By CHARLES MINERT
A research associate for the Illinois Legislative Council in Springfield, he holds degrees in political science from Park College, Kansas City, Mo., and the University of Illinois, Chicago Circle Campus. No longer in existence after January 1979

*Personal property tax

UNLESS THE General Assembly acts promptly, local governments throughout Illinois stand to lose as much as $585 million annually. Without these replacement revenues, many local governments will face a financial crisis. The personal property tax on individuals — but not businesses — was abolished on January 1, 1971. For six years the General Assembly has been on notice that it must also abolish, by January 1, 1979, the personal property tax levied on corporations, partnerships, limited partnerships, joint ventures, professional associations, and professional service corporations. Not only does the Constitution require the abolition of this tax on these businesses, it also requires that the General Assembly replace the lost revenue with a new tax on these businesses by the same 1979 date. So far, it has done neither. Big job ahead for legislators Undoubtedly, the General Assembly's delay in implementing this constitutional mandate is attributable to the impending clash between the business community and local governments. Business interests will strenuously lobby for legislation which will not increase their tax burden and local governments will press for legislation which will assure an expanding tax base. In spite of these tensions, the General Assembly can no longer defer action. If they do, local governments could go bankrupt. The extent of the General Assembly's task is revealed by a phrase by phrase analysis of section 5(c) of Article IX in the Constitution.

First, the General Assembly is required to abolish the personal property tax and "... replace all revenue lost by units of local government and school districts as a result of the abolition of ad valorem personal property taxes subsequent to January 2, 1971," that is, by

the property taxes on business to be eliminated on January 1, 1979. Second, all replacement revenues must come from statewide taxes. Third, no replacement revenues can come from taxes on real property. Fourth, replacement taxes may only be imposed on those taxpayer classes relieved of paying the personal property tax (businesses). Fifth, replacement taxes may be based on the income of businesses, corporations, et cetera.

The General Assembly's task is formidable. Determinations must be made regarding the amount of personal property tax collections and the replacement tax packages which will yield an equal amount. Taxpayer classes must be identified and evaluated in terms of their capabilities to produce replacement revenues. Methods of allocating replacement revenues and their impact on local governments must be analyzed. Finally, the General Assembly must consider the ramifications if they fail to enact replacement taxes. Given the politically charged atmosphere in which this issue will be discussed, it is important that some fiscal guidelines be established so that replacement tax packages that are proposed can be evaluated properly.

Criteria for replacement taxes
In Replacement Revenue Sources, a 1973 study commissioned by the Illinois State Chamber of Commerce, Dr. Robert Schoeplein suggests four basic criteria: (1) the replacement taxes must provide adequate revenues and be responsive to economic growth without frequent rate changes; (2) the replacement taxes should fit into existing tax collection and administrative machinery. Taxes which do not require increased administrative costs to the state and the taxpayer should be very carefully considered; (3) the replacement taxes must

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Mandated to replace revenues lost to school districts and local governments with new taxes on businesses, the General Assembly must decide soon to change tax laws or propose a constitutional referendum be equitable so that taxpayers in the same class should be subject to like taxes and taxpayers of varying income and wealth should be subject to different tax burdens, according to their ability to pay; (4) the replacement taxes must be considered in the light of their economic impact on employment, migration and business investment. One of the General Assembly's crucial tasks is to accurately estimate the amount of personal property tax revenues which must be replaced. Many estimates will be made and the General Assembly must pick and choose among them. Recent data from the Illinois Department of Local Government Affairs indicates that 1974 statewide personal property taxes, collectible in 1975, will total approximately $530 million. Assuming that about 15 per cent of these taxes will not be collected, the statewide personal property tax collections for 1975 will be about $450 million. Using this figure as a base and assuming a 10 per cent annual increase in collections for 1976, 1977, and 1978, the statewide collections should total about $585 million by January 1, 1979. Burden on businesses Any evaluation of taxpayer classes must take into consideration that part of section 5(c) which states that the replacement burden must fall solely on those taxpayers ". . . relieved of the burden-of paying ad valorem personal property taxes because of the abolition of such taxes subsequent to January 2, 1971," that is, on businesses. Taxes on personal property owned by individuals were abolished by the adoption of Article IX-A to the 1870 Illinois Constitution on November 3, 1970. The effective date of this article was January 1, 1971. After this date and until January 1, 1979, only businesses pay personal property taxes. The Constitutional Convention anticipated the ratification of Article IX-A by including section 5(b) in Article IX of the 1970 Constitution. Section 5(b) states that "[A]ny ad valorem personal property tax abolished on or before the effective date of this Constitution shall not be reinstated." Consequently, only personal property owned by corporations, partnerships, limited partnerships, joint ventures, professional associations and professional service corporations is currently subject to the personal property tax. Any replacement taxes will fall on these taxpayer classes. In Replacement Revenue Sources, the Illinois State Chamber of Commerce provides a detailed analysis of taxpayer classes according to industry groupings. The chamber's 1973 estimate of the percentages of total corporation

