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The destination is right, but the path is flawed

Tuesday, Feb 5, 2019

* Greg Hinz

Under the proposal from the Civic Committee of the Commercial Club, the state would increase personal and corporate income taxes by one percentage point across the board, pulling in $4 billion. The group would net another $1.9 billion by beginning to tax retirement income, and $500 million by extending the sales tax to cover more consumer services.

That $6 billion a year in higher taxes would be matched by $2 billion in spending cuts, half in general state spending and half in trims to health insurance for state workers and retirees. But the plan notably does not include any projected savings from cuts in pensions by requiring workers to pay more, accept reduced benefits, or both.

The full report is here.

* OK, first of all, Pritzker ran on an oft-repeated promise to implement a progressive income tax and said he wouldn’t raise taxes on regular folks. He’d have to break that promise. The only way I see him doing that is if he can’t get a graduated tax proposal through the General Assembly and approved by the voters.

Secondly, Pritzker ran hard against a tax on retirement income. So, following the Civic Committee’s plan would require a gigantic flip-flop in order to implement a horribly unpopular tax. Paul Simon Institute..

A recurring idea is for the state to tax retirement income, such as pensions and social security. This idea is widely unpopular, with 74 percent opposing and only 22 percent in favor.

Proposing such a thing is infinitely easier said (from Chicago) than done (under the Dome).

Also, the Illinois Supreme Court decided in Kanerva v. Weems that retiree health care costs are to be treated the same as pension benefits. So, the Civic Committee has a work-around

However, the ruling does not apply to new employees, and the State could create a separate retiree healthcare plan for new employees with a reduced premium subsidy structure that would be applied going forward. It is unclear how much the State could save from reducing the premium subsidy for new employees, but the State should pursue the implementation of a separate retiree healthcare plan for new employees.

* And their billion dollars in other budget cuts comes from this

Reduce State spending through operational improvements

Magic wand.

* But, overall, the numbers make some real fiscal sense

Specifically, it wants to take the current funding plan in which the state pays about $8.5 billion a year and add an extra $2 billion a year. Doing so would get the state to the actuarial level in just four years, and result in 93 percent funding of the pension plans by 2045. By paying earlier, the state would save at least $46 million in interest costs on pension debt over the next three decades—not counting the potential upgrade of the state’s bond rating and more economic growth, the report asserts.

Such “front funding” of pension debt indeed has been recommended by numerous officials lately including Pritzker. But there has been no agreement on where to find the needed revenue.

Of the $8 billion in new revenue and spending cuts, roughly $3 billion will be needed each year to cover the state’s growing structural deficit, according to the committee’s math. Another $1.5 billion would go to pay short-term, non-pension debt; $1 billion into a new reserve fund; and $2 billion into the extra pension payment.

…Adding… From a pal…

Remember when Fahner and the Civic Committee were personally meeting with the ratings agencies to get the state downgraded? Hard to have imagined this day coming. Welcome to reality, boys and girls

Yep.

…Adding… Wordslinger is probably spot-on…

I always thought the civvies obsession with pensions was really about heading off a call for a progressive income tax.

I think this particular tax increase proposal is the same.

- Posted by Rich Miller        

59 Comments »
  1. - Demoralized - Tuesday, Feb 5, 19 @ 1:32 pm:

    ==But the plan notably does not include any projected savings from cuts in pensions by requiring workers to pay more, accept reduced benefits, or both.==

    Probably because none of that is Constitutional.


  2. - wordslinger - Tuesday, Feb 5, 19 @ 1:32 pm:

    I always thought the civvies obsession with pensions was really about heading off a call for a progressive income tax.

    I think this particular tax increase proposal is the same.

    Watch — someone’s going to say these fat cats will “move out of state” if there is a progressive income tax.


  3. - City Zen - Tuesday, Feb 5, 19 @ 1:34 pm:

    “A recurring idea is for the state to tax retirement income, such as pensions and social security. This idea is widely unpopular, with 74 percent opposing and only 22 percent in favor.”

    Typically, taxing something that is currently not taxed is unpopular. Survey participants also thoroughly shot down expanding our sales tax to cover services, which is also not taxed.

    I’m sure if Illinois had no state income tax, and a survey asked if we should tax income, the results would be similar.


  4. - Ninian Edwards - Tuesday, Feb 5, 19 @ 1:46 pm:

    “A recurring idea is for the state to tax retirement income, such as pensions and social security. This idea is widely unpopular, with 74 percent opposing and only 22 percent in favor.”

