Retiree tax, double tax, city tax all likely with Pritzker’s ‘fair tax’

Illinois politicians are already talking about taxing retirees, adding “surcharges” and city income taxes if they can convince voters to abandon the Illinois Constitution’s flat tax protection and give lawmakers greater taxing power.

Illinoisans will “celebrate” this Tax Day as the taxpayers who shoulder the nation’s heaviest state and local tax burden, but that load could get even bigger by Tax Day 2021.

That’s because voters Nov. 3 will be asked to eliminate the Illinois Constitution’s flat tax protection to make way for Gov. J.B. Pritzker’s “fair tax,” which gives state lawmakers the power to decide what is fair and who to tax. So far the possibilities include taxing retirees, double or even triple taxing the same income, imposing city income taxes and other creative ways to try to squeeze more from taxpayers and the state economy.

Here are some of the likely ways politicians would impose new taxes once they are freed from treating all taxpayers the same.

Retirement tax

The “fair tax” is a progressive state income tax, taking a higher percentage the higher the income, but all 32 states with a progressive tax also tax retirement income. Illinois Treasurer Michael Frerichs already admitted a progressive income tax would be needed before imposing a retirement tax, and that taxing retirees was “worth discussion.”

Taxing retirement is not a new idea in Illinois. Former Chicago Mayor Rahm Emanuel proposed taxing retirees with incomes over $100,000 last year, while the Civic Committee of the Commercial Club of Chicago proposed taxing retirement income over $15,000 per year.

The Chicago Sun-Times editorial board is in favor of Pritzker’s “fair tax,” writing: “Next, that tax should be expanded to include the highest retirement incomes.”

Illinois for six straight years has lost residents, but since 2013 Illinoisans over age 65 have been the least likely to move out. Taxing their retirements boosts the No. 1 reason Illinoisans say they think about moving away.

Double taxation 

Currently the state constitution restricts income taxes by saying “at any one time there may be no more than one such tax imposed by the State for State purposes on individuals and one such tax so imposed on corporations.”

The language of the progressive income tax removes the “no more than one such tax” wording. The reason to eliminate that phrase? To allow double or even triple taxation in Illinois. The language includes no restrictions or limitations on state politicians’ taxing power, other than a cap on the ratio between taxes imposed on corporations and on individuals. It would allow virtually any type of income tax to be imposed by simple majority vote.

“If somebody decides there’s a need for another income tax increase, I think it’s going to look a lot like a ‘special assessment for public safety.’ It’s going to be a ‘special tax dedicated to education.’ It’s going to go under that guise,” said Todd Maisch, president and CEO of the Illinois Chamber of Commerce.

A graduated income tax structure has lead to double taxation before. President Lyndon B. Johnson imposed a surcharge on income tax to fund the Vietnam War, while Connecticut and New Jersey have imposed surcharges on corporations. 

Local income taxes

New York City imposes income taxes on residents, starting with 3.078% for individuals earning less than $12,000 and a top rate of 3.876% on incomes over $50,000 per year. Indiana imposes county income taxes, ranging from 1.5% to 3.13%.

Eliminating Illinois’ flat tax protection would make it easier for state lawmakers to let Chicago or other home rule cities begin charging a city income tax, because that tax would no longer need to be imposed on all residents equally. The city income tax idea was already backed in 2018 when Chicago Ald. Ricardo Munoz was considering a run for mayor.

Business tax increases

Already difficult economic recoveries from COVID-19 could get worse for Illinois businesses should Pritzker’s “fair tax” pass.

Illinois’ corporate tax rate currently sits at 9.5%, but would increase by 10% to 10.49% should the state adopt a progressive income tax. It could even be increased to as much as 15.28% – the highest in the nation at a time when Illinois’ neighbors are dropping their corporate rates.

Small businesses could fare even worse. Tax rates for more than 100,000 small businesses could jump as much as 47%, from 6.45% to 9.49%. Small businesses have been responsible for 60% of the state’s job creation and have been Illinois’ economic engine since the Great Recession. Higher taxes on businesses means less hiring and lower wages for workers.

Already, thousands of Illinois small businesses are not expected to recover from COVID-19’s restrictions. Even Chicago-based United Airlines is expected to lay off nearly half of its employees. Tax increases will kill more jobs.

Farm taxes

 Under a progressive income tax, tax rates on farmers will be subject to how much they make each year, punishing them for more successful growing seasons.

“If the constitutional amendment is approved in November, the government will impose varying tax rates based on how successful you are as an individual or as a corporation,” said Brian Duncan, vice president of the Illinois Farm Bureau. The bureau opposes Pritzker’s “fair tax.”

Illinois’ farms are a staple of the state’s economy, generating $19 billion alone. The food processing industry accounts for another $180 billion. However, economists believe the next five years will be rocky for the state’s farmers as they deal with the fallout from the pandemic, a trade war and the state’s extreme climate swings.

Life for a farmer is not particularly wealthy, despite the industry’s size. The average farm has an income of about $69,000, but only $20,000 without government subsidies. A model developed by University of Illinois economists shows income for a farm making six figures now could drop to less than $2,000 in just two years.

The last thing one of Illinois’ most volatile professions needs is more uncertainty from a progressive income tax. The state’s farmers should be rewarded for a successful harvest, not punished for putting food on America’s table.

Marriage taxes

More than 4 million Illinois couples will face a marriage penalty averaging more than $2,500 under Pritzker’s “fair tax.” The penalty hits couples who file their taxes jointly because their combined income can push them into higher tax brackets that if they filed individually in lower brackets.

Research shows marriage penalties disproportionately harm women’s careers and exacerbate gender pay gaps.

At the same time average couples are being harmed, Pritzker’s “fair tax” rates impose no marriage penalty on couples who earn more than $1 million. Many couples earning between $350,000 and $1 million would actually see a marriage “bonus” of nearly $9,000 by filing jointly.

This directly contradicts Pritzker’s promise that a progressive income tax would be harder on the rich. If voters approve the “fair tax,” Illinois will become just the 16th state with a marriage penalty – something even the federal government does not do.