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An Illinois budget fix politicians won’t touch

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* My Crain’s Chicago Business column… [fixed link]

Big Jim Thompson and I disagree.

The former 14-year Illinois governor says he has no regrets about pushing legislation in the 1980s that exempted retirement income from state taxation.

I think it’s crazy. Illinois is facing a $4 billion hole in its 2015 budget when the 2011 income tax increase automatically starts to roll back on Jan. 1. That’s a huge headache for whoever wins the Nov. 4 election, Gov. Pat Quinn or Republican nominee Bruce Rauner.

Illinois is leaving $2 billion on the table by not taxing retirement income, studies have shown. That missed revenue is escalating every year. Total retirement income in Illinois is growing by 6.5 percent a year, compared with just 1.9 percent annual growth for personal income that is taxed, according to a study by the Civic Federation.

Illinois is one of just three states that exempt pension income from taxation, according to the Chicago Metropolitan Agency for Planning.

Shouldn’t we get in line with all those other states? Mr. Thompson says no.

Click here to read the rest before discussing, please [fixed link]. Included in the story are exclusive results from a new poll of Illinois senior citizens on this issue.

posted by Rich Miller
Monday, Aug 4, 14 @ 9:32 am

Comments

Rich, your link goes to the wrong article.

Comment by Joan P. Monday, Aug 4, 14 @ 9:35 am
But it is an interesting one as well for what it is worth…

Comment by OneMan Monday, Aug 4, 14 @ 9:42 am
I’m retired and I agree. I still use the roads and I still use the services. Why shouldn’t pay something for that?

Comment by Sangamo Sam Monday, Aug 4, 14 @ 9:45 am
What Joan said.

Comment by Just Observing Monday, Aug 4, 14 @ 9:45 am
I personally don’t mind a tax on my retirement income, seeing how it would help the state.

Looking at Rich’s article, an overwhelming majority don’t want retirment income to be taxed. It’s like people who don’t want a tax increase but who want to keep funding government services. We can’t have it both ways, yet we insist on it.

Something has to give. What about the combo of a gradual cost shift plus a retirement income tax? Could the tax be unconstitutional and a diminishment of pensions?

Comment by Grandson of Man Monday, Aug 4, 14 @ 9:46 am
I agree, and if we would just base the income tax on federal taxable income, it would be both simpler and more progressive than the current system. And constitutional.

Comment by Excessively Rabid Monday, Aug 4, 14 @ 9:50 am
== It’s past time that it was taken seriously.–

You’re right about that, in the sense that it’s too late.

If it was ever going to happen, it would had to have been before the Boomers started retiring. The number of retirees is going to continue to grow and they vote at higher rates than any other group. Game over.

Comment by wordslinger Monday, Aug 4, 14 @ 9:51 am
and this is why i`m voting for quinn rauner don`t have a position

Comment by Anonymous Monday, Aug 4, 14 @ 9:55 am
We should tax retirement income when it is earned (Roth style). That provides more cash now, heads off retirees from leaving, and captures tax revenue from those that retire elsewhere before they leave.

Comment by thechampaignlife Monday, Aug 4, 14 @ 9:57 am
It’s incredible that one in two seniors believes he already is being taxed, and that 83% of them believe their income tax is too high! That says something about the ignorance of half the seniors and about how unpopular taxes are –even when they don’t exist.

Comment by Anon Monday, Aug 4, 14 @ 10:01 am
Also, the feds don’t tax social security of lower income seniors, so even if we did tax retirement income, we would presumably not tax these seniors either.

Comment by Random Bystander Monday, Aug 4, 14 @ 10:01 am
Here is the right link until Rich fixes the other:

http://www.chicagobusiness.com/article/20140802/ISSUE01/308029973/an-illinois-budget-fix-politicians-wont-touch

Reading the article, I have to agree that it is a reasonable and large revenue stream that 47 other states are able to benefit from. According to his numbers, even taxing retirement income over $50k would result in $1.5 billion a year in much needed revenue that would still protect those that don’t enjoy particularly lucrative pensions.

Comment by The Lowly LA Monday, Aug 4, 14 @ 10:03 am
Sorry about the bad link. Fixed.

