Chicago intercepts tax refunds to collect unpaid debt, hitting poor black areas the hardest

In Chicago, residents can sometimes enter into payment plans to pay off fines and fees. But if they miss a payment, or if the debt becomes delinquent for any other reason, then their state tax refunds may be seized. Under the law, municipalities notify the state comptroller’s office about all delinquent debts they are owed. The comptroller’s office then cross-checks those names with people receiving a tax refund. If there’s a match, the comptroller withdraws the amount of the debt from the person’s state tax refund — and delivers the money to the municipality instead.

All debts deemed “past due” or in “final determination status” may be referred to the program for collection, according to Cabanban. Fines and fees handed down through city administrative hearings enter final determination status 30 days after the final hearing. For parking violations, debts may be sent to the program if the ticket remains unpaid 83 days after it was issued.

Illinois residents are given 60 days to appeal the interception of their tax refunds. However, this appeal can address only whether or not a debt is delinquent. If the debt is delinquent, there is no recourse. A person’s economic circumstances — often the reason they haven’t been able to pay their debts in the first place — are not taken into account, unless they have declared bankruptcy. This means that if a person cannot afford to pay off their parking tickets, or if they miss a key administrative hearing, there is nothing they can do. As long as the debt is outstanding, their tax return is subject to confiscation by the city.

This method of generating money for the city by taking people’s tax returns can be “predatory,” said Tracy Occomy Crowder, a senior organizer with Community Organizing and Family Issues, a Chicago-based community group that has led efforts to reform the city’s fines and fee system. “There’s something about it that’s scary and devastating,” she said. “Like the city is going to get its money no matter what. No matter what, by any means necessary.”

A blunt instrument to balance the budget?

Chicago started using the program in 2012, the year after Rahm Emanuel was elected mayor. Emanuel had promised to balance the city’s budget, mainly through cuts to government spending. But he also vowed to implement “a new aggressive approach to improve collections owed to the city, including millions of dollars in unpaid parking tickets, unpaid fees, fines and penalties.”

“I’m actually leveling the playing field, so it doesn’t tilt in favor of those who cheat, and cheat other taxpayers,” Emanuel said at the time. “Our legitimate law-abiding citizens, law-abiding companies, and commercial entities are bearing an unfair burden, because they’re being responsible, and yet those that are being irresponsible and cheating are getting away with it. And we’re going to stop that.”

This was the justification state legislators made as well when they created the tax-refund interception program in 2011. “The thrust of the legislation was that if people who owe the money don’t pay the money, it just means that the rest of the people who do pay their bills have to pay more,” former state Senator Chris Lauzen, one of the co-sponsors of the legislation, said in a recent interview. “It was a fairness issue.”

Critics, however, argue that poor Chicagoans who owe money to the city are victims of a fines and fees system that is tilted against them, not cheats who are trying to avoid paying what they rightfully owe. “Is it because people don’t want to pay? Or is it because they can’t?” City Clerk Anna Valencia asked reporters at a 2019 press conference announcing a debt-relief program for motorists.

“I think people, for the most part, who are not paying these fines and fees, are not doing so because they can’t afford it,” said Occomy Crowder. “The system itself is not providing affordable ways for them to actually pay the debt. It’s just kind of a backdoor way of doing it, and it’s not helping that particular person who is struggling.”

In her view, the program is a blunt instrument that does not take into account the disproportionate economic impacts of Chicago’s fines and fees system or provide opportunities for relief.

“Individuals are given no opportunity to explain to a court why they are unable to pay, and the state never has to prove before a court that the amounts they claim are owed are in fact owed,” said Mitali Nagrecha, director of the National Criminal Justice Debt Initiative at Harvard Law School.

Lisa Foster, co-director of the Fines & Fees Justice Center, a New York-based nonprofit organization that advocates for fines and fees reform, agrees that the system is too heavy-handed when it comes to putting the city’s desire to fill its coffers above the needs of its residents.

“Many people need their tax refund to provide basic necessities for themselves or their families,” Foster said. “To withhold them for fines and fees — whether imposed by a municipality or the state itself — is wrong, unless a court has determined that the individual has the actual ability to pay.”

