Local Government Distributive Fund (LGDF):
What is it and why does it impact my property taxes & local services?
Monday, April 13
The Local Government Distributive Fund: What is it, and why does it impact my property taxes & local services?
History of the Local Government Distributive Fund (LGDF)
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.
Local Usage of the Local Government Distribute Fund (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.
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.
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.
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.
What would it mean for Chicago if the percent of 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.
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.
Have questions about this report? Reach out to us comms@i4pg.org.