The Local Government Distributive Fund
What is it, and why does it impact my property taxes & local services?
A report by the Institute for the Public Good
The Local Government Distributive Fund is a quiet, decades-old promise: a fixed share of Illinois income taxes routed back to the cities and towns that can't tax income themselves. That promise has been steadily eroded. This report traces how a "temporary" cut became permanent, what it has cost municipalities, and what restoring the full share would mean — for Chicago and for communities across the state.
01 — Origins
History of the Local Government Distributive Fund
The Local Government Distributive Fund (LGDF) is another name for a portion of state income taxes that are collected from individuals and corporations in Illinois that go out to local governments to help fund local services and the functions of government. The distribution first started in 1969 when Governor Ogilvie was trying to pass a state income tax. He needed the support of Chicago's Mayor Richard J. Daley to get it passed, so he agreed to give local governments a portion of the proceeds. The Constitutional Convention happened in the next year, 1970, which included a prohibition on local income taxes. The LGDF was an important agreement to provide income tax revenue to local governments since they could not do their own local income taxation.
02 — Where It Goes
Local Usage of the LGDF
LGDF funds pay for important local services and allow local governments to fund services without fully relying on raising property taxes, the primary revenue tool for local government. The funds account for a sizeable portion of municipalities' budgets, in many cases as much as 10-20%. They are used for a variety of local needs including police and fire, road repairs and maintenance, garbage collection, storm water and flooding prevention, pensions, economic development, and infrastructure.
03 — How the Promise Eroded
Changes to the LGDF, 2011–2017
Starting in 1993 through 2011, local governments received 10% of state income taxes distributed on a per capita basis. In 2011, the state legislature passed a temporary income tax increase from 3% to 5% to fill a hole in the state budget. This meant that instead of receiving 10% of the total tax collected, local governments would now receive 6%, holding municipal levels constant, but not giving municipalities a share in the increase.
By law, the income tax increase was meant to be temporary – gradually decreasing back to 3.25% by 2025, with the share of local government distribution moving from 6% back up to 10%. Instead, in 2017, the income tax increase to 5% was made permanent by the legislature, and the local government rate was frozen at 5.45% – reversing the plan to bring local distributions back to the initial 10%. Since 2017, it has increased slightly to 6.47% of individual tax collections (6.847% for corporate income tax), but never returned to the 10%. Essentially, the Illinois legislature has allowed municipalities to receive a level amount, but those dollars are eroding in value due to inflation. With rising local costs, a flat amount can lead to the need for budget cuts or local tax increases.
The deal is struck
Gov. Ogilvie secures Mayor Daley's support for a state income tax by routing a share of the proceeds back to local governments.
Local income taxes barred
The Constitutional Convention prohibits local income taxes — making the LGDF municipalities' substitute for taxing income themselves.
The full 10% share
Local governments receive 10% of state income taxes, distributed per capita.
A "temporary" cut
A temporary income tax hike from 3% to 5% drops the local share to 6% — holding dollars flat, but cutting municipalities out of the increase.
Made permanent
The 5% rate is made permanent and the local share frozen at 5.45%, abandoning the plan to return to 10%.
Frozen below the line
The share sits at 6.47% of individual collections — never restored to 10%, and eroding against inflation.
04 — The Consequence
What is the impact of the reduction in the LGDF?
When state funding to local governments decreases, local governments have few options other than to make cuts to services or increase property taxes. Because the state constitution limits what powers home rule governments have to tax, and in particular the options for taxing corporations, there are few options to generate new revenue locally. The original proposal to reduce the LGDF was temporary and designed to help the state fill a budget hole with the intention of returning to the full 10% after the crisis passed. But the state has continued the policy of "holding harmless" local governments rather than allowing them to benefit from growth in the state income tax.
Local governments are particularly impacted at this moment as COVID-era funding is expiring and they are experiencing cuts from the federal government.
With local income taxes barred by the state constitution and corporate taxing powers limited, a cut to the LGDF leaves municipalities with two blunt instruments: raise property taxes or cut services.
05 — The Toll
Funding lost from Illinois cities, 2016–2025
Over the past 10 years, all Illinois municipalities as a whole have lost $10.3 billion in state income tax revenue due to the decrease in the percentage of the LGDF with a projected loss of $6 billion over the next four years. A breakdown of the 10 year loss and projected loss for each of the 20 largest cities is below.
06 — The Counterfactual
What would it mean for Chicago if the LGDF went back to 10%?
If the LGDF had been restored to 10% in 2025, Chicago would have received an additional $289 million in revenue. With this amount of money, the city could have avoided the need to sell $90 million in debt, avoided $40 million in cuts to the corporate budget, and had $159 million to invest in critical programs such as expansion of permanent housing programs for people experiencing homelessness, non-police crisis response, green social housing, and youth violence prevention.
in debt the city would not have needed to sell.
in cuts to the corporate budget.
for permanent housing, non-police crisis response, green social housing, and youth violence prevention.
Interactive
The restoration estimator
The report gives one fixed anchor: restoring the full 10% share would have meant $289 million more for Chicago in 2025, measured against today's 6.47% share. Move the slider to see, in round terms, how much additional annual revenue Chicago would gain at any share between today's level and the full 10%.
If Chicago's LGDF share were restored to…
Additional annual revenue for Chicago, relative to the current 6.47% share.
07 — The Road Ahead
How will the Governor's introduced budget impact the LGDF?
The Governor's Budget for 2027 proposes to reduce the LGDF from 6.47% to 6.23%. This will keep funding levels the same for local governments, but not allow them to share in any of the growth of the state income tax this year.
Although the state income tax was structured to ensure local governments received a fair share of state income taxes since they can't enact their own income taxes, the state has allowed the amount they receive to stagnate and decrease in value, while also not allowing additional taxing powers for local governments. Keeping the amount of funding level as Pritzker has proposed to do amounts to a steady decrease in funding for local government.
Although taxes can be a divisive issue, cities represented by elected officials across the political spectrum agree that this is a policy that must change. When the state has a balanced budget, but local governments face budget deficits, cuts to services, and rising property taxes, the fiscal health of the state is still in jeopardy.
References
Sources
- Institute for the Public Good — analysis of city budgets. City budget data.
- Illinois General Assembly — FY 2026 Budget Summary. ilga.gov.
- Commission on Government Forecasting and Accountability — 3-Year Budget, FY 2027–2029. cgfa.ilga.gov.
Have questions about this report? Reach out to us at comms@i4pg.org.