The Illinois-based Woodstock Institute, whose research has played a large role in the fines and fees debate in Illinois, has also raised concerns about the intercept debt collection program.

Reforming a regressive system

Despite these criticisms, the program has been popular not just in Chicago, but across the state. Between 2013 and 2018, Illinois municipalities outside Chicago used the program to intercept $45 million. In 2018 alone, 217 municipalities across the state took advantage of the program, according to data provided by the state comptroller’s office. For each debt it collects, the state adds a $20 processing fee, which comes out of the debtor’s pocket. Comptroller data shows the state made $3.8 million from these fees in 2018. Similar laws have also passed in nearly a dozen other states across the country where municipal courts and local governments have struggled to raise revenue, including Alabama, Georgia, Indiana, Iowa, Kansas, Maryland, Minnesota, Mississippi, North Carolina, Ohio, and West Virginia.

Now, however, Illinois is beginning to look into reforming the program. “The concentration of unpaid fine collections in poor and minority communities concerns us,” Illinois Comptroller Susana Mendoza told The Chicago Reporter and Type Investigations.

In February, Mendoza’s office stopped assisting municipalities in collecting unpaid red light camera debts, a program that Mendoza called “clearly broken,” and “unfair to low-income Illinoisans.” The policy change came amidst a corruption probe into the relationship between state and local officials and private red light camera company SafeSpeed. Mendoza similarly ended her office’s collaboration with Chicago’s red light camera program amid worries that the program “was about revenue not safety,” and not “a legitimate program to collect debt for,” according to Abdon Pallasch, Mendoza’s director of communications.

In response to the findings by The Chicago Reporter and Type Investigations, Mendoza suggested that further reforms to the tax-refund intercept program might be warranted. “Our office will continue examining our collections and researching whether they are fairly applied,” she said. “The city should consider alternative methods of debt settlement for lower-income people to pay some of these fines, such as more flexible payment plans or other creative options.”

The Lightfoot administration says it is continuing to evaluate the city’s fines and fees systems. The mayor “is committed to addressing the city’s historically burdensome and regressive fines and fees structures and to moving forward with policies that will promote economic inclusion for all Chicagoans,” Cabanban said.

In October, the city launched an amnesty program for city sticker debt. Other progressive reforms include utility bill debt forgiveness for an estimated 20,000 qualifying homeowners. However, advocates for more progressive revenue sources have been disappointed by the mayor’s refusal to reinstate a city corporate head tax.

Some change has come from the state level, however. Mendoza’s reform to end the comptroller’s participation in red light camera debt collection followed the introduction of the License to Work Act — which Governor J.B. Pritzker recently signed into law — that ends the practice of suspending driver licenses for failure to pay fines and fees from most non-driving related offenses.

In June, Pritzker also signed a bill that places a graduated income tax on the 2020 ballot — a change that could help address Chicago’s financial woes and decrease its appetite for debt collection. Since 1970, Illinois has had a flat tax, and state law prevents municipalities from enacting their own income tax policies. Simultaneously, since 2011, the state has also reduced local governments’ share of state income tax revenue.

If the ballot initiative passes, the state will share a larger amount of tax revenue with local governments, though at a rate below historic levels. “Voters will have the power to say yes to a fair tax system that will improve the trajectory of our state’s finances forever,” Pritzker said.

The governor’s office did not respond to a request for comment about the use of the tax-refund intercept program. With the COVID-19 pandemic, municipal and state budget issues have been dramatically exacerbated across the nation. How governments respond is at the forefront of peoples’ minds, including in Chicago and Illinois.

For now, at least, Chicago and Illinois continue to stand by their practice of collecting fines and fees from people’s tax refunds — a policy that may still affect thousands of city taxpayers this tax season.

Correction: An earlier version of this post understated the amount that Chicago has raised from the tax-refund intercept program between 2013 and 2018. The color palette on the scatterplot graphic “Chicago residents in the most non-white, lowest income ZIP codes are intercepted the most” has been updated to diverge at Chicago’s median household income.

This article was reported in partnership with Type Investigations. David Eads contributed analysis to this investigation.