Comment by Rich Miller Monday, Aug 4, 14 @ 10:05 am
They would tax it if they could limit it to public employees and teachers, its those darn millionaire CEO retirees who gum up the works on this one.

Comment by Obamas Puppy Monday, Aug 4, 14 @ 10:07 am
Show young working moms in entry level jobs telling us they are being overtaxed because more and more retirees are getting a free ride on taxes.

Show abled body retirees parking in handicapped parking spots in their nice rides, then trotting into restaurants asking for senior coffee and special meals, as families struggle.

Show all the special treatments given to retirees as young families struggle to find money for school supplies.

Interview all the grandparents shopping for their grandkids because their parents can’t afford the cost of living and taxes on families.

Keep telling Illinoisans that this state is one of the only states that don’t ask their retirees to contribute to their increasing costs via taxes.

Keep it up until Boomers realize they don’t have to remain a growing burden on society in their golden years, that they can pay their way just as they always had.

The argument has to be over whether we should continue to pamper the Boomers, or spend our money on our kids.

Quinn and Rauner are not putting the argument out there showing how Boomers are taking from their grandkids in order to get those free catheters, rolling scooters and other retiree perks. Both are Boomers themselves and really need to recognize that their generation’s time is past and that we need to take care of our kids, just as previous generations took care of the Boomers back in their day.

Comment by VanillaMan Monday, Aug 4, 14 @ 10:07 am
I agree with you Rich. I use to prepare taxes and had a few clients that had done pretty well with their retirement accounts. Some had hundreds of thousand coming to them each year when you added their pension checks, social security checks and then their withdrawls. But no state taxes to pay. I would think politically you would have to make the threshold higher than $50,000 though.

Comment by Been There Monday, Aug 4, 14 @ 10:08 am
When people say the tax on their retirement is too high, does WAA ever ask what was the total retirement tax they actually paid?

Comment by zatoichi Monday, Aug 4, 14 @ 10:10 am
As a retiree I don’t like it but recognize that it’s needed. If it was phased in in some manner and didn’t apply to low income retirees it could be politically palatable.

But why stop there? It’s time to overhaul our tax system. Why all the exemptions, deductions, etc.? Are the social and economic benefits they supposedly provide worth it? Why isn’t interest and dividend income treated the same as earned income? Why is it that some people and some businesses pay no income tax? I bet there’s more than $2 billion to be made.

Comment by Sir Reel Monday, Aug 4, 14 @ 10:13 am
No problem taxing my retirement. I would suggest if the pensioner is a former state employee, leave the tax % in their retirement system instead of the general revenue. Would take a dent out of the pension funding and prevent the GA spending it as they deem fit.

Comment by Kissfan Monday, Aug 4, 14 @ 10:14 am
If we had a graduated income tax, I would be all for taxing pensions. Those with small pensions should not be paying the same rate as the wealthier.

I am retired with a TRS pension and would pay state taxes on my pension if that is the law. I know many who retired in the 1980’s and 1990’s who have small pensions, no Social Security, and do not have Medicare. We should not be taxing them at the same rate but a lower rate.

Comment by Nearly Normal Monday, Aug 4, 14 @ 10:15 am
I think it is crazy to let the income tax rate to drop back when there is already a $4 billion hole in the budget.
The no-tax on retirement savings was pushed for awhile as a means for the state to encourage people to put money into 401Ks, 403Bs, IRAs, and such.
I had a letter from the state decades ago that said “Illinois will NEVER tax that money”.
Retirees still pay property tax, license plates, gasoline tax, and sales tax.

Comment by DuPage Monday, Aug 4, 14 @ 10:24 am
==“To the best of your knowledge, does the state of Illinois’ income tax apply to retirement income, such as Social Security, pensions and 401(k) withdrawals?”==
I love that you polled this.

I wonder what tiny percentage of retirement tax income could be used for repairing his building?

Comment by Robert the Bruce Monday, Aug 4, 14 @ 10:26 am
Amazing how the focus is on taxing retirees but no one can even consider increasing taxes on those making millions. Sorry, but there are few pensions (at least public pensions) that are extravagant—-although the handful that are large seem to be portrayed as customary and usual because it fits the dialogue. Unbelievable that those living extremely large continue to get a pass. Shows who controls everyone in this state and the powers-that-be. Silly to be picking on small time people while passing up the real money pot.

