The Illinois Constitution and Taxes

The Illinois Constitution was adopted on December 15, 1970. The constitution sets forth the taxing powers of home rule units and describes the exclusive power of the General Assembly to raise revenue. Because the constitution creates the framework for how Illinois’ taxing system functions, this post will discuss the constitution’s general structure and the impact it has on Illinois taxes.

Background

In 1968, the people of Illinois called a constitutional convention to “modernize, shorten, and liberalize” its 1870 constitution. One of the advocates for the convention was Chicago mayor, Richard J. Daley, who sought two primary goals: (1) obtain constitution home rule power for the City of Chicago, and (2) to allow for classification of real property for ad valorem taxation purposes.[1] Another important motivating factor for revising the constitution was to abolish the state’s personal property tax, which was generally seen as disproportionately affecting downstate taxpayers as compared to those located in Chicago.[2] At the end of the convention, the state voted to adopt the constitution.

The Illinois Constitution of 1970 is composed of fourteen articles. Article VII relates to “Local Government,” Section 6 of which is dedicated to describing the powers of home rule units. Article IX describes the General Assembly’s revenue power. These two sections are the most important in understanding the constitutional constraints on Illinois tax.

Powers of Home Rule Units

As we have discussed with respect to Chicago and Cook County, the Illinois constitution grants home rule authority to counties and municipalities which have a population of more than 25,000.[3] Other municipalities may elect by referendum to become home rule units or, alternatively, home rule units may by referendum elect not to be a home rule unit. To the extent home rule county ordinances conflict with municipality ordinances, the municipal ordinance will prevail.[4]

Although home rule units appear to have plenary authority, the constitution does limit their powers. Home rule units only have the power granted by the General Assembly “to license for revenue or impose taxes upon or measured by income or earnings or upon occupations.”[5] Moreover, the General Assembly may limit home rule power to tax where the General Assembly approves such preemption by a three-fifths vote.[6] Otherwise, home rule units may exercise and perform concurrently with the state any power or function of a home rule unit to the extent the General Assembly does not specifically limit the home rule unit’s exercise of such powers or specifically declare the state’s exercise of a similar power to be exclusive.[7]

These constitutional revisions “drastically altered the balance of power between [Illinois] state and local governments, giving local governments greater autonomy.”[8] Indeed, the Illinois Supreme Court has explained that these provisions were “drafted with the intent to give home rule units the broadest power possible under the constitution.”[9] Nonetheless, the three most meaningful limitations on home rule units contained in the constitution are that home rule units may not license for revenue, impose income taxes, or impose occupation taxes without the explicit grant of authority from the General Assembly.

While Illinois courts have been somewhat hesitant to strike down home rule taxes on the basis that such taxes are impermissible occupation taxes, the Illinois Supreme Court, in 1982, struck down a City of Chicago tax which taxed certain services.[10] The court explained that delegates from the constitutional convention “saw the occupation tax as a corollary to the sales tax which would extend that tax to services, and [?] equated the occupation tax with a tax on services.”[11] Thus, generally speaking, home rule units may only impose taxes on services to the extent permitted by the General Assembly.

State Revenue Power

The General Assembly has the exclusive power to raise Illinois revenue except as limited or otherwise provided by the Constitution. The General Assembly may not surrender, suspend, or contract the power to tax away.[12] Similar to many other states, Illinois has a “Uniformity Clause,” which states that “[i]n any law classifying the subjects or objects of non-property taxes or fees, the classes shall be reasonable and the subjects and objects within each class shall be taxed uniformly.  Exemptions, deductions, credits, refunds and other allowances shall be reasonable.”[13]

The Illinois Constitution also dictates that any income taxes must be at one set rate and may not be graduated. Moreover, income taxes may only be imposed once on individuals and corporations, but tax rates imposed on corporations may differ from tax rates on individuals, so long as corporations are not taxed at a ratio greater than 8 to 5 when compared to individual tax rates.[14] A number of constitutional amendments have recently been proposed to amend the constitution to allow for a progressive income tax.[15]

Another important aspect of the Illinois Constitution is that counties with a population of more than 200,000 may classify real property for purposes of taxation.[16] These classifications must be reasonable and assessment of tax must be uniform within each class. Moreover, real property used in farming in a county may not be assessed at a higher level of assessment than single family residential real property in the county.[17]

Finally, the constitution provides that the “General Assembly by law may classify personal property for purposes of taxation by valuation, abolish such taxes on any or all classes and authorize the levy of taxes in lieu of the taxation of personal property by valuation.”[18] The constitution required, on or before January 1, 1979, the General Assembly to abolish all ad valorem personal property taxes and to replace all revenue lost as a result by imposing statewide taxes on those classes relieved of the burden of paying ad valorem personal property taxes. To the extent such taxes are measured by income, “such replacement tax shall not be considered for purposes of the limitations of one tax and the ratio of 8 to 5” regarding personal and corporate income taxes. The resulting “replacement income tax” is imposed on corporations at a rate of 2.5% of the taxpayer’s net income and for S corporations, partnerships, and trusts, is imposed at a rate of 1.5% of the taxpayer’s net income.[19] The Illinois Supreme Court has confirmed that the constitution’s prohibition on personal property tax is permanent, and such taxes may not be resurrected in the absence of a constitutional amendment.[20]

Conclusion

The Illinois General Assembly retains a substantial amount of authority to structure the state revenue system as it desires. However, the 1970 Constitution provides home rule localities significant power to do the same absent preemption by the General Assembly.  Understanding this unique balance provides useful insight into how to navigate Illinois state and local revenue laws.