Gov't watchdog urges tax on retirement income: New video!

Civic Federation report cautions against expecting revenue too soon from sports gambling, pot, while Pritzker has other ideas

Illinois seniors could soon face a tax on their retirement income. (Shutterstock)

Illinois seniors could soon face a tax on their retirement income. (Shutterstock)

By Ted Cox

A prominent government watchdog recommended that Illinois tax retirement income in an annual fiscal report released Wednesday.

The Civic Federation released its “State of Illinois Budget Roadmap” for the upcoming 2020 fiscal year. A business-oriented watchdog, the federation began by renewing calls to cut government spending, but it quickly added a recommendation for “eliminating the tax exclusion on federally taxable retirement income.”

According to the report: “This will enhance the state’s fiscal stability by providing access to a faster growing portion of the income tax base, generating FY2020 revenues of over $2.5 billion.”

The paper points out that the federal government taxes “certain levels of Social Security benefits and other retirement income,” including pensions, but Illinois does not. According to the report, neighboring states “Michigan, Indiana, Wisconsin, Iowa, and Missouri all exempt Social Security income,” but tax other retirement income, at varying rates and with some exemptions for those 55 and older.

Yet former state Sen. Denny Jacobs, of East Moline, has pointed out that Illinois actually lures retirees from other states — especially Iowans to the Quad Cities — specifically because it doesn’t tax retirement income.

Even so, given the state’s dire financial straits, the report warned that other options were unappealing, stating: “To raise the equivalent amount of revenue by increasing the rates on the existing tax base would require a hike of approximately 0.5 percentage points in the personal income-tax rate and a proportionate 0.85 percentage points in the corporate income tax. This would be on top of the rate increase on working taxpayers in 2017, while retirees have not yet been asked to contribute to the state’s financial recovery.”

Gov. Pritzker is slated to give his first budget address next Wednesday in Springfield. He has not endorsed a tax on retirement income, instead emphasizing the need for a progressive income tax. But the Civic Federation warned that the absolute earliest a graduated income tax could be adopted — with the need to change the state constitution through overwhelming majority votes in the General Assembly and in a statewide general election — would be November 2020, and even that process would be fraught with conservative anti-tax groups sure to rally opposition. Otherwise, the federation took no formal position on a graduated income tax.

Even so, Pritzker spokeswoman Jordan Abudayyeh reaffirmed the governor’s support for a progressive income tax, issuing a statement saying, “Illinois will need years to dig out of the fiscal mess this administration inherited, and as we recover we must invest in critical areas like education so that our state can grow and thrive. We appreciate anyone who comes to this conversation with a sincere desire to fix the state’s problems, even when we disagree on some of the specifics. The governor is committed to moving forward with a fair tax that requires the wealthy to pay more while the vast majority of Illinois families get a tax break — not the other way around.”

The federation also calls for a maximum of 3 percentage points difference in the top and bottom tax rates, ignoring that Iowa has a top tax rate of 9 percent and Minnesota a top tax rate of 9.85 percent, well above the lowest rates. Pritzker himself has recommended hefty taxes on “people like me” worth billions of dollars.

The federation also warned that revenue from legalizing recreational marijuana and sports gambling, even if swiftly adopted this year, would most likely be slow to grow. “In order to avoid building deficits into future budgets, the initial proceeds from sports gambling or cannabis should not be used to prop up Illinois’s budget until the state has a reliable accounting,” said Civic Federation President Laurence Msall in a statement accompanying the release of the annual report. “Instead they should be designated for one-time expenses, such as paying down the multi-billion-dollar backlog of bills.”

The report also recommends expanding the sales tax to various services, which have long gone untaxed. While it acknowledges, “Any taxation of services is expected to be controversial and draw intense opposition from a variety of special interest groups,” it suggests the state follow Wisconsin’s lead in taxing 14 specific services including “entertainment; cable and internet; landscaping; parking and towing; repair of personal property; and contracts for the future performance of services.”

The report also recommends the state consolidate bureaucracies in its higher-education system and its pension funds, while also advocating the pursuit of changing the constitution to potentially lower pension benefits — a concept tentatively endorsed last year by Chicago Mayor Rahm Emanuel, but not by Pritzker.

The federation also endorses reforms to trim the state’s prison population — which could perhaps be included on marijuana offenses in a legalization bill.