Comment by AnonymousOne Monday, Aug 4, 14 @ 10:30 am
By the way, Vanilla Man, as a retiree who owns property, the bulk of my tax bill goes to schools. Our kids are long gone, but we continue to pay the freight for YOUR children. And in my community, that is a large bill to pay for you.

Comment by AnonymousOne Monday, Aug 4, 14 @ 10:34 am
The article is wrong in part. Although two states beside Illinois do not tax any pension income, seven states have no income taxes thus no pension tax and many states do not tax public pensions. Look it up.

Comment by Vitaman Monday, Aug 4, 14 @ 10:40 am
AnonymousOne - public schools are not there to educate YOUR children or MY children, they are there to educate OUR children. We pay for them over the course of our lifetime, not just when we happen to have kids in school, because over the course of our entire lifetime, we benefit from a well educated community.

Comment by Anonymous Monday, Aug 4, 14 @ 10:46 am
Sticky wicket on this one and as Slinger suggested, the window to act boldly on this might be nailed shut at this stage.

Comment by A guy... Monday, Aug 4, 14 @ 10:53 am
I’m curious whether they CAN be taxed at this point. One could argue that, once a pensioner is promised a tax-free pension, imposing a tax now would be an unconstitutional diminution.

Comment by Zoom Monday, Aug 4, 14 @ 10:57 am
The comments rightly address questions of fairness and political feasibility. The practical impact on the current pattern of relatively affluent and mobile residents (e.g., well-off Boomers) to leave Illinois and the extent to which taxing retirement income would accelerate this trend also needs careful consideration.

Comment by Former State Senator Monday, Aug 4, 14 @ 11:08 am
The rich don’t pay enough taxes. Now the retirees don’t pay enough taxes. The working middle class pays too much taxes. But who gets most of the services our taxes pay for? Non working or low income people. There’s a problem. What’s the solution besides more taxes?

Comment by Anonymous Monday, Aug 4, 14 @ 11:23 am
Politicians can’t keep taking areas of taxes off the table. There is no good reason why retirement income over 50k shouldn’t be taxed. We desperately need the revenue.

Comment by Chicago Cynic Monday, Aug 4, 14 @ 11:23 am
Just a thought.

What happened when the Illinois cigarette tax was hiked. The “projected” increase in income to the State never materialized because people bought their tobacco out-of-State.

Just wondering if there has been a study on how many seniors would actually relocate because of a new tax on retirement income. Illinois is a high-tax State and this might? be the reason some seniors still live here?

Just a thought.

Comment by Jechislo Monday, Aug 4, 14 @ 11:24 am
To Anonymous re: everyone benefits from an educated population. You are 100% correct. No one here complains about supporting our schools with our property taxes. I was responding to VanillaMan whose implication is that retirees are getting a free ride and pay for nothing. I begged to differ. We are responsible citizens, part of the community and supportive. We don’t get things that we haven’t earned over 40 years of our life.

Comment by AnonymousOne Monday, Aug 4, 14 @ 11:34 am
Cue the senior ads of poor Grandma and Grandpa struggling to get by for whichever candidate suggest this idea. Even a graduated tax would require understanding of the issue which the poll shows clearly wouldn’t happen especially with the other side hammering the point home.

Comment by OurMagician Monday, Aug 4, 14 @ 11:38 am
I am retired and my income is K per year. I pay no income tax and only 150 dollars property tax.I don’t have anything left over at the end of the month but I still should be paying more tax,even if it is just a couple hundred dollars I should be paying more.

Comment by reflector Monday, Aug 4, 14 @ 11:38 am
I am retired and my income is 36 K per year. I pay no income tax and only 150 dollars property tax.I don’t have anything left over at the end of the month but I still should be paying more tax,even if it is just a couple hundred dollars I should be paying more.

Comment by reflector Monday, Aug 4, 14 @ 11:40 am
Kissfan @10:14: Creative idea and would probably make the spoonful of medicine go down a bit easier. Having said that, there must be something wrong with the idea for it to make so much sense.

