Monday, April 25, 2016

What is Personal Property Replacement Tax?

As recently reported on this blog and elsewhere, the Illinois Department of Revenue acknowledged that the state made over-payments to thousands of local taxing districts.  Beginning in 2014, Illinois overpaid 6,500 taxing districts by $168 million, including nearly $87 million that was misallocated to local school districts.

The payment miscalculation was in disbursements of Illinois’ Personal Property Replacement Tax (PPRT) funds. The error was found during a recent tax system upgrade, and it will be very costly to recoup. The biggest loser is Chicago SD 299, which was overpaid by $23 million. Other districts with large overpayments include $2.8 million to Rockford SD 205, $1.5 million to Peoria SD 150, $1.2 million to south suburban Valley View CUSD 365U, and $1 million to Granite City CUSD 9.

But what is PPRT? It is a tax collected by the state that is shared with local governments to replace funds that were lost when taxing bodies’ ability to impose personal property taxes on corporations, partnerships, and other business entities was abolished under the 1970 Constitution.

In advance of a state constitutional deadline, legislators enacted a law in 1979 to impose these new statewide taxes on corporations, partnerships, trusts, S corporations, and public utilities, according to the Illinois Department of Revenue. PPRT tax rates are as follows:
  • Corporations pay a 2.5 percent tax on income.
  • Partnerships, trusts, and S corporations pay a 1.5 percent tax on income.
  • Public utilities pay a 0.8 percent tax on invested capital.
Corporate income taxpayers submit their taxes along with their state income tax payments. Their estimated PPRT payments are made quarterly. Partnerships, trusts, and S corporations instead pay replacement income tax on an annual basis. No estimated payments are required. Utilities make quarterly estimated payments of tax on their invested capital in March, June, September, and December. A final return is due by March 15, after the close of their taxable year.

The proceeds from these taxes are placed into the Personal Property Replacement Tax Fund to be distributed to local taxing districts. The total collections are then divided into two portions. One portion (51.65 percent) goes to Cook County. The other portion (48.35 percent) goes to downstate counties.

The Cook County portion is distributed to the taxing districts in Cook County on the basis of each district’s share of personal property tax collections for the 1976 year. For example, if total taxes collected by all districts were $1 million and District A collected $35,000 of that total, District A’s share of any future distributions would be 3.5 percent.)

The portion for other counties is distributed similarly, except that the collections from the 1977 tax year are used to calculate each district’s share of the distribution. This percentage is called the district’s “allocation factor.”

State law provides for separate payments to taxing districts to be made in each month, except February, June, September, and November.

This does not mean schools and other taxing bodies receive eight equal distributions. The amount being distributed varies from one payment to the next depending on the amount of tax the state has collected since the last payment was made to the districts.

State warrants are made payable to the treasurer or fiscal officer of each local taxing district. Under the former personal property tax, the county treasurer distributed the money to local units.

Personal property replacement tax proceeds are distributed to any local government that had a personal property tax in 1977 through a formula based on that local government's share of the statewide total. A district that had 0.1 percent of the personal property tax then gets 0.1 percent of the corporate personal property replacement income tax proceeds today.

Click to see districts
and PPRT funds owed.
The recent over-allocation was identified during IDOR’s implementation of a new general ledger system, designed to enhance accuracy and efficiency at the Department. IDOR Director Connie Beard stated April 20 that the state would be recouping the funds from the local units of government.

“We are certainly sensitive to the impact recouping these funds will have on some of our taxing districts,” said Beard. “We will be working with the impacted taxing districts to establish a plan to recapture the funds over an extended period of time. The Auditor General’s regularly scheduled Financial and Compliance Audit of the Department began today, and we have fully disclosed the calculation error to the auditors for appropriate review.”

School management groups said the payback may have a harsh impact on some districts, and therefore the payback period needs to be extended beyond the short term.

“This is a serious financial issue for many districts,” emphasized Michael Jacoby, executive director of the Illinois Association of School Business Officials. “The CPPRT resources that were overpaid have already been expended in many instances and the recalculation of GSA would shift resources considerably. Districts are looking for a longer than shorter pay-back term in order to manage both the loss of future revenue and time for ISBE to review and recalculate past GSA payments or adjust future allocations.”