Illinois county updated tax sale, participation dropped

White County joined Rock Island in altering tax sale rules to stop equity theft. The moves are intended to protect them from an unconstitutional state law.

White County just changed the rules at its delinquent tax auction, for the first time requiring tax buyers to return owners’ surplus equity if the buyers eventually take possession of the property.

The U.S. Supreme Court has ruled equity theft as unconstitutional, but Illinois law still allows it – letting a tax buyer take a property without giving the owner the value in excess of the tax debt. Cook County has been held liable for the practice and other counties face the same threat.

White County Treasurer Mike Baxley at the Jan. 30 sale required buyers to agree to take responsibility for returning any surplus equity if they ultimately took ownership of the property. The change mirrors a policy adopted by Rock Island County in December following multiple federal court decisions warning counties may face paying back property owners for constitutional violations.

Baxley acknowledged Illinois’ tax sale system remains out of compliance with constitutional protections for property owners.

“Counties must be able to enforce tax collections so government can function,” Baxley said. “But enforcement cannot come at the expense of constitutional rights. Illinois needs to reform its tax sale system to protect equity while still allowing counties to operate.”

In the most recent White County tax sale, Baxley required tax buyers to sign an agreement holding the county harmless and placing responsibility for distributing equity with the tax buyer, because buyers receive properties free and clear. No other tax sale rules were significantly changed, but participation dropped from 70 registered buyers to 44 after the new requirement was disclosed.

Illinois property owners still face a threat because state lawmakers have failed to fix an unconstitutional tax sale system. Also, state leaders have added to the property tax pain by taking revenue from local governments.

In 2011, Illinois enacted the largest income tax hike in state history. It also reduced the share of income tax revenue distributed to local governments.

The money could have been used to offset the pressure of rising property taxes. Instead, the state kept 100% of the income tax increase and spent it. Illinoisans pay the highest effective property taxes in the country, averaging $4,584 per year, plus some of the highest state and local taxes.

“These combined failures are contributing to a system that is increasingly taxing people out of their homes,” Baxley said. “Restoring constitutional protections and fair revenue sharing is essential to long-term stability for taxpayers and local governments alike.”

Federal courts have increasingly signaled counties cannot rely on state law as a shield from liability. In September, U.S. District Judge Nancy Rosenstengel of the Southern District of Illinois ruled counties may be liable for failing to return surplus equity to homeowners, even though Illinois law governs tax sales.

In December, U.S. District Judge Matthew Kennelly echoed that conclusion in a ruling involving Cook County, writing that counties have an independent obligation to comply with the U.S. Constitution and rejecting the argument they are merely following state law.

Like Rock Island County, White County has attempted to address that legal risk by shifting responsibility to tax buyers rather than continuing tax sales unchanged. Baxley required buyers to hold the county harmless and accept responsibility for distributing surplus equity if a tax deed is issued. However, simply requiring tax buyers to sign an agreement that they will do so may not be enough to shirk county leaders’ liability in the process. If that is the case, taxpayers may still be the ones ultimately paying damages for equity theft.

Under current state law, when someone falls behind on their property taxes, the county sells that debt to private investors called tax buyers. If the homeowner cannot repay the debt plus interest within what is typically a 30-month redemption window, the tax buyers can take the deed to the home.

The U.S. Supreme Court unanimously ruled in Tyler v. Hennepin County that taking full value of a grandmother’s condo for a small tax debt violated the Fifth Amendment. Other states changed their laws. Illinois has not.

Since 2019, more than 1,000 Cook County homeowners have lost their homes and all their equity, often over tax debts of less than $1,000. Their homes were worth more than $108 million combined.

Researchers estimate tax buyers in Illinois collected at least $148 million more than what was owed between 2014 and 2021. If courts require restitution, counties – and ultimately taxpayers – could be paying to make wronged property owners whole.

Faced with this challenge, counties have taken divergent approaches. Cook County delayed its tax sales. Rock Island and White counties have attempted to shift responsibility to tax buyers. Others continue operating under the existing system, exposing taxpayers to potentially significant liability.

It’s on lawmakers to pass reforms that adjust the guardrails to protect homeowners and counties. One potential solution is Senate Bill 3494. It extends the owner’s time to recover their property to five years and fixes the equity theft issue.

Homeowners’ constitutional rights should not depend on which county they live in. Counties should not be forced to devise legal workarounds to avoid unconstitutional outcomes.

Illinois state lawmakers need to end equity theft.