Reduced to its most basic form, any tax is calculated by applying a rate to a tax base. Most modern taxes use the value of a transaction as the base. Sales tax is the most obvious, but transaction-based taxes include income tax, estate tax (transfer of assets), severance tax (oil and gas extracted), unemployment taxes (wages paid) and many others you have probably never heard of. In each case, determining the tax base is, or can be, relatively simple because it starts from a transaction clearly measurable in monetary terms.

One major tax, though, is a throwback. The real estate property tax is not based not on what changes hands, but rather it is based on what you have. The tax base is the value of the real estate you own. Or at least, that's the theory.

Property taxes have an ancient history, dating at least to Roman times and perhaps much earlier. In their present form, they are an outgrowth of feudal practices, where kings would extract money from, and maintain control over, the land-owning nobility by sending out armed troops to collect taxes. The collectors would look over a nobleman's property, decide what it was worth, and demand tax based on that value'perhaps adjusted upwards or downwards by bribes to the collector.

Tax collectors no longer use armed troops in the U.S., but the fundamental problem remains. Those same economic theorists and tax law both define fair market value as the amount a willing seller will pay a willing buyer, neither acting under compulsion. Therefore, one truly knows the value of property only when it is sold. Anything else is an estimate, a very subjective one. This may explain why the taint of corruption has lingered in Cook County at least into the last decade.

The Base

A property tax assessor determines the value of each property regularly. In Cook County, property is assessed every three years. You may have heard much screaming recently, as 2003 was Chicago's turn, and the hot residential real estate market of the past few years became reflected in the assessments. Other Illinois jurisdiction use shorter cycles or some sort of rolling reassessment, perhaps applying an annual percentage to those properties not actually evaluated. Contrary to myth, the assessor's staff does not visit every property (at least, not here) and mostly only looks at the outside of those it does visit. The best data available to the assessor come when a property is sold. Not only does that make the value of that property clear, the sales price can be extrapolated to nearby properties. Beyond that, they look at indirect measures of relative value, such as age, square footage, number of bathrooms, presence of air conditioning, and known improvements (i.e., those for which building permits were obtained). This is obviously a flawed process, as a luxurious bathroom recently redone in marble is counted much the same as one which has been unchanged, or uncleaned, since 1939.

In Illinois, property is supposed to be valued for tax purposes at one-third of its actual market value. I've never been able to find out the history of this, but my guess is that its roots are in practical politics. Let every property owner feel like a winner with an assessment well below market, and you encounter fewer complaints and resistance. In Cook County, that one-third is supposed to be a weighted average. Different types of property here are assessed at higher or lower percentages of their supposed market value. For example, single-family homes, condominiums, small apartment buildings, etc., are assessed at 16 percent, large commercial property at 38 percent, and vacant land at 22 percent. Only by accident would this process produce a 33.3 percent average. The need for elected officials to keep voters happy and the success of some in the assessment appeals process assure that the real percentage will be far lower, so a state board sets an equalization factor, commonly called the multiplier for each county. This equalizer, in theory, raises each assessment enough that the overall assessments for that county are one-third of the real value.

The process of determining the multiplier is, of course, both subjective and political. Last year's factor for Cook County was 2.4689. Most other counties had a factor of close to 1.

The Rate

The process of determining tax rates in Illinois is complex. In most of the U.S., the governing board (e.g., City Council, school board) votes a particular rate, such as three percent of the assessed value of property. Illinois does it backwards. The governing board votes on the dollar amount of taxes they want, and leave it to the county collector to divide it out and determine the rate. State law limits the maximum rate some of these governmental units can collect, but since the assessment process is not finished when the levy must be voted on, they do not actually know what amount of taxes will be billed for months.

Further, Illinois is known for having many special-purpose units of government; 11 appear on my property tax bill. After all, you can't blame Mayor Daley for the Cook County Health Facilities fund. Or maybe you can.

The other peculiarity of Illinois property taxes is that they run a year behind. The taxes due two weeks ago in Cook County were the second installment of the 2002 property taxes. The reassessment of Chicago's property will be reflected in the 2003 tax bills. More people find the assessment appeal process worthwhile each year, and that process has many layers. The 2003 assessed valuations probably will not be finalized until next May, and the actual tax rate won't be known until shortly before the second installment bills are mailed, which normally occurs at the end of July. To keep local governments from starving, the first installment tax bills (due at the end of February) are estimates, equal to one-half of the prior year's taxes. This concentrates any increase in the second installment, which serves to exaggerate the rate of change and cause much public expressions of anguish.

Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call 773/525-1778 (888/525-1778 toll free outside the Chicago area) or e-mail greg@gregmermel.com.

Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He also sometimes produces theatre.

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