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Illinois

* Steve Chapman does not love the fact that Illinois exempts all pension income from taxation…

It’s an expensive indulgence, costing Illinois about $1 billion in revenue every year–this at a time when the state faces a big deficit. And it’s hard to defend on grounds of fairness. If other types of income are taxed, why should retirement benefits be exempt? Social Security benefits are subject to the federal income tax.

The exemption helps the poor, elderly retirees, of course, but also people who aren’t poor or old. The state says that one-third of the people who get retirement payments are under 65 and many have other income in the form of wages and salaries.

Quinn’s tax proposal would raise the personal exemption from $2,000 per person to $6,000 per person, which would mean low-income people, retired or not, would be spared state income taxes. So it makes sense to repeal the retirement exemption, treating that income the same as other earnings. Before we raise income tax rates, we should plug the holes that are leaking revenue.

* The Question: Should this exemption be abolished? Exlain fully.

* Bonus Question: How politically volatile do you think this would really be?

posted by Rich Miller
Tuesday, Apr 7, 09 @ 10:58 am

Comments

Yes. If we wanted to exempt the poor, then we’d have a means-tested exemption, not a source-based exemption. It’s completely arbitrary, and doesn’t create any needed incentives that might otherwise justify an arbitrary or “unfair” tax.

We might as well exempt from our income tax all gains from stocks that begin with letters A-F.

Comment by Greg Tuesday, Apr 7, 09 @ 11:04 am
Abolish the exemption, for reasons stated by Greg above. Quinn preaches about making the tax code more equitable and “fair”, but isn’t putting his money where his mouth is. Perhaps taxing pensions at a lower rate is a compromise that could be considered.

It is likely to cost Quinn politically, but he’s also made claims that he’s indifferent regarding his political popularity. Whether or not that’s true, and I suspect it is not, pandering to seniors is Blago-esque.

Comment by The Doc Tuesday, Apr 7, 09 @ 11:10 am
It’d political Mt. Vesuvius with the gray-skinned blue hairs.
Yes, it absolutely should be done away with. The cost of senior program and expanded senior programs is a huge drag on the state budget. Those seniors who can pay their fair shares should.
And if you think differently, stop for a moment and answer this question:
Do you really think Kurt Granberg’s inflated pension should also be tax free?

Comment by Frank Booth Tuesday, Apr 7, 09 @ 11:14 am
-Do you really think Kurt Granberg’s inflated pension should also be tax free?

lol. I like how you think Frank!

Comment by Ulysses Tuesday, Apr 7, 09 @ 11:17 am
I am no tax expert and don’t claim to fully understand all of the various tax laws on the books. this does, however, sound like an idea worth considering–abolishing the pension income exemption. in light of the higher personal exemption that the Governor is requesting, it seems more fair to lower and middle income folks.

politically, I have doubts that this is an idea that has a future. regardless of the positive changes we have seen in legislative leadership and the governor’s office, the spin on this will be all about taxing the rich, or raising taxes, or whatever. there just is not the political will in either party to be so bold as to help the low and middle class families, not when it comes to anything that can be labeled as raising a tax. even if doing so is what the public can live with. it is all about the next election.

sorry to be such a downer. kinda’ feeling pessimistic today!

Comment by susie Tuesday, Apr 7, 09 @ 11:17 am
I’m going to bypass the first question because I don’t have the time to do proper research on it right now. On it’s face, I wouldn’t have a problem looking into it, IF the funding of the pension fund was made with pre-tax $$. If after-tax $$ is used, that would be double taxation.

On the second part, I can only imagine hanging that albotross around the Dems. Think about how easily Quinns’ 1.5% income tax hike suddenly became a 50% INCREASE IN YOUR TAXES.

I can only imagine the blowback if a couple of sad sack seniors were used to highlight the impact of taxing away the only money they have to buy heart medication with.

Comment by How Ironic Tuesday, Apr 7, 09 @ 11:20 am
That’s 1.55 million eligible voters to consider, according to 2007 Census estimates. Even more if you count people who retired before age 65.

Comment by Six Degrees of Separation Tuesday, Apr 7, 09 @ 11:27 am
In the case of folks who both draw a pension and continue working and earning income, isn’t the non-pension income taxed anyway? So I don’t really understand that objection.

Seniors on pensions have a fixed income. They only get so much $ (however much that is), so they don’t have flex in their budget to handle tax increases easily as their only raises are COLA raises, unlike wage earners who might receive merit increases due to the increased work experience through the years, or self employed who can work a few hours longer if they want more $. That strikes me as a good reason not to tax pension payments.