    I wonder how it polls if you drop social security and IRA income but keep pension income.


  5. - Honeybadger - Tuesday, Feb 5, 19 @ 1:46 pm:

    Start taxing retirement income and you WILL really see people leaving Illinois.


  6. - Einherjar - Tuesday, Feb 5, 19 @ 1:47 pm:

    Yeah, that’s a good idea. Cheat stateworkers out of backpay. Increase their healthcare premiums AND saddle them with more work because no one wants to work for the state NOW. Let’s just add more disincentives to public service.


  7. - Blue Dog Dem - Tuesday, Feb 5, 19 @ 1:48 pm:

    I can only find $1.2 billion to cut


  8. - PublicServant - Tuesday, Feb 5, 19 @ 1:49 pm:

    ===Wordslinger is probably spot-on…===

    Uhm, he’s absolutely pot on.


  9. - wordslinger - Tuesday, Feb 5, 19 @ 1:51 pm:

    –Uhm, he’s absolutely pot on.–

    Too early.


  10. - Rich Miller - Tuesday, Feb 5, 19 @ 1:55 pm:

    ===Too early===

    *Like*


  11. - City Zen - Tuesday, Feb 5, 19 @ 1:56 pm:

    ==I think this particular tax increase proposal is the same.==

    Wouldn’t a higher flat income tax make a progressive tax more palatable?


  12. - Perrid - Tuesday, Feb 5, 19 @ 2:01 pm:

    City Zen, to some people. You could see it more as “No no, we don’t need a progressive income tax, we just need to do XYZ”, kinda desperately throwing something else at the wall to see if it sticks.

    Or we’re being cynical. *Shrugs*


  13. - Blue Dog Dem - Tuesday, Feb 5, 19 @ 2:01 pm:

    Prediction. When it finally happens, the middle class will view the progressive tax as an increase to the flat tax.


  14. - Anonymous - Tuesday, Feb 5, 19 @ 2:03 pm:

    How about changing the health insurance now so that new employees do not get free health insurance after retirement and that current workers get what they’ve earned so far.

    If a current employees has 10 years. They get 50% off
    If a current employees has 20 years they get the 100% off. Etc.

    Should be constitutional Not taking away what is not already earned.


  15. - Sue - Tuesday, Feb 5, 19 @ 2:06 pm:

    Folks- pretty interesting news out of NY today- Cuomo is dealing with a nearly 3 billion shortfall related solely to high income residents moving out of NY to lower tax jurisdictions primarily Florida. He is quoted as saying tax the rich tax the rich but what do we do when they leave. It’s legit and in the papers and on line sites. Raising taxes on the rich always results in less revenue as people who can leave


  16. - City Zen - Tuesday, Feb 5, 19 @ 2:09 pm:

    ==I wonder how it polls if you drop social security and IRA income but keep pension income.==

    Even though it would be illegal, the poll results would certainly be amusing.


  17. - Anonymous - Tuesday, Feb 5, 19 @ 2:09 pm:

    Sue, I read about NY state’s budget mess last night and thought immediately about Illinois and how we will be hammered by a progressive income tax. Illinois is not New York.


  18. - Anonymous - Tuesday, Feb 5, 19 @ 2:11 pm:

    The median family income in Illinois is around $80k. What would tax rates be on the “rich” if we can’t tax the middle class more?


  19. - steve - Tuesday, Feb 5, 19 @ 2:16 pm:

    Here’s the new infamous quote from New York Governor Cuomo : “Tax the rich, tax the rich, tax the rich. The rich leave, and now what do you do?” Remember, this is the new world of the Trump federal tax code where SALT deductions are only $10,000.


  20. - City Zen - Tuesday, Feb 5, 19 @ 2:18 pm:

    ==we will be hammered by a progressive income tax.==

    Progressive tax rates only apply to anonymous commenters.


  21. - Anonymous - Tuesday, Feb 5, 19 @ 2:22 pm:

    Taxing pension income? I have to assume they mean public pension income. There are lots of people who receive pensions but not public pensions. WOuld we like to tax their pensions too then?


  22. - Demoralized - Tuesday, Feb 5, 19 @ 2:24 pm:

    Anonymous:

    They meant all pension income. You can’t tax only public pensions.


