If ‘fair tax’ passes, expect more seniors to leave Illinois looking to avoid retirement tax

Adam Schuster

Senior Director of Budget and Tax Research

Adam Schuster

Bryce Hill

Senior Research Analyst

Bryce Hill
October 9, 2020

If ‘fair tax’ passes, expect more seniors to leave Illinois looking to avoid retirement tax

Illinois would have lost an additional 10,577 seniors from 2012 to 2018 if outmigration were as severe as in Connecticut, the last state to enact a progressive income tax.

There are 2 million Illinoisans of retirement age, and currently the state does not tax their retirement income. But there is significant reason to believe the “fair tax” amendment to the Illinois Constitution would bring retirement taxes if passed.

And then there might be 10,577 fewer of those seniors in Illinois if its experience with a progressive tax matches Connecticut’s.

Proponents of the progressive income tax amendment are scrambling to cover up the likely effects of the tax increase on retired Illinoisans. On Oct. 5, three Cook County retirees joined the Illinois Policy Institute in filing a lawsuit over the inaccurate language being presented to voters on the ballot. Among other things, the lawsuit points out that misleading statements mailed to all voters by the Illinois Secretary of State, “will induce retirees into voting to impose on themselves a tax on retirement income.”

The lawsuit points to comments by Illinois State Treasurer Michael Frerichs in June stating that “[o]ne thing a progressive tax would do is make clear you can have graduated rates when you are taxing retirement income, and, I think that’s something that’s worth discussion.”

Frerichs planned a press event Oct. 6 to clarify his earlier comments, but canceled 12 minutes before it was to begin, without providing a reason for the cancelation. Others have been eager to fill in the reason: Gov. J.B. Pritzker wants the damage caused by Frerichs’ earlier admission minimized.

All 32 states with a progressive income tax also tax some form of retirement income, including Connecticut, the last state to enact a progressive income tax. Connecticut is also one of the few states to lose more retirees to outmigration than Illinois. If Illinois had experienced the same level of retirees moving out of state as Connecticut in recent years, Illinois would have lost an additional 10,577 seniors.

Frerichs is the most recent “fair tax” backer to make the connection between progressive tax powers and taxing retirees, but not the first. Pritzker’s head of the Illinois Department of Revenue previously proposed a bill to tax retirees and several prominent amendment backers have admitted passing the progressive tax is the first step to taxing retirement income in Illinois.

Attempts to deny progressive taxes are linked to retirement taxes at this late stage, less than a month before the Nov. 3 election, likely stem from widespread public opposition to taxing retirement income. A 2019 poll from the Paul Simon Public Policy Institute found 73% of Illinoisans somewhat or strongly opposed eliminating the retirement exemption, while only 23% supported or somewhat supported the change. Crain’s Chicago Business columnist Greg Hinz recently asked, “Is Pritzker’s graduated tax plan in trouble?” He pointed to Frerichs’ comments as one reason the answer might be “yes.”

A retirement tax would likely affect areas of the state differently, as there is a greater share of retirees in some counties compared to others. Jo Daviess, Pope, Hardin, Carroll and Henderson counties would likely be the most affected, as more than 25% of their citizens are seniors.

Progressive tax powers make it inherently easier to raise taxes on everyone by giving politicians the ability to raise taxes on small segments of the population, one at a time, rather than facing backlash from all taxpayers at once. This amendment would enable Springfield to begin taxing retirement income above a certain level at varying rates, gradually lowering income brackets to raise additional revenue by slowly adding more Social Security and pension income to the tax base. The amendment also grants lawmakers the ability to tax retirement income at a different rate than regular income, which could allow for rates to rise over time so the hikes generate less unified public opposition.

Data proves the exemption of retirement income is an important tax advantage for Illinois seniors. From 2012 to 2018, Illinois retained residents 65 and older better than every other age group.

During that time, those 65 and older left Illinois at a slower rate than people in every other age group.

The only state to shift to a progressive income tax structure in the past 30 years, Connecticut, tells a different story.

From 2012 through 2018, Connecticut taxed retirement income, including Social Security, above $50,000 for single filers and $60,000 for joint filers. And the above-65 outmigration rate has been more than double the outmigration rate for prime working age adults, or people ages 26 to 54.

Comparing rates between age groups and within states helps control for factors that affect migration besides retirement tax policy. While both states are losing residents among all age groups, the gap between retirees and prime working-age adults may suggest residents view Illinois as the better state for retirement.

If Illinois taxed retirement income in the same way as Connecticut and saw the same rate of outmigration among seniors, it would have lost 10,577 more seniors from 2012 to 2018. Connecticut’s heavy loss of retirees is likely part of the reason why the state is now reversing course, and is in the process of expanding income tax exemptions for middle-income retirees.

Illinois has lost population for six years running, driven primarily by adults in their prime working years leaving for other states. The most common reason residents give for wanting to leave is the high tax burden, according to public opinion polling conducted for NPR and the University of Illinois-Springfield.

Analysis from the Illinois Policy Institute has uncovered a weak housing market and poor job opportunities as other core causes of the exodus, which are linked to the tax burden. While people older than 65 have left as well, they’ve done so at a lower rate, which is likely influenced by the retirement tax exemption.

“The elderly out-migrate significantly less if a meaningful pension exemption is offered by the state,” according to a large statistical study published in the Journal of Regional Analysis and Policy. This matches the moregeneral finding in economics literature that Americans tend to move from high tax states to lower tax states.

Connecticut – which in 1996 became the last state to adopt a progressive income tax – has already provided Illinoisans with plenty of evidence showing the progressive income tax would be bad for the Prairie State. Connecticut sold its progressive tax by making very similar claims to those being used to push a progressive tax in Illinois, including middle-class tax relief, balanced budgets and no economic damage.

But all of those promises were broken. Instead, Connecticut’s change to a progressive tax was followed by a 13% jump in middle-class income taxes, a 35% increase in property taxes and a sharp increase in poverty. Then after all that economic damage, the state continued running budget deficits.

Illinois residents need to know that passing the progressive income tax amendment would fail to deliver the benefits its proponents claim, as well as make it more likely Springfield will tax retirement income in the future. With Illinois’ economic growth already being held back by persistent population loss, the state can hardly afford to drive away even more residents as it works to recover from a pandemic.

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