Additionally, as time goes on, more people will be withdrawing from 401Ks (which are taxed) than drawing traditional pensions, so this issue doesn’t seem all that urgent to me.

Comment by cermak_rd Tuesday, Apr 7, 09 @ 11:29 am
Sorry, I didn’t answer question #1. Can’t answer it without more info - I would like to see an analysis of many retirees would move out of state if enacted, and the net benefit/loss considering “lost” tax income vs. cost of social services provided and other cost and benefit incidentals. I suspect it would still be a money raiser. Fundamentally, I think it would be fair to tax retirement income over a certain threshhold.

Comment by Six Degrees of Separation Tuesday, Apr 7, 09 @ 11:31 am
No it should not be abolished. It will be very volatile, especially because a bunch of have-nots just want to punish somebody who gets a good pension. It just seems typical of the “pro-tax” crowd that seems to be attracted to the Capfax. “Gosh darn it, we can’t let people have their own money. We need to make them as poor and jaded as we are.”

Comment by Heartless Libertarian Tuesday, Apr 7, 09 @ 11:31 am
Cermak, it’s not just pensions. Illinois doesn’t tax any retirement income.

Comment by Frank Booth Tuesday, Apr 7, 09 @ 11:33 am
Remember, if you means-test it, you do not capture $1 billion in revenue (if that $1 billion figure is even correct at all, what’s the source?)

Senior retirement income skews HEAVILY to the lower income side. So you probably are talking about $250-$350 million once you implement the Quinn higher exemptions ($6,000 pp), plus an expected demand for an extra exemption for seniors (so you aren’t raising taxes by $540 on a senior who lives alone and has a social security/retirement payout of $18,000/year).

Comment by George Tuesday, Apr 7, 09 @ 11:33 am
I don’t have a problem with taxing pensions, but to tax Social Security benefits and unemployment payments as is currently done is absurd. Why should governmental payments be taxable?

Comment by Ken in Aurora Tuesday, Apr 7, 09 @ 11:35 am
I agree with Greg. The source of the income should bot be the basis of an exemption or reduction in taxes assessed.

There can be many ways to protect the poor wage earners, but we have a large cadre of late 50 year olds who are earning six figure pensions. It is plain nutty to give them a free pass.

We should also consider doing what California does. They tax the retirement benefits earned in their state, which are delivered to out of staters. That means if an individual earns their pension in Illinois, but moves to Hawaii to retire, they owe the State of Illinois for the portion of their retirement earned in Illinois. That is big bucks.

The political fallout would be huge with every state entitlement class screaming because they would have to pay something.

Makes sense. Forget the source of income, put in a floor to protect the poor and select your flat tax level.

Comment by Plutocrat03 Tuesday, Apr 7, 09 @ 11:38 am
This comes up every year and then gets dropped so I presume that politicians in general, and not just Quinn, are leary of taking a chance. And with Quinn’s next “election” coming up fast, in February 2010, I’m wondering if he would want to take the chance.

Plus, is the year to increase taxes on any more members of the middle class, given our supposedly important role (per Obama) in reviving the economy. Since employee unions and corporate interests (campaign contributions, ya know) are likely to successfully bargain down their contribution to the amelioration of the state’s budget problems, that will likely leave the middle class with an even higher bill. So maybe this is the year to be kind to middle class seniors. Put this idea back to bed until the economy recovers.

Comment by Cassandra Tuesday, Apr 7, 09 @ 11:38 am
Go ahead and tax my pension but IF you do, please give me an exemption from paying any further property taxes to my school district, which manages their budget worse than a hedge fund manager.

Comment by Just My Opinion Tuesday, Apr 7, 09 @ 11:50 am
Volatility? Doesn’t anyone remember Rostenkowski?

Comment by Anon Tuesday, Apr 7, 09 @ 12:04 pm
I would say bad idea generally. Most retirees have fixed or declining incomes that do not keep pace with inflation. Additionally the chnages to medicare mean they are paying more, in many instances, for prescriptions and other care which increase as you age. I would not be opposed to a graduated system, but 6k of exemption is way to low to start going after those on fixed flat incomes. When you consider that people are living a lot longer, this means that fixed income needs to provide support at often a flat rate for a lot longer then in the past.

Given the number of aging and retired in our populace, and the power of AARP, I would not want to be standing on the side of a yes vote on this topic.

Comment by Ghost Tuesday, Apr 7, 09 @ 12:05 pm
Oh come on - if he’s not going to take away their free RTA passes, even if they’re a millionaire, do you think he’s going to tax their income, even if they’re a millionaire?

