It's time to tax Illinois retirement income

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.

This column also appeared in the Chicago Tribune.

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  • Mr. Byrne, I just read your comments in the Tribune. I disagree. My retirement income is my ONLY income and my "take home" from it amounts to roughly $1000/ month. I believe that that qualifies as poverty. I can't AFFORD to pay any more. Think of EVERYONE before you open your mouth.

  • In reply to mjamgt:

    Perhaps you missed the part of the column where I said:

    "Yes, imposing a tax on those seniors who actually are in poverty isn't right. But if a retirement income tax is imposed, there are ways — e.g., tax credits or exemptions — to provide relief for impoverished seniors."

  • In reply to mjamgt:

    Most folks in your income category would be exempt from having to file taxes at all, just as they are at the federal level. Retirement income would not apply in your case.

  • Once the public sector unions are brought into line, the pension mess is resolved by an amendment to the Constitution and without raising taxes, the State truly balances its budget, term limits are imposed, and a fair legislative mapping process is instituted, then and only then would I support the shared sacrifice of taxing retirement income. And then, there needs to be a reasonable income level established that is non taxable.

  • I must agree, penalizing seniors who have worked and paid taxes faithfully for decades is not the solution to fiscal woes. It will only result in a greater exodus out of the state. Many seniors elect to retire elsewhere, but a goodly portion that were able to be responsible and save for an active retirement maintain homes in two states ("snow birds"). I can see a great many of those closing up the summer home in Illinois in a heartbeat, resulting in not only income tax loss, but property taxes as well. Until the public sees some responsibility in government, and until those who created the current mess by moving funds and playing shell games are brought to some sort of account, an new taxes in Illinois will wind up being regressive and contributing to further tax revenue loss by attrition.

  • fb_avatar
    In reply to Sue Fitzpatrick:

    You say it is unfair to "penalize the seniors" then you say that "those who created the current mess are brought to account" but in my opinion, those who voted repeatedly for the creators of the current mess also share some blame, and given the age of the current mess, it is quite fair to say that includes many of the seniors who today pay nothing in state income taxes. So instead of taxing them, you are OK with increasing taxes on those who haven't yet retired?

  • fb_avatar

    Very nice and informative article here. I think it could also be useful for everyone to know how and where to fill a form online. I've found some decent tutorials on how to fill a form out online here .

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