Survey of statewide organizations on replacement tax issue SPOKESMEN FOR 38 organizations which have registered' lobbyists were asked to comment on the personal property tax replacement issue. Seven responses were received. An increase in the income tax was conceded to be the basic replacement source, but five of the seven favored changing the Constitution to retain the existing personal property tax. A summary of replies follows: David F. Ellsworth, state chairman, Common Cause / Illinois, who emphasized that the views expressed were his own, said he favored amending the Constitution to allow a personal to corporate income tax ratio of 2:1 and raising corporate income taxes to the level needed to replace the existing tax. Alternatives to an increased income tax might include a value-added tax or retaining the existing tax, provided this is tied to reform of the state administration of the property tax. Len Gardner, secretary, Illinois Agricultural Association, cited a resolution adopted by I.A.A. delegates at a meeting early in December favoring a constitutional amendment to retain the existing personal property tax. Harold Dodd, president, Illinois Farmers Union, favors amending the Constitution to retain the tax. His alternative is an increased income tax for replacing lost revenue. Oscar A. Weil, legislative director, Illinois Federation of Teachers, says, "Those who supported the Constitution of 1970 assumed the revenue from the income tax would be used to lessen the tax burden on property and to replace revenue lost by abolition of the tax on personal property." He opposes amending the Constitution to retain the personal property tax, contending such a move "would tend to erode the credibility of state government." He favors amending the Constitution to permit a graduated income tax "not only to replace revenue lost from elimination of the personal property tax, but to allow reduction of the tax burden on nonincome producing real property." William E. Stowe, Illinois State Chamber of Commerce, favors a "balanced combination [of replacement taxes] to avoid massive shifting of tax burden between groups," including an increased income tax as part of the package. In opposition to amending the Constitution to retain the existing tax, he states, "This is a dangerous idea, advocated by special interests." Troy A. Kost, executive director. Township Officials of Illinois, favors retaining the existing personal property tax by constitutional amendment. If this cannot be done, Kost said, the state income tax should be increased to replace lost tax revenues. Urban Counties Council of Illinois suggested a combination of sales, income and public utility taxes as a replacement "to insure that no shifting in the tax burden occurs." Retention of the personal property tax is seen as "the only solution" to insure that no shifting occurs.

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Pressure is on the General Assembly to get down to business and avoid a fiscal and constitutional crisis in 1979

and partnership personal property of each industry grouping, the book value of taxable tangible personal property, and the personal property tax collected from corporations and partnerships is illustrated in the table below.

In considering particular replacement tax packages, the General Assembly must take note of the section 5(c) directive requiring that replacement taxes come from ". . . statewide taxes, other than ad valorem taxes on real estate." The reference to "statewide taxes" implies that the Constitutional Convention intended that replacement revenues come from a package of two or three taxes, rather than a single tax.

Section 5(c) also states that "[I]f any taxes imposed for such replacement purposes are taxes on or measured by income, such replacement taxes shall not be considered for purposes of the limitations of one tax and the ratio of 8 to 5 set forth in Section 3(a) of this Article." Thus, a surtax on income may be considered as a viable replacement alternative. In addition, it is important to recognize that there is no constitutional requirement that taxpayer classes currently subject to the personal property tax must pay exactly the same amount under any replacement tax alternative.

Allocation of new revenues
When considering methods for allocating replacement revenues, the General Assembly has two alternatives: direct dollar for dollar replacement or replacement based on something other than an absolute dollars lost criteria. In either case, the General Assembly will have to devise an allocation formula which will insure an equitable distribution of the additional revenues the replacement taxes will generate.

All of the foregoing presupposes that the General Assembly will pass a replacement tax package. There is, however, a possibility that the General Assembly will not pass the necessary legislation by January 1, 1979. The opening sentence of section 5(c) states that"[0]n or before January 1, 1979, the General Assembly by law shall abolish all ad valorem personal property taxes and concurrently therewith and thereafter replace all revenue lost by units of local government and school districts . . . ."

Dilemma for Supreme Court
There is some dispute regarding the meaning and intent of this language. The ramifications of this dispute were dealt with by the Illinois Supreme Court in Elk Grove Engineering v. Korzen. Dicta in the majority opinion stated that ". . . the provisions of section 5(c) constitute a mandate to the General Assembly to abolish all ad valorem taxes on personal property on or before January 1, 1979; that the provision is not self-executing and legislation is both contemplated and necessary to carry it into effect; and that the provision does not require that all such taxes be abolished at one and the same time but the General Assembly is under a continuing duty to effect their abolition on or before January 1, 1979."

The dissent held that the personal property tax is abolished on January 1, 1979, and the constitutional mandate for replacement taxes cannot be judicially enforced.

If the taxes are not abolished and replaced, a lawsuit will undoubtedly be filed to determine the effect of section 5(c). If this happens, the Supreme Court will face a serious dilemma. If it allows the personal property tax to be collected after January 1, 1979, section 5(c) is meaningless. The imposition of another deadline would be just as unenforceable as the January 1,1979, date. If the court refuses to allow the collection of the tax after January 1, 1979, it is powerless to enforce the General Assembly's constitutional mandate to replace lost revenues. All personal property taxes paid after January 1, 1979, will be protested and held in escrow accounts until the court decides on the legality of the personal property tax. Recognizing the unenforceable nature of the replacement mandate, the court could, nevertheless, order that the protested taxes be held in these accounts until the General Assembly

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enacts replacement taxes. The pressure would then shift to the General Assembly to deliver on its replacement mandate. All of these possibilities indicate that section 5(c) is seriously flawed because it is not self-executing and the replacement provisions are not judicially enforceable. The General Assembly could resolve this dilemma by calling for a referendum to amend section 5(c). Several alternatives are possible. First, the amendment could change the date and buy more time for General Assembly action. Second, the amendment could change the date and delete the replacement provision, thereby averting an immediate fiscal crisis on the local governmental level. Third, the amendment could delete the replacement provisions. Senate Joint Resolutions 33 and 67 and House Joint Resolution 27, introduced in the 79th General Assembly, adopted this alternative. Fourth, the amendment could repeal section 5(c). As January 1, 1979 approaches, pressure to make a decision will increase. Delay and avoidance of this issue are no longer possible if local governments are to have uninterrupted tax revenues to support their services.