Comment by Anonymous Tuesday, Apr 7, 09 @ 12:11 pm
Get the legislation going ! Everyone has to anti-up !

Comment by bluedog demo Tuesday, Apr 7, 09 @ 12:12 pm
If it comes down to hitting state employees twice (once with cuts, once with tax increases) or hitting them once, and taxing pensions, I’m for taxing pensions.

We shouldn’t be balancing the Illinois budget on the backs of state employees.

Comment by Leroy Tuesday, Apr 7, 09 @ 12:31 pm
Hmmm, I think at this moment in time taxing public pensions should at least be discussed thanks to the whole financial environment. Also I know how volatile it was since the Con-con initiative was defeated based on the pension issue. People want to protect their pensions no matter what!

Comment by Levois Tuesday, Apr 7, 09 @ 12:33 pm
While freely admitting my conflict of interest and thanking you Illinois taxpayers for my pension, I would ask,

“What part of disincentive don’t you understand?”

I was told Governor Thompson’s demographer (the one who may still run a Chinese restaurant on MacArthur near Wabash) wrote a paper based on the 1980 census. He argued that Illinois was a dying state because the ratio of taxpayers to tax dependents was decreasing.

He suggested that Chicago was already lost and the question was whether the rest of Illinois would follow suit.

Needless to say, severe editing occurred before he was allowed to publish.

There are all sorts of retired folks like me who do not have to live in Illinois.

Start making me pay a couple of thousand more a year, in addition to $8,000 a year in property taxes, and I’ll start thinking about moving to a state without an income tax. My snowbird in-laws, who have a condo in Florida, would change their legal residence immediately.

Get a hint of the problem this brilliant idea would unleash?

And I haven’t even mentioned the political problem for those who vote for the idea.

Comment by Cal Skinner Tuesday, Apr 7, 09 @ 12:37 pm
It’s more than just pensions / retirement income. I recently left my job and took another position. I cashed out my SURS pension and took the lump sum. I happily paid the 10% penalty to the feds (knowing I’d pay a far greater penalty down the road) but I had to pay NO TAXES at all on the lump sum distribution to the State, even though I’m 31.

Comment by John Bambenek Tuesday, Apr 7, 09 @ 12:40 pm
All people will do is move to a state that doesn’t tax retirements. Then Illinois will lose all that income being recirculated. The State will lose more than it will gain.

Comment by Fed Up Tuesday, Apr 7, 09 @ 12:42 pm
This will mix about as well as an open bottle of kerosine to a lit match.

Seniors plan their lives on retirement which includes what taxes they will pay when they are retired. Then the grinches swoop down and say “now we want to tax what we told you earlier we wouldn’t tax.”

The free rides on the RTA, CTA, Metra they can give back since they never anticipated nor asked for it.

But I don’t see any seniors voluntarily giving on the subject at hand.

Comment by Louis G. Atsaves Tuesday, Apr 7, 09 @ 12:50 pm
The public sees taxing retirement as “indian giving”: giving with the one hand and yanking it right back with the other. I have to agree; seniors in general have it pretty tough and it will be tougher as time goes on, taxing their well-earned benefits is accounting voodoo that the blue-hairs will NOT appreciate at the polls.

And they have nothing better to do than organize and vote.

Comment by Gregor Tuesday, Apr 7, 09 @ 12:52 pm
Why not have anyone who has retirement income over $100,000 pay taxes on that and any other income they might have? And, yes, there are retirees who do have that kind of income.

Comment by lincolnlover Tuesday, Apr 7, 09 @ 12:52 pm
First let me say that I think a means test should be part of any decision whether or not to tax pensions. But as for this retired person, if you tax my pension, I’m changing my residency to a no state income tax state because I can and I will.

Comment by Just a Citizen Tuesday, Apr 7, 09 @ 1:19 pm
If this exemption were abolished, this blue haired skin head or whatever I am would move to another state, taking my spending, my real estate taxes, my sales taxes, etc. with me to a better climate. This exemption is one of the few good reasons for people who pay a hell of a lot of other taxes to remain domiciled in Illinois.

Comment by Excessively rabid Tuesday, Apr 7, 09 @ 1:39 pm
It only seems fair that an across the board tax is logical - however - that’s where the rub comes. You can bet you life the GA won’t have their pensions taxed…seems funny to me that their pension system “falls through the crack” when it comes to changes. While I don’t want to pay tax on my pension and certainly do not advocate the move - it’s not totally unreasonable if it’s fair and square with retirement plans all over.

