved to sales taxes and later to income taxes as their primary sources for revenue. This transition was brought about in large part due to a loose knit but national property taxpayer revolt.

Chicago assumed a leadership role in this revolt. Its citizens, enraged over corrupt practices in property tax assessments discovered before the Depression, and stressed in their ability to pay the toll joined together and refused to pay taxes. Similar protests in Milwaukee, Detroit and New York City led to an estimated 3,000-4,000 taxpayer organizations forming nationwide. Tax protestors became key players in local politics across the country.

In 1932 and 1933 alone, 16 states and numerous localities enacted property tax limitations. Property tax revenue for the state government of Illinois fell from nearly $40 million in 1931 to less than $10 million in 1935.

Over time many local governmental units also reduced their reliance on the property tax share in total revenue as they increased user fees, licensing fees and local sales taxes. Dependence on state and federal aid also increased.

But in the 1950s and 1960s the role of property tax expanded dramatically at the local level as it became the major source of school funding during a period when education spending was increasing to meet the demands of the baby boomers. As school districts became more dependent upon property taxes the gap between property-rich and property-poor districts widened.

By 1982 the baby boomers had passed through the public school system. Rural communities began losing their schools due to declining or stagnating population and tax bases. Property values would often decline with the loss of schools. Rising property values in the large cities led to suburban sprawl as parents became willing to commute to work in exchange for lower housing costs and better funded schools. Property tax rates are usually lower in urban cities but the out-of-pocket taxes are generally higher than in rural communities with lower property values. Moving to adjacent communities meant bigger homes for less money and even if taxed at a higher rate they felt their children received a bigger bang, in terms of quality education, for their property tax dollars.

Soon the rural school districts began crying foul because of the mounting funding inequities. State governments, including Illinois, tried to balance the gap by reducing the amount of state aid to the wealthier (in property value) school districts.

The state governments simply could not keep up with the rate property taxes was increasing. The percentage of overall school revenues from the state dwindled lower and lower.

Because funding inequities exist both within and between states and because many rural communities felt shortchanged by legislators their arguments were brought to the courts. After all, doesn’t the Constitution guaranty equal rights for education?

In a landmark ruling on San Antonio Independent School District v. Rodriguez, issued in 1973, the U.S. Supreme Court denied this contention. By a 5-4 vote, the high court ruled that the U.S. Constitution does not require equal funding among school districts.

The funding equity issue has been more properly addressed in state courts. Many state constitutions mandate equal opportunities in education. Suits challenging the legality of unequal funding based on district property taxes have been filed in more than three-fourths of the states, and these suits have been upheld or are still pending in at least 31 states. In some cases, these actions have provided supplementary dollars from state taxes for impoverished school districts while leaving levels of funding for affluent school districts in place.

In 1990, seventy of Illinois’ school districts sued the State of Illinois, challenging the constitutionality of the school funding formula. They argued that the Illinois Constitution calls for the state to pay half of all public education costs. The State Supreme Court felt that the issue should be handled by the state legislature and not the courts.

Suburban opposition to plans for greater equity in public school funding has been strong. Many of those taxpayers are in their second or third community in their suburban sprawl and fail to perceive any benefit-cost ratio in helping schools in other communities gain more funding at their expense. They argue that a shift from local property taxes to state funding sources could mean a loss of local control.

The suburbs most effective allies in blocking all attempts to balance local and state funding are the teacher unions and school administrator associations.  Public sector unions are the largest political campaign donors in Illinois. Centralizing teacher and administrator salaries reduces the ability to play one community against another.

The Illinois Federation of Teachers, a public sector union, has adopted the following positions regarding education finance:

1. Move the state toward 51% funding
2. Increase the revenue base for education funding (taxes)
3. Raise the foundation level and index it
4. Reduce resource inequities
5. Harm no district

If no district can be harmed and the state must assume 51% of school funding by raising the education level and indexing it to the cost of living then there cannot be school funding equity between the state’s school districts.

Income tax is based on the ability to pay. The federal income tax system is progressive, the higher the income the higher the tax rate. Many states have similar systems.  Illinois has a flat tax system. An Illinois wage earner pays 3% of his/her adjusted gross income minus deductions for dependents. But regardless of system the taxpayer has some protection, when or if their income level drops, from the taxes s/he must pay.

Real estate ownership is a measurement of wealth as an asset. It is also a primary source of debt for most homeowners. Failure to pay property tax, voluntary or involuntary, results in the loss of all money invested. A decline in income due to loss of job or spouse can result in the loss of a home for someone who cannot afford their property tax bill.

Rising property values increases long term wealth and shorter term borrowing power. It can also increase out-of-pocket property taxes even if taxing bodies reduce their tax rate. The damaging results are families and seniors stressed to meet housing costs in mortgages, rents and taxes.

One reason school officials are reluctant to their funding shifting from property tax to income tax is that the former offers a much more stable source of revenue than the latter. What is good for the goose is a burden to the gander.

Perhaps those who truly want education finance reform would be served well by studying the tax revolts of the 1930s.