Illinois retirees would pay $2,482 in state income taxes if “fair tax” targets them
Members of Pritzker’s administration, advisors and lawmakers have suggested a progressive income tax should tax retirement income in Illinois.
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.
If Illinois begins taxing retirement income under the proposed progressive income tax schedule, an Illinoisan earning the average Social Security and retirement income would pay $2,482 in income taxes.
Illinoisans on average receive $19,999 in annual Social Security benefits and $30,950 in retirement income from sources such as 401Ks or IRAs. That brings total retirement income to $50,949. Currently, none of that income is taxed.
However, a progressive income tax could mean that these retirees will eventually pay taxes. According to proposed progressive income tax rates already passed by state lawmakers, that would take $2,482 in taxes from the average retiree annually.
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.
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, days 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.”
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.
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.