Comment by Tommydanger Monday, Aug 4, 14 @ 11:41 am
I’ve been saying for years that retirement income should be taxed. However, if you provide a deductible (probably necessary for it to have any chance of adoption) the revenue falls away very quickly to under a billion

Comment by Anonymous Monday, Aug 4, 14 @ 12:03 pm
I still maintain Rich’s numbers are too high. I think you will only generate $0.8B to $1.5B or so of new revenue if you put in an exemption ranging from $50K down to $29K. And, as others have pointed out, you could lose a lot of the higher income retirees.

A quick check shows that 26 (actually 27 but Iowa is phasing it out) do not tax Social Security. 9 additional states have no income tax of any kind. A total of 13 states (partially overlapping the first 26) do not tax any kind of retirement income from qualified plans. So there are plenty of states to pick from if Illinois starts to tax retirement income.

Comment by RNUG Monday, Aug 4, 14 @ 12:06 pm
And if you were going to impose a retirement income tax, along with a deduction tied to average SS for the State or some equivalent, I would schedule it to phase in at the rate of 1% per year. Make it relatively painless and it might stand a better chance of actually being enacted.

Comment by RNUG Monday, Aug 4, 14 @ 12:10 pm
“Amazing how the focus is on taxing retirees but no one can even consider increasing taxes on those making millions.”

Um, could have something to do with the State Constitution. Which dictates a flat tax.

Now, you’d say, “amend it to get the rich to pay their fair share”, and many would say “thanks for opening up the constitution, lets change some other stuff, too, like the Pension Clause”.

Comment by Chris Monday, Aug 4, 14 @ 12:25 pm
It would be a huge help if ‘they’ would talk about what ‘they’ have done to reduce spending, then talk about ways to increase the income stream to the State, with guarantees that the money will be used for defined programs.

A majority would likely to then go along with helping out. IMHO, trusting politicians to do what’s right for the people, in the long haul, is just not going to happen.

Comment by Sunshine Monday, Aug 4, 14 @ 12:28 pm
My mom’s in her eighties, losing her shirt paying property taxes, makes almost nothing for pension/retirement/Social Security income, and is slowly drowning in debt. She’s had to take the house dad paid off the mortgage on, and put it into an equity loan just to get by those unexpected bills that come up like home maintenance issues.. Any serious illness, and everything will be gone, pfft. I’d help out more, but I’m not much better off than her at this point. She spent a lifetime paying taxes; I say, leave her be for her last few years. Taxing retirement income is like going back on a promise. She already paid it in; let her keep it.

Comment by Leave 'em be Monday, Aug 4, 14 @ 12:54 pm
47 states do no have the benefit of taxing retirement funds. Nine states do not have earned income taxes (two of these tax only interest and dividends). Of the 41 with personal income tax only 4 offer no exemptions at all for retirement income. Five states, not three, exempt almost all retirement income. http://taxes.about.com/od/statetaxes/a/State-Income-Taxes-In-Retirement.htm
With the baby boomers retiring, many without adequate savings, this is the wrong time to tax them. Other tweaks could be possible such as taxing retirement income for those under a set age such as 65 or taxing those with retirement income over $100,000. Don’t know how that would work with flat tax built into constitution.

Comment by DuPage Grandma Monday, Aug 4, 14 @ 1:42 pm
“That says something about the ignorance of half the seniors. . .”

I found the percentages of seniors unaware that they pay state taxes only mildly surprising. In most households, there is one individual who takes care of financial matters, and the death of a spouse often means those matters are delegated to someone else in the family, like a son or daughter.

Comment by Jeanne Dough Monday, Aug 4, 14 @ 1:52 pm
If all retirement income–social security, pension, IRA’s, etc. were to be taxed, how much revenue would that generate? Also, anyone have the figure on what the average Illinois retiree’s income is?

Comment by Anonymous Monday, Aug 4, 14 @ 2:02 pm
@Chris, if they change the pension clause it would have no effect what so ever on those already retired and probably on those currently employed, at least on the tenure that they’ve already earned and possibly would only affect new hires after the change was made. If the contracts were already in affect before the constitutional change was made the benefits can’t be changed. That would run afoul of both the US and State constitution as it pertains to ex post facto laws being illegal.
Back to the original topic I would be ok with taxing retirement income if say, the first $30-$40K was exempt and in exchange for that concession the tax rate was changed to a progressive one. That way if lower middle class retirees are kicking in more the wealthy can too. I’ll bet you those who represent the interests of the Illinois Policy Institute won’t take this deal, mainly the GOP, won’t accept this deal.