  23. - RNUG - Tuesday, Feb 5, 19 @ 2:29 pm:

    == I wonder how it polls if you drop social security and IRA income but keep pension income. ==

    How will you treat Teachers pensions? They were not allowed by the State to participate in Social Security. Would be a clear cut case of unequal taxation.


  24. - Anonymous - Tuesday, Feb 5, 19 @ 2:29 pm:

    Take it a step further, Demoralized. How can only one type of retirement income be taxed? Taxing all pensions but not IRAs, 401ks, social security…discriminatory and in the courts forever. All retirement income or none might pass muster if public would approve of that.


  25. - Cindy - Tuesday, Feb 5, 19 @ 2:30 pm:

    A lot of what is in the proposal is repackaged Rauner stuff. They pulled this straight from Zigmund’s GOMB reports. If you notice the section on cuts to stateworker healthcare it looks like the anti union bias was cut and pasted from Rauners bedside diary.


  26. - RNUG - Tuesday, Feb 5, 19 @ 2:31 pm:

    == that current workers get what they’ve earned so far.

    If a current employees has 10 years. They get 50% off
    If a current employees has 20 years they get the 100% off. Etc.

    Should be constitutional Not taking away what is not already earned. ==

    You obviously have not read the Kanerva decision. Go read it and then explain how your suggestion would be constitutional.


  27. - AnonymousOne - Tuesday, Feb 5, 19 @ 2:33 pm:

    With respect to the above comment about free health insurance for retirees, please note that this does not and never has been the case for teachers. TRIP insurance is health insurance before medicare but after retirement. It is not cheap. Some think teachers get free insurance. They are wrong.


  28. - City Zen - Tuesday, Feb 5, 19 @ 2:37 pm:

    ==They were not allowed by the State to participate in Social Security.==

    Well, their salary would immediately drop 6.2% because employers include their social security contribution in figuring out how much they can pay you in salary.

    Then, there’s the matter of them paying 6.2% of their own salary towards social security.

    Then there’s the matter of the service year multiplier which is lower in all states where teachers pay into both pensions and SSI (read: smaller pension).

    What’s this “allow” you speak of?


  29. - Anon - Tuesday, Feb 5, 19 @ 2:38 pm:

    Capping Salt was good policy.

    Doing so will start to reign in out of control housing markets and help bring back affordability.

    Not being able to write off massive mortgage interest and property taxes (as well as high state taxes) above a reasonable amount (which $10,000 is) will act as a counter weight on the continued growth of both.

    Unlimited Salt deductions were nothing more than a subsidy to the top 10% of earners in this country.

    Capping Salt will save the federal government almost $80 billion this year alone it is being reported, and up to $675 billion over the next 10 years.

    That is a huge subsidy we can no longer afford.


  30. - Anonymous - Tuesday, Feb 5, 19 @ 2:39 pm:

    But the massive federal tax cut for topbearnera we could afford?


  31. - Anonymous - Tuesday, Feb 5, 19 @ 2:40 pm:

    I base that on the policy that state employees will receive 5% per year as outlined
    I’m not suggesting that be taken away. I think they should get the credit that is owed to them per the time worked
    As the current contract provides

    I guess I’m saying why can’t you take something away that is never earned


  32. - RNUG - Tuesday, Feb 5, 19 @ 2:43 pm:

    == With respect to the above comment about free health insurance for retirees, ==

    More specifically, it is only premium free, co-pays and deductibles still apply.

    Plus, as Kanerva made crystal clear, it is not a “free” grant, but the result of a contract where the State said (to condense / paraphrase) “IF you work for the State 20 or more years AND you retire” THEN “the State will provide premium free health insurance to the State retiree”. Offer-Conditions-Acceptance. And since it is clearly a State pension related benefit, the State Pension Clause against diminishment applied.


  33. - Sue - Tuesday, Feb 5, 19 @ 2:46 pm:

    Anonymous- there really wasn’t a massive tax reduction for the very wealthy. My actual bill will be higher given the loss of property tax and state income deductions. The corporate rates were the most advantaged. As for individuals- it’s pretty much a wash and very individualized. The benefit to the National GDP may offset the hit to the treasury but it’s too early to tell


  34. - RNUG - Tuesday, Feb 5, 19 @ 2:48 pm:

    == I base that on the policy that state employees will receive 5% per year as outlined ==

    You are misreading it. It only applies the 5% per year, up to 50%, retirees who have not completed 20 years.

