Everyone knows the state of Illinois is in terrible financial shape after perpetually spending more than it takes in (last balanced budget in 2001), and still faces a huge burden in underfunded pension obligations.
The state constitution says those pension benefits “shall not be diminished or impaired,” so unless a voter-approved amendment to the Illinois Constitution that would allow the legislature to make “reasonable and moderate changes to the pension benefits of current employees and retirees” were to happen (don’t hold your breath), Illinois must look at other ways to tackle the issue.
The Chicago Tribune reported last week that nonpartisan budget watchdog Civic Federation has joined the Civic Committee of the Commercial Club of Chicago in calling for Illinois to tax retirement income–including 401(k) plan distributions–and expand the sales tax to some consumer services as a way to address the state’s fiscal woes.
The Civic Federation’s Institute for Illinois’ Fiscal Sustainability’s annual “budget roadmap” points out Illinois is one of only three states that have an income tax (out of 41) but don’t tax any retirement income. The Tribune piece notes that all of Illinois’ neighbor states tax retirement income in some form.
In its report, Civic Federation President Laurence Msall called the state’s policy “an outdated and expensive exemption” that shifts the tax burden from wealthy retirees to working people. By taxing all retirement income that is subject to the federal income tax, the report says Illinois could bring in $2.5 billion during the budget year that begins July 1.
Illinois Gov. J.B. Pritzker unveiled his first annual budget proposal to a joint session of the General Assembly on Wednesday, Feb. 20, amid an estimated $3.2 billion deficit, which is projected to increase to $3.4 billion in fiscal year 2021, according to the Illinois News Network.
Part of Pritzker’s plan includes raising more than $1 billion in state revenue by legalizing recreational marijuana and sports betting. He also wants a tax on insurance companies and to reform the income tax system with a graduated tax based on income, something voters would have to approve. He has not endorsed the idea of taxing retirement income.
AARP pushes back
AARP quickly came out against the nonprofit groups’ proposals to tax retirement income in Illinois.
AARP Illinois state director Bob Gallo told Illinois News Network Feb. 15 that retirees aren’t anchored to Illinois by a job and will just leave in high numbers if retirement income is taxed by the state.
“People don’t move to the Sunbelt states just for sunshine. The reason many people retire there is affordability,” Gallo said. “What organizations like the Civic Federation don’t consider is that a lot of (retirees’) income is family income as well. They’re better off using their retirement income to help the individuals who they love than the government taking the money away from them to distribute it in a different way or to solve a problem that they didn’t create in the first place.”
The Civic Federation has been pushing the idea of taxing retirement income for several years, but its recommendation has failed to gain traction among lawmakers.