Illinois is, as I’ve said before, in terrible shape as far as state and local government finances are concerned. And Tribune contributor Dennis Byrne (who has plenty of right-wing bona fides) has an answer. A politically-unpopular answer, but an answer nonetheless. Rather than raising taxes yet higher on the general taxpaying population, or cutting social services, such as child care support for the working poor, why not eliminate the largest loophole in our tax code?
He writes, of course, of the fact that retirement income is wholly exempt from Illinois state tax.
Of course, retirement savings already produces tax breaks, insofar as 401(k)s, 403(b)s, and IRAs allow us to save for retirement in a tax-deferred manner, and pension accruals at our employers are also a form of tax break — we earn the benefit while we work but don’t pay tax on the money that our employers contribute to Defined Contribution accounts or to pension funds on our behalf. But this doubling-up of tax breaks to exempt the retirement income from tax, too, is well beyond reasonable retirement policy prescriptions. And this is what I didn’t know: it has a massive effect on our state’s bottom line.
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. . . .
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).
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.
He also notes that only two other states, Mississippi and Pennsylvania, have similarly generous policies.
So Byrne is right. But it’s also the case that no politician will touch this, and, indeed, the comments to his article are uniformly negative, treating the elimination of this tax break as a “penalty on savings” or the like. Fills you with confidence for the future of Illinois, doesn’t it?
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