    Again, you have not read Kanerva. The court made it clear that terms at time of hiring apply PLUS any enhancements granted by the Legislature can not be diminished. Straight contract law. They left ZERO wiggle room on unilateral changes.


  35. - Anonymous - Tuesday, Feb 5, 19 @ 2:52 pm:

    TRIP monthly premiums are hefty.


  36. - RNUG - Tuesday, Feb 5, 19 @ 2:52 pm:

    Again, to be clear, the 20 year health insurance did not come about as the result of any labor contract. It was an action by the State to stop employer turnover and enacted by the Legislature. You can’t touch existing employees.

    It would be legal to change it for new hires.


  37. - A Jack - Tuesday, Feb 5, 19 @ 2:56 pm:

    Any new employee health insurance changes would take at least ten years to be realized for state employees since it takes that long for tier two to be vested. I don’t think we can wait that long for a solution.


  38. - Anonymous - Tuesday, Feb 5, 19 @ 2:59 pm:

    Glad to hear TRIP premiums are hefty. Everyone needs to pay their fair share.


  39. - the Patriot - Tuesday, Feb 5, 19 @ 3:00 pm:

    JB needs $2-4 billion to balance the budget and has actually increased spending with no proposed cuts. He needs minimum $4 billion to get any of his big ticket promises passed.

    115 days to find a minimum of $4 billion without raising taxes on or cutting services to the middle class.

    The only viable part of the plan I see thus far is legalize marijuana and hope everyone is too high to remember what the governor promised.

    All I can say is that if you believe you can raise that much money without taxing the middle class or significant budget cuts…Little less puff, little more give!


  40. - Chicagonk - Tuesday, Feb 5, 19 @ 3:02 pm:

    No one said it was going to be easy being governor. The reality is that the Democrats in the legislature and Pritzker are going to own whatever comes next. If they can sell it as fiscally responsible and do a good job explaining why the increases are necessary and why there isn’t a good alternative, they should be fine with voters in 2020 and beyond.


  41. - Andy S. - Tuesday, Feb 5, 19 @ 3:04 pm:

    I work for a private university. Like all state employees in Illinois hired since 1986, we pay into Medicare. Using this as a rationale, my university (which offers relatively generous retirement, healthcare and dependent tuition benefits) eliminated post age-65 health coverage 16 years ago for new employees. I think it would be appropriate (and constitutional) for Illinois to likewise eliminate retiree health coverage, post age 65, for new employees. However, I just do not see mathematically how that would save $1 Billion per year. It might eventually, but not for several decades.


  42. - Michelle Flaherty - Tuesday, Feb 5, 19 @ 3:07 pm:

    – $1 billion into a new reserve fund –

    I know the bean counters and rating agencies love it when government takes in more than it needs and sets it aside for some day when it wants to spend more.

    If we’ve got an extra $ billion laying around, I would suggest paying down more debts faster.

    “I’m going to raise your taxes so much that we’ve got an extra $1 billion just in case” isn’t exactly a good slogan with the people


  43. - Original Rambler - Tuesday, Feb 5, 19 @ 3:08 pm:

    RNUG, are you sure about that 50% cap for years 10


  44. - NeverPoliticallyCorrect - Tuesday, Feb 5, 19 @ 3:16 pm:

    Tax Retirement Income? Sure, let’s tax retirement assets as well. Who in their right mind puts this stuff out with a straight face?


  45. - City Zen - Tuesday, Feb 5, 19 @ 3:26 pm:

    ==I think it would be appropriate (and constitutional) for Illinois to likewise eliminate retiree health coverage, post age 65, for new employees.==

    Won’t someone please think of the children? #SomeoneElse


  46. - Former State employee - Tuesday, Feb 5, 19 @ 3:50 pm:

    I love the comments here. It is as if the entire argument is about state employees. News flash. There are a couple of people in Illinois who don’t work for the State.


  47. - Original Rambler - Tuesday, Feb 5, 19 @ 3:53 pm:

    Whoops, lost the rest of my post. Are you sure about that 50% cap for years 10-19. I was told by an SRS retirement counselor that it is a straight 5% per years of service calculation.


  48. - Notageniusbutiknowthisd - Tuesday, Feb 5, 19 @ 4:21 pm:

    Original Rambler. There is no cap at 10 years. The state contributes 5% per year of qualified service. So 19 years is a 95 percent state contribution toward the premium.


