The state of Illinois isn't the only taxing body reeling from dwindling revenue these days. Declining sales, property, and gaming receipts are blowing holes in municipal budgets across Illinois.  As a result, local officials are struggling to maintain basic services like police protection, fire patrols, and snow removal. What are they doing to alleviate the strain?  Not surprisingly, some towns are considering local fee hikes or gas taxes.  This led us to wonder what local governments might gain under HB 174, the tax reform package favored by the Responsible Budget Coalition. As it turns out, quite a bit.

First the details: Sen. James Meeks' (D-Chicago) proposal -- which cleared the Illinois Senate last spring but was never called for a vote in the House -- would raise the income tax rate from 3 percent to 5 percent and expand the sales tax to roughly three-dozen services. A series of tax credits -- raising the personal exemption from $2,000 to $3,000, doubling the state property tax credit, and tripling the Earned Income Tax Credit -- would help offset the tax burden on low- and middle-income households.

Where municipalities would stand to gain the most is through the Local Government Distribution Fund (LGDF), which siphons off a 10 percent share of the state's net personal income tax receipts and distributes that money to local governments on a per-capita basis. The Illinois Department of Revenue ran the numbers and estimated that, had HB 174 been adopted this spring, an additional $541 million would have been directed to the fund in FY 2010, on top of the projected $890 million that the LDGF is already scheduled to generate.

There is one catch though. Because so much of the overall $5.2 billion in new revenue would initially be committed to filling the state's massive budget hole, $249 million of those LGDF dollars would likely be transferred into the Common School Fund to cover K-12 education costs in FY2011. With local districts facing multi-million deficits and school funding soon expected to fall off a cliff with the expiration of federal stimulus assistance, that money will serve as a lifeline for ailing districts. After 2011, however, when tax receipts are expected to rebound and some of the new tax revenue will funnel into the education system (33.33 percent for the Common School Fund and 16.7 percent for Higher Ed), schools would gain a new (and secure) funding source.

That's not all. By applying the sales tax to the fastest-growing sector (PDF) of the economy -- services -- IDOR estimates that an additional $500 million could be collected each year. If local governments follow suit, applying their own 1.25 percent levy to those services, they could take in an additional $125 million a year.

While that kind of money won't magically solve all local budget conundrums, it will offer a much-needed boost. And the Center for Tax and Budget Accountability's Ron Baiman reminds us (along with a growing number of experts) that, without a tax increase, the state's financial problems are going to cost local governments dearly. We began to see the ripple effect this year as public health departments, emergency management teams and senior programs were scaled back as a result of initial budget cuts. But that was just the tip of the iceberg.

"If some town has a prison that shuts down or a medical facility that closes it not only impacts the services, but there's a loss of jobs," Baiman tells us. "These impacts could be very, very severe. I think people have their heads in the sand if they don't recognize it."

Image used under a Creative Commons license by Flickr user vistavision.