Comment by Toni H. Tuesday, Apr 7, 09 @ 1:46 pm
Yes, I have family who are retired school teachers earning more than $60,000 in pension that is tax free. Seems a bit unfair when the average working family earns $10,000 less. In addition they have great insurance and aren’t bothered with Medicare. There are only a handful of states that don’t tax pensions and most are looking at changing that rule.

Comment by make it so Tuesday, Apr 7, 09 @ 1:47 pm
Remember inflation?
I do.
When this kicks in again, you can say so-long to this proposal.

Inflation is the reason why this exemption existed, and it is the reason why the exemption will stay. With Obama spending Trillions, inflation will be here soon enough to end this debate in favor of the exemptions.

Comment by VanillaMan Tuesday, Apr 7, 09 @ 1:54 pm
No. Most states do not tax Retirement (Pension, IRA, and Annuity) or Social Security. Many of those who could afford the tax if the exemption were repealed already have second homes in warm states such as Florida. Florida does not have an income tax. There would be a large chunk of seniors suddenly swithing there residency to Florida and Illinois would loose out probably more than they stand to gain.

Comment by KPK Tuesday, Apr 7, 09 @ 2:05 pm
yeah, a very volatile idea. but, why should there not be an income level test on this one? in general, look at the tax and revenue plans of surrounding states, and consider similar plans.

Comment by Amy Tuesday, Apr 7, 09 @ 2:35 pm
Here goes the rant … First the State promised a tax free pension and free health care if I worked long enough. Then they underpaid me around 30% in my technical profession for 32 plus years. Along the way they forced me to take unpaid furlough days (unlike the union people who eventually got it paid back). I had to work unpaid OT to the point where they still owed me over a full year in off the books comp time when I retired. They limited my merit comp raises based on a stupid formula while exempting “political” positions by giving them undeserved raises. Then they wanted to get rid of all of us in 2002 because they needed to cut the personnel budget. Finally, you would have to at least double my pension to get me in the neighborhood of any 6 figures. The state is already nibbling at the health care costs through higher deductibles and co-pays. Now the State wants me to start paying for the promised health care if I’m are under 65 … hey, remember, you bribed us to retire early, so you caused that cost … didn’t the budget genius’s figure that in? Now the State wants to take away the only benefit they haven’t somehow reneged on … my pension income tax break. So yeah, I’m upset.

Originally I planned to move out of state when I retired … right now I still live here because of two elderly parents. Lot’s of other family still live here so I can move to one of the no income tax warmer states if I want to … it’s just that the rest of the family is still working and it’s easier for us to do things right now.

Some of the other states also have other tax incentives. Check out property taxes in Georgia … after a certain age (either 55 or 60, don’t remember which), you don’t have to pay the school portion of the property tax because you are a senior … doesn’t matter what the home is worth, they figure you already paid to put your kids through school.

Every state has an incentive mix of taxes and seniors can shop around for the deal they want. Plus, as others said, we have time to both organize and show up to vote.

Comment by Retired Non-Union Guy Tuesday, Apr 7, 09 @ 2:38 pm
==Inflation is the reason why this exemption existed, and it is the reason why the exemption will stay. ==

Not true. It exists because of Thorpe v. Mahin, 43 Ill.2d 36 (1969), and because it would be political suicide to repeal it now.

Comment by Anon Tuesday, Apr 7, 09 @ 2:59 pm
I say apply state taxes to all sources of income with the current poverty level as the floor. Make more than that, pay taxes on it - even if from Social Security and pensions.

Benefits for seniors are intended to permit them to live comfortably after retirement. The more they make above a set minimum, tax them like the rest of us. (And I’m a 61 year old)

Comment by Capitol View Tuesday, Apr 7, 09 @ 3:02 pm
Retired Non-Union - Many companies have changed their policies over the past 30 years. I was promised free health insurance. It now costs over $100 each payday. I’m not complaining because I have health insurance. I was promised annual raises, they froze our salaries a number of times when sales were bad, when times were hard, when the boss wanted to take the Mrs. to Europe… I’m just pointing out we all have been pushed around over the years.

Comment by make it so Tuesday, Apr 7, 09 @ 3:38 pm
Probably “should” be but probably won’t
happen.

Comment by Esteban Tuesday, Apr 7, 09 @ 3:40 pm
Great lets run Biz out provide nadda for hardhats, run retirees out, that’ll balance medicare, have the Dems determine the face of the GOP (SB600)watch the Hampster wheel thats MMs capitol regional hearings, and come back the 21st to ethics,No real capitol bill and a fake budget. Bless Ill.

