IT’S TAX DAY! Taxes in Illinois Explained
We might not make you love it, but we’ll help you understand it.
Every year Tax Day rolls around like a test you’ve barely prepared for on a subject that still makes no sense. Oh, and if you fail, you go to prison. While we can’t promise to make you love tax day, we can at least help you understand it.
Taxes in Illinois are contentious and confusing. Some people complain that our taxes are the highest in the country, while others complain they are among the lowest. And because comparing taxes is complicated, both those groups of folks are right. That’s why we are here to help.
Here are the basics. All year you pay taxes on the things you buy. Twice a year you pay taxes on the property you own. Once a year you pay taxes on the investments you hold and the income you make. Depending on how you view it, Illinois could be called a high tax state (our property taxes are among the highest in the country), an average tax state (our sales taxes are right in the middle), or a low tax state (the state has comparatively low individual and corporate income taxes and sales taxes on services).
Making things even more complicated, all of that tax revenue doesn’t all go to the same place. Most state tax revenue goes to state government agencies, but property tax revenue stays at the local level.
Let’s break that down.
State Income Tax
On April 17th this year, most people will file their state and federal income taxes. Our individual state income tax rate is relatively low. Seven states do not tax income, most others — 34 along with the federal government — tax income using a graduated system where people who earn less pay a smaller percentage of their income in taxes and wealthier people contribute more. Illinois is one of nine states with a flat-rate income tax, which means the state taxes income at the same rate for everyone, regardless of how much people earn. In Illinois, the flat state income tax is currently 4.95% for all individuals. That rate is set by the state Legislature, and it gets set and changed just like any state law (shoutout to our overview of the legislative session in Illinois!).
How is That Money Used?
Your state income tax revenue goes to everything from K-12 schools, state universities, and teacher pension funds, to medical assistance, early-childhood care, state police, and a host of other agencies. Most of this revenue (almost half) comes from individual income tax. The state’s second largest source of tax revenue is state sales tax. The other third of the state’s revenue comes from a combination of business income taxes, gaming taxes, public utility taxes, special sales taxes, and federal funds.
We will fully breakdown this mumbo jumbo bureaucratic system later this year in our state budget explainer. For now, we’re on to property taxes.
Property Tax
You may have heard a lot of talk about Illinois’ property taxes. Property tax rates vary drastically throughout Illinois. This is because property tax rates are set at the local level. The average across Illinois is 2.13%. That is very high compared both to our neighboring states and to the rest of the county. If you rent, this also affects you, because landlords set your rental prices based in part on how much they pay each year in taxes.
Property tax rates are set by your local taxing districts. Your local taxing districts include your city or village, education board (which oversees public education), park board, library board, county board, and a range of other local government bodies, depending on where you live. Yes, that’s right, all those board officials on your election ballot that you didn’t didn’t bother to vote for decide how much tax to charge you in order to fund the services they provide. (Remember to vote.) Each taxing district hands its rate to the County Treasurer who compiles them into the property tax bill that winds up in your mailbox.
How Is That Money Used?
Most of your property taxes go to public education. One of the reasons why Illinois has such high local property taxes is because the state contributes less than any other state in the nation to its primary schools — just under one-quarter of the needed school funding. Because the state spends so little on schools, the rest has to come from somewhere. In Illinois, that somewhere is property taxes.
Because public education systems are mostly funded by their local districts, the state suffers from a huge discrepancy in spending on education. While some districts bring in enough revenue to spend $32,278 on each pupil, others can only afford to spend $8,542.
Property taxes help fund a lot of other services too. Here are some examples depending on where you live in the state.
If you want to know how your property tax dollars are being used, go to the next meeting of your taxing district board and ask them for more information. Outside of Chicago, each taxing district has its own autonomous governing board (school board, library board, park board, etc.), so if you have questions about your school district’s taxing and spending policies, you have to ask the school board, not your city council or county board for information.
In Chicago, things work a little differently because the Mayor appoints people to most of the big governing boards, like the school board, library board, and park board. It’s still a good idea to direct school funding questions to the Chicago Board of Education, and park funding questions to the Chicago Park Board, because ultimately they are the ones setting your tax rates and deciding how to spend your tax dollars. It’s confusing. We know.
The Everyday Taxes:
Finally, everyone pays taxes on goods and services. These taxes should not be overlooked. State sales taxes are the second largest source of revenue for Illinois and local and county sales taxes help fund many important local government activities too.
Goods: Combined, the base state sales tax rate and base local sales tax rate is currently 6.25%. But cities and counties can increase the local sales taxes, meaning that total sales taxes can be as high as 10.25% depending on *where you are in the state*. Illinois’s base sales tax rate is pretty similar to our neighboring states and right in the middle nationally.
Services: Unlike most of our neighbors, Illinois does not tax most services (like car repair, hair cuts/styling, pet grooming, and massage therapy), even though spending on services makes up around two-thirds of the economic activity in the state. Of the 168 categories of taxable services, we only tax 17 and most of those are utilities. As a result, Illinois has one of the lowest sales tax bases in the nation.
In Conclusion
We hope that this gives you a somewhat clear and simple sense of how your taxes are set and where they go. In Illinois, income tax is low and flat, property taxes can be high and vary, and sales taxes are average but don’t cover all that much. Got it?
You made it to the end! Congratulations! Now go take a nap, you deserve it.