  49. - foster brooks - Tuesday, Feb 5, 19 @ 4:33 pm:

    you mean tax com ed , att, nicor pensions etc? Btw medicare becomes primary at 65


  50. - RNUG - Tuesday, Feb 5, 19 @ 4:49 pm:

    == Whoops, lost the rest of my post. Are you sure about that 50% cap for years 10-19. I was told by an SRS retirement counselor that it is a straight 5% per years of service calculation. ==

    I think we are saying the same thing.

    Talking in terms of reduction, yes. If you have 19 years in and retire, then the retiree has to pay 5% of the premium. 18 years and retire, then the retiree pays 10% of the premium … etc… At 10 years of service, the retiree would pay 50% of the premium. Maybe I wasn’t clear the way I phrased it.


  51. - Mama - Tuesday, Feb 5, 19 @ 5:17 pm:

    - RNUG - Tuesday, Feb 5, 19 @ 4:49 pm: -

    That is for each person you carry on your insurance policy. Most people carry health insurance for them and their spouse. In that case, each person on the insurance policy would have to pay. For two people, it would be 10& per year for each year one doesn’t meet the 20 years.

    RNUG, is that right?


  52. - Mama - Tuesday, Feb 5, 19 @ 5:19 pm:

    “…10& per year for each year…” I meant to say 10% per year for each year…
    Sorry


  53. - RNUG - Tuesday, Feb 5, 19 @ 5:30 pm:

    ,-Mama-, I’m not sure how the dependent portion works on that. I will ask someone who was in that situation tomorrow when I see them.


  54. - Anonymous - Tuesday, Feb 5, 19 @ 6:05 pm:

    I believe retirees pay the same dependent costs as the current employees


  55. - thoughts matter - Tuesday, Feb 5, 19 @ 7:36 pm:

    Yes, retiree dependent coverage is the same as active employee. No further discount for years worked. Medicate becomes primary st age 65. There are different premiums for Medicare primary vs state primary.
    I have no real problem with changing retiree healthcare for new employees. However- the less attractive you make the retirement benefits, the less likely new employees will stay very long. So the turnover will be high. Salaries will raise as a way to reduce turnover. Also, try telling elected officials that they won’t be able to come back and get on the retiree health insurance later in life. I think that’s mainly what that ‘ you can leave and come back for the retiree health insurance’ option is for. Normal state employees work here until they retire.
    Finally - once you are Medicare primary, the state retiree health insurance becomes a Medicare Advantage plan.


  56. - wordslinger - Tuesday, Feb 5, 19 @ 8:27 pm:

    –Folks- pretty interesting news out of NY today- Cuomo is dealing with a nearly 3 billion shortfall related solely to high income residents moving out of NY to lower tax jurisdictions primarily Florida–

    Pretty interesting that you choose to omit that Cuomo blames that alleged “rich flight” on the feds SALT deduction cap.

    I think both he and you are silly. Rich people live where they want. Price some real estate in NYC or in any of those towers going up in Chicago and you’ll see.

    Chicago’s population decline is driven solely by the 24% loss of black population since 2000. White, Hispanic and Asian populations have all increased.

    You think the 200K black residents who left were rich and did so because of taxes?

    https://www.chicagoreader.com/chicago/chicagos-black-exodus/Content?oid=66920657


  57. - Sonny - Tuesday, Feb 5, 19 @ 9:34 pm:

    Sorry rich guys, we tried it your way, it doesn’t work, and now it’s your turn. Soak the one percent.


  58. - Stuntman Bob's Brother - Wednesday, Feb 6, 19 @ 12:27 am:

    ==How will you treat Teachers pensions? They were not allowed by the State to participate in Social Security. Would be a clear cut case of unequal taxation==

    I think this that is something that the courts would have to decide, RNUG. According to Kiplinger’s, approximately 34 states do not tax Social Security benefits, but many (most?) of these 34 tax other pension benefits in some manner. I do agree that public service pension benefits could not be singled out, you would also have to tax 401k and IRA benefits at the same rates (which is fair). But even that may be up to legal interpretation, some states (Idaho, I believe is one) tax pension income but exempt Railroad pensions.


  59. - Quicksand - Wednesday, Feb 6, 19 @ 4:08 am:

    Anonymous - Tuesday, Feb 5, 19 @ 2:11 pm:

    The median family income in Illinois is around $80k. What would tax rates be on the “rich” if we can’t tax the middle class more?

    80K? What is your source, Anonymous.


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