Southwest IL town mulls sales tax increase so it can cut property taxes for residents

O’Fallon city officials are considering a proposal to increase sales tax to gain $2.2 million in revenue while reducing the amount a household pays in property tax by $15.

This would provide some property tax relief for residents, adding revenue to the general and parks funds without that revenue. It would also help fund future projects in the O’Fallon Master Plan and Capital Improvement Plan, Finance Director Sandy Evans said.

A 1/2-cent sales tax increase means 50% goes towards funding parks operations and the other 50% goes towards implementing a 20-year Master Plan, creating a Build O’Fallon Trust Fund.

Increasing the sales tax will result in less burden on O’Fallon residents, Evans said.

The city’s largest retail businesses are four big-box stores that make up over 40% of the sales tax revenue. Only 9.4% of shoppers are from O’Fallon — overall, 40% is paid by O’Fallon residents and 60% by visitors.

If the sales tax hike is approved, O’Fallon will be at 8.35%. To compare to other neighboring towns, Fairview Heights is already at that rate. Shiloh is 7.35% (but 8.35% in Dierbergs shopping center), Collinsville is 8.60% for the St. Clair and Madison counties boundaries. Belleville is 8.10% and Edwardsville is 7.35%. Those figures do not include special business tax districts in Belleville, Collinsville, and Edwardsville.

Alderman Jessica Lotz mentioned, because O’Fallon is a home rule community, sales tax is not applied to groceries or medical prescriptions. The sales tax is applied on prepared foods, however.

The benefits mentioned include, for a $250,000 home, an $85 per year property tax reduction and because of a $70 per year increase in sales tax per household, on average, that would save $15 per year per household, Evans said.

In the first draft of the CIP for 2023-2027, there are $19 million worth of unfunded projects, which means no funding sources have been identified.

That includes stormwater projects, downtown redevelopment, economic development, hiking and biking trails, improvements to aging buildings and parks, swimming pool replacement, new facilities for an additional fire station, public works and library, new parks in such underserved areas as northwest, northeast and southwest O’Fallon, completion of the Family Sports Park and equipment.

Staff have been reviewing 13 new revenue sources for four months. A comprehensive review of sales tax, property tax, state income tax and utility has taken place.

The purpose was not to necessarily increase taxes, but to determine if there are more equitable forms of taxes that will better serve the future needs of the growth and development of the city, Mayor Herb Roach said.

Evans provided tax revenue recommendations to aldermen on the council’s Finance and Administration Committee during a meeting Oct. 25. This is a continuation of a discussion from the Sept. 27 meeting.

The city’s current financial situation includes declining tax revenues in property, telecommunications, cable TV franchise, and utility, which has been extended.

The Auffenberg car dealership’s relocation from the O’Fallon Auto Mall to Shiloh will mean a sales tax loss of $1 million. However, Evans said the $1 million sales tax loss will be offset by the estimated increase in income tax and use tax because of the 2020 census number additions. That should account for $1.184 million in revenue, she estimated.

The Disabled Veteran Tax Exemption is increasing from $70 million to $87 million — and climbing, Evans said. That will cause a decrease in total EAV and mean a 5.8% increase in the property tax rate.

“This is an ongoing and accelerating problem, so the property tax rate would not only increase this year, but likely every year,” she said.

The push video gaming tax was approved at the Oct. 18 council meeting, which will go into effect May 1, 2022. It is expected to add $100,000 to $300,000 in revenue.

Minimum wage will be going up in January to $12 an hour, and by 2025, will be $15 an hour, in the state.

Moving forward

No action was taken, but the council will be asked to act within the coming months. A preliminary proposal will be presented again at the next finance committee meeting Nov. 22. Evans said staff would have updated EAV estimates then.

The next step, after approving the tax levy Dec. 20, would be to approve the property tax relief program, which is needed to remove the general fund and park levies.

Then, the increase in sales tax must be approved in an ordinance and must be certified and sent to the Illinois Department of Revenue, which needs it by April 1 to become effective July 1 of the same year.

The language that establishes the Build O’Fallon Trust Fund for capital funding of Master Plan projects would need to be approved.

Evans said it may take several years to grow the Build O’Fallon Trust Fund account to build funds for future generations. The money can be used as a match for grants, and the fund can be designated as “assigned” in the budget and can only be used for a specific purpose. It could also reduce the cost of issuing bonds.

Annual Tax Levy

The annual tax levy must be filed with St. Clair County by the last Tuesday in December, which falls on Dec. 28.

The rate-setting EAV is the base for next year’s estimate — as provided by the county — which is projected to be $759,695,029.

The current disabled veteran exemption totals $87,721,087, which represents a 25% increase from the previous year. Evans said the disabled vet exemptions now represent approximately 11.5% of the city’s residential EAV.

“We have not heard a definite answer, but if similar to last year, the county will also apply a 1.029% multiplier for O’Fallon Township and a 1.0255% multiplier for Caseyville Township, thereby increasing the EAV by approximately $7,802,068,” she said.

Evans said because of the number of petitions that again could be filed with the Board of Review for review of property assessments, the projected EAV was reduced by $2 million.

“Therefore, our estimated rate setting EAV for the 2021 Tax Levy is $765,497,097, which is only $82,207 higher than the 2020 Final Rate Setting EAV,” Evans noted.

Multiple scenarios

Evans presented two scenarios for the proposed 2021 tax levy. The first one provides no property tax relief; the city is requesting an additional $400,000, which includes increases for the pension funds, Social Security, ambulance and fire, plus a $25,000 increase for the library.

Based on the current EAV estimate, the tax levy rate would equate to 0.9510, which would be a 5.8% increase.

The second scenario provides property tax relief by removing the levies for the general fund and parks, and replacing them with alternative funding, such as an additional sales tax and the push tax, which would reduce the tax levy by 5.5%. That would equate to a tax levy rate of 0.8491 — the lowest in 35 years.

Evans noted the tax levy is based on dollar amount, not by rate.

“Therefore, if the estimated EAV is even higher than projected, the tax levy rate will be lower, and if the EAV is lower, the tax levy rate will be higher.”

Draft of Capital Improvement Plan 2023-2027

Assistant City Administrator Grant Litteken told the finance committee the first draft of the proposed Capital Improvement Plan for the next five years is now available on the city’s website, https://www.ofallon.org/administration/pages/capital-improvements-plan.

It is a new program. Alderman Nathan Parchman, chair of the finance committee, said it was a “great option.”

The Capital Improvement Program evaluates and identifies city projects for purchases, renovations, repairs and construction.

Litteken said department heads will attend the Committee of the Whole meeting Nov. 29 so aldermen can ask them about CIP projects.

This story was originally published October 27, 2021 at 8:00 AM.