What are replacement taxes?
Replacement taxes are revenues collected by the state of Illinois and paid to local governments to replace money that was lost by local governments when their powers to impose personal property taxes on corporations, partnerships, and other business entities were taken away.
These taxes resulted when the new Illinois Constitution directed the legislature to abolish business personal property taxes and replace the revenue lost by local government units and school districts. In 1979, a law was enacted to provide for statewide taxes to replace the monies lost to local governments.
Who pays these taxes?
Corporations, partnerships, trusts, S corporations and public utilities pay these taxes.
What are the rates?
- 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.
How and when are these taxes paid?
Corporate income taxpayers submit their taxes along with their state income tax payments. Estimated payments are made quarterly.
Partnerships, trusts, and S corporations pay replacement income tax on an annual basis. No estimated payments are required.
Utilities make quarterly estimated payments of tax on their invested capital by the fifteenth day of March, June, September, and December. A final return is due by the fifteenth day of March after the close of their taxable year.
How is the money distributed?
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 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 then 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 downstate portion 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.”
Can a district's allocation factor change?
Yes. Local taxing districts can continue to collect unpaid personal property taxes owed for the base year (1976 for Cook County; 1977 for downstate counties) and increase their share of the distribution. On the other hand, an allocation factor can decrease due to tax refunds made for the base year. The allocation factor can be adjusted for each payment if there are significant shifts in collections for the base year for that district or other districts sharing the same portion of the fund.
How often is the money distributed to you?
The legislature amended the original schedule of quarterly payments effective with the 1981 payments to provide for separate payments to be made in January, March, April, May, July, August, October, and December.
Does this mean you receive eight equal distributions?
No. The total to be distributed will vary from payment to payment depending upon the amount of tax that the Illinois Department of Revenue has collected since the last payment was made to the districts.
Who qualifies to receive these payments?
Only districts that collected personal property taxes for the 1977 tax year, 1976 for Cook County, are eligible to receive a share of the money. Districts created after 1977 do not receive replacement tax money since they did not experience a loss in revenue.
Are payments made directly to the unit of government?
Yes. 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.
Are there restrictions on how replacement tax money can be used?
If part of the former personal property tax money was used to pay off “debt service,” a comparable proportion of the replacement tax money received must go toward this purpose. The same holds true for pension or retirement obligations previously supported by personal property taxes. Certain municipalities and townships also are required to allocate a portion of their payments to dependent library districts under their jurisdictions. After these obligations have been satisfied, the remaining money can be used for the same purposes as the money the district raised through real estate taxes.