June 14, 2018
Illinois Governor Bruce Rauner presented his FY2019 State budget proposal in February for the State fiscal year beginning on July 1, 2018. As discussed in an earlier blog post, the proposal included measures that would have affected local governments including municipalities, counties and transit agencies. The State of Illinois FY2019 enacted budget was passed by the Illinois General Assembly on May 31 and signed by Governor Rauner on June 4. This blog post provides an update on two of the measures included in the FY2019 State budget that make adjustments to revenues collected by the State and distributed to local governments.
Local Government Distributive Fund and Public Transit Funds
The State of Illinois collects a statewide personal income tax and a corporate income tax. A portion of the total income tax revenue collected is placed in a Local Government Distributive Fund (LGDF) and distributed to municipalities and counties based on population size. This portion equals 10% of income tax revenue generated based on tax rates that were in effect prior to 2011 (3% for personal income and 4.8% for corporate income). Recent changes to the income tax rate are not incorporated into local governments’ distribution. In FY2019 total net personal and corporate income tax collections are estimated to be $21.4 billion. Of those total collections, the LGDF will distribute $1.25 billion to counties and municipalities, or 5.8% of total state income tax revenue.
The FY2018 State of Illinois budget reduced the portion of income tax revenue allocated to the LGDF by 10%, effectively holding back 10% of funds that would have otherwise been distributed to local governments. Additionally, the State changed the way income tax revenue would be shared with local governments, directing the money straight into the LGDF rather than passing it through the General Revenue Fund, in order to speed up payments. The 10% reduction in payments made to local governments was intended to be a one-year adjustment. The Governor’s proposed FY2019 budget included the continuation of the 10% reduction to the LGDF for another year.
The enacted FY2019 State budget reduces the holdback of income taxes to the LGDF from 10% to 5%. The 5% reduction is also intended to be a one-year adjustment. This adjustment is projected to result in an additional $98 million being distributed to local governments across the state compared to FY2018. In FY2019, a total of $1.25 billion is estimated to be distributed from the LGDF. This is compared to an estimated $1.14 billion in FY2018 based on a March 2018 forecast by the Commission on Government Forecasting and Accountability (COGFA) and $1.22 billion distributed in FY2017.
Similar to the Local Government Distributive Fund for counties and municipalities, transit agencies receive payments from the Public Transportation Fund (PTF) and Downstate Public Transportation Fund (DTPF). These funds consist of sales tax revenue collected by the State and distributed to transit agencies. The enacted FY2019 budget will also reduce the FY2018 10% holdback from these funds to 5%. Total sales tax distributions through the PTF and DTPF are projected to be $496 million in FY2019, compared to an estimated $449 million in FY2018 based on the March 2018 COGFA forecast. In FY2017 a total of $723.1 million was distributed to transit agencies from the PTF and DTPF.
Sales Tax Administrative Collection Fee
The FY2018 State budget imposed a 2% administrative fee on sales tax collections distributed to local governments. The fee was intended to cover the State’s cost of collecting and distributing locally imposed sales taxes. The fee was originally projected to generate $5.3 million per month, but after the first eight months of collections, the fee had actually generated $6.2 million on average per month. The Illinois Municipal League advocated for the fee to be reduced from 2% to 1% and two bills reducing the fee to that level were introduced during the spring legislative session. Instead, the FY2019 enacted budget reduced the collection fee from 2% to 1.5%. The change in the fee does not affect the State’s General Funds budget because the fee goes into a special Tax Compliance and Administrative Fund.
 Total personal and corporate income tax collections are net of a portion placed into a fund for tax refunds.
 Public Act 100-0587, FY2019 Budget Implementation Act, p. 61 of PDF.