Comment by The Dude Abides Monday, Aug 4, 14 @ 2:06 pm
- Zoom - Monday, Aug 4, 14 @ 10:57 am: and others-

Taxing pension income would not be a diminishment of government workers pension if the tax was placed on ALL pensions. If you are thinking they could pass a law that would only tax retired government workers pensions and not other company pensions or social security? Now that would be an unconstitutional diminishment, but I don’t think anyone but the IPI or Reboot Illinois would propose that form of pension tax. They would likely be all in for THAT tax…

Comment by Roadypig Monday, Aug 4, 14 @ 2:21 pm
CTBA did a piece on taxing retirement income a few years ago: the numbers are probably up some since then

http://www.ctbaonline.org/reports/taxing-retirement-income

Comment by steve schnorf Monday, Aug 4, 14 @ 2:43 pm
==Taxing pension income would not be a diminishment of government workers pension if the tax was placed on ALL pensions.==

Roadypig is right. The courts long ago held that imposing a new or increased income tax on everyone is not a diminishment of compensation paid to legislators or elected officers. (Franklin Roosevelt made that claim on his tax return regarding a tax hike he had signed.)

Comment by Anon. Monday, Aug 4, 14 @ 3:17 pm
I would gladly pay taxes on the pension I was promised when I moved to the state. To gut the benefits AND tax…. uh, no.

Comment by ash Monday, Aug 4, 14 @ 4:04 pm
Let me think…..OK. Let’s mimic some other states.
First, a progressive income tax based on increased income, just like the feds. Check! Sound policy yes…politically achievable, maybe.
Second, lets mimic other states….tax SERVICES! If I change my own oil (mechanic), prepare my own taxes (accountant), cut my own grass (landscaper), paint my own house (contractors), shovel my own snow (oops, neighbors kid), and all the similar SERVICES that I don’t use, I would pay less in taxes, those who use more would contribute more. Sound public policy, yes…politically achievable, maybe.
Third. Tax incomes across the entire spectrum, with NO DIFFERENTIATION FROM SOURCE and no special tax treatments. Pensions, Social Security, dividends, capital gains, interest income, investment income, earned income, gambling income, foreign income, etc…you get the drift. No one gets ‘their’ income treated any differently than ‘my’ income.
Sound public policy…I say yes. Politically achievable, probably a big NO.
Fifth. No offsets, special ‘capitol loss carry overs’, deductions for IRA, Keogh, 401K, blah, blah, blah. We should all be saving for retirement, and a Roth IRA is already set up this way. You already pay taxes on the income, so everything you save, you keep. However, if you earn ‘income’ (read interest, capitol gains, etc.), you pay income taxes on that too.
Lastly, a high personal exemption, say $80K/person, $200K/couple. While this may sound like a lot, metro Chicago’s population has incredibly high transportation, housing, medical and other expenses. Keeping people IN Illinois should be one policy goal, in conjunction with increasing revenue in a balanced way.
Just sayin’…..

Comment by northernwatersports Monday, Aug 4, 14 @ 4:51 pm
We say we don’t want to burden our children with huge government debt. But we don’t want to help pay down that debt by taxing retirement income.

Illinois needs a graduated income tax on all retirement income, but his would require a constitutional amendment and here we are in an election year.

Comment by Enviros-Anon Monday, Aug 4, 14 @ 6:14 pm
Roadypig: an income tax on just public pensions would not pass constitutional muster.

Comment by Yellow Dog Democrat Tuesday, Aug 5, 14 @ 12:00 am
Rich I realize this is your blog. You own it, I get it.

Would you please take the time to explain to me why you deleted my post. Obviously it offended you, or broke your blog rules or it pushed some kind of button.

You and Vman hate us. Why? You’re only in your very early 50’s which makes you a very late Boomer but why do you scorn your own kind when they share their story?

I still support the retirement tax and I was lobbying many years for it before this blog was thought of.

Comment by redleg Tuesday, Aug 5, 14 @ 3:00 pm
I am very astonished by the data of this blog and i am happy i had a look in excess of the blog. thank you so much for sharing such great data.

Comment by Illinois State Income Tax Thursday, Aug 7, 14 @ 11:34 am

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