Here’s one reform that could ease Illinois’ fiscal troubles: Tax retirement income.
Illinois exempts from taxation all retirement income, including Social Security, an astonishing fact, considering the state’s ruinous fiscal health. Only two other states, Mississippi and Pennsylvania, are as blindly generous.
Most other states tax a portion or all of retirement income, including public and private pensions, 401(k) plans, IRAs, payments to retired partners, deferred compensation and such. Even the feds take back part of Social Security payments in the form of taxes. Illinois taxes none of it.
It should. It must.
Truth: There’s no legitimate reason that retirement income shouldn’t be taxed. There’s only a political purpose: a gift from spineless politicians to attract support from seniors, a group that tends to vote in greater numbers than others, a group that some think shouldn’t have to pay its fair share.
Mostly the argument comes down to this: “We made it this far; we deserve a break.” Or that a tax on retirement income is an unfair burden on frail, old grannies who already have to choose between eating or taking their meds. Or that people with fixed incomes will be “placed at risk.”
The facts are somewhat different. Natalie Davila, former research director for the Illinois Revenue Department, explains in an article in Tax Facts, a publication of the Taxpayers’ Federation of Illinois: In 2012, 1 in 4 Illinois tax returns claimed a retirement income exemption to avoid paying taxes. Altogether, those exemptions cost the state $2.3 billion — money that could pay down Illinois’ pension debt, or help it catch up on the billions in unpaid bills, or fund those human and other services that are getting squeezed out of the budget by the cost of paying interest and principal on the state’s crushing indebtedness.
While the number of residents filing returns overall has actually declined slightly from 2007 to 2012, the number of people claiming a retirement income exemption has increased by 9 percent. While declared income of all residents grew during that time in the single digits, the value of retirement exemptions grew by 36 percent. In other words, the retirement exemption is eating an ever-increasing chunk of the state budget.
As for the “granny tax,” the amazing fact is that most people claiming the retirement income exemption are younger than 65, according to data Davila obtained from the Revenue Department. Overall, some 60 percent of taxpayers claiming a retirement exemption haven’t even reached “retirement age.” It’s even truer for those whose adjusted gross income exceeded $1 million. About 70 percent of the millionaires who claimed the exemption were actually under 65. Their exemption averaged $241,939.
How can that be? People don’t always have to wait until they are 65 to start drawing retirement income. People with 401(k)s can start at 59 1/2. Government workers often start drawing their pensions even earlier. Designated IRA beneficiaries don’t have to be 65, and anyone can inherit defined contribution retirements.
Is that fair?
As for “poor” seniors, consider this: The poverty rate for seniors (65-plus) is declining while for the general population it is increasing. In 2013, the poverty rate for Illinois seniors was 9 percent; for children, 18 percent; for adults, 12 percent (according to the Kaiser Family Foundation).
Ultimately, the opposition’s argument will come down to “it’s mean to tax seniors.” Not if they’re making a lot of money. Just like it wasn’t “mean” to end the free transit rides that imprisoned former Gov. Rod Blagojevich engineered for seniors, even ones who didn’t need it.
Let me put it this way: I’ve worked hard my entire life and have made significant contributions to my own retirement and, through taxes, to the common good. Just because I have reached a certain age should not automatically get me off the hook.
For information on my award-winning historical novel, “Madness: The War of 1812,” visit: http://www.madness1812.com
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