Comment by chessplayer Tuesday, Apr 7, 09 @ 3:57 pm
Tax the generation that made all the tough decisions to pass the costs of their generous pension and medical programs, social security, etc. to their children and grandchildren? Perish the thought. If the world stopped revolving around the baby-boomers, it might fall off its axis and roll into the sun. Stop this crazy-talk.

Comment by Sap Tuesday, Apr 7, 09 @ 4:06 pm
Like Retired Non-union Guy’s opinion. Except my wife is a retired teacher who sure isn’t making any $60,000 in pension (what a joke that comment was!); there is no way we can sell our house in this economic climate to be able to afford to move to another state; at age 60, I will have to work until age 66 to get social security; and then I don’t see how I will be able to afford to retire, because I’m helping out kids and grandkids.
Incidentally, retired teachers don’t have “great” insurance-it is no better than other plans. And since my insurance was through my wife’s job, I now have to pay the school district each month for my insurance-and guess who’s policy went up in August?
Political fallout? Don’t know- it doesn’t matter anymore…

Comment by Downstate Commissioner Tuesday, Apr 7, 09 @ 4:39 pm
Why should the State keep its promises? The last governor certainly didn’t. I worked for the State for 34 years, and not as a teacher, so I didn’t get in on the scam where my salary was bumped up in my last 2 years to increase my pension. I stuck it out all those years, and for many of them I did not only my work but also the work of my supervisor, who was too stupid, crooked, and detached to do it himself. I also had to absorb a continuous stream of political appointees into my work group, and they counted as productive employees even though one of them couldn’t read. So my work load did not decrease. As I said, I stuck it out for all those years, including through the Dan Walker layoffs, because the State had made some promises to me, and one of them was that my pension would not be taxed. But what’s a promise to a politician? Not any more than it is to the commenters to this post, apparently. And there’s another point - Rich has said that pensions are protected by the constitution. I’m not a lawyer and don’t know the wording of the provision, but it seems to me that instituting a tax on the pension would in effect be reducing the pension and might violate the terms of the constitution. That could easily result in another political blunder where the State loses in court and has to pay back taxes and a penalty, thereby costing more than if no tax had been levied. Sound like Blago never left.

Comment by aufjunk Tuesday, Apr 7, 09 @ 4:59 pm
===would in effect be reducing the pension and might violate the terms of the constitution.===

That’s exactly how members of the US Supreme Court got out of paying the new federal income tax for many years way back when.

I seriously doubt it’d work in this instance, though.

Comment by Rich Miller Tuesday, Apr 7, 09 @ 5:01 pm
make it so:

The difference is that the promises made to Retired Non-Union Guy, myself and thousands of others were made by the State of Illinois and supposedly backed by the full faith and credit thereof.

Comment by IDOT Engineer Tuesday, Apr 7, 09 @ 5:39 pm
== That’s exactly how members of the US Supreme Court got out of paying the new federal income tax for many years way back when. ==

FDR tried the same argument to get out of his own tax increase. The Supreme Court has long since acknowledged that the argument doesn’t work. And I don’t know that anyone with any authority to make a binding promise ever said that pensions (state or private) would never be taxed. The decision not to tax pensions was made by the General Assembly, and the decision to start taxing them again can be made by the General Assembly.

Comment by Just Me Tuesday, Apr 7, 09 @ 9:18 pm
First of all, all pensions are taxed by the federal goverment. Be the first to propose this and watch that legislator, constitutional officer be run out of office as would anyone supporting it.
Politicians can say they are doing the right thing but the public doesn’t buy their credibility and sees daily the misuse of their tax dollars.

Comment by Joe Olders Tuesday, Apr 7, 09 @ 9:57 pm
Hello florida

Comment by foster brooks Tuesday, Apr 7, 09 @ 10:01 pm
From the retirementliving.com website: “Ten states exclude all federal, state and local pension income from taxation. These include Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, New York and Pennsylvania.” Re: personal income tax — “Seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) do not tax personal income. New Hampshire and Tennessee apply it only to income from interest and dividends.”

So, that’s a total 19 states where pension income is not taxed at the state level.

Also, military retiree benefits cannot be taxed when state and local pension benefits are not taxed.

Somewhat related, the Food, Conservation and Energy Act of 2008 exempted all tax-preferred pension/retirement accounts from the asset test of the Food Stamp program. This includes deferred comp(457s), traditional pension, 401K and Roth IRA accounts.

Comment by Marianne North Tuesday, Apr 7, 09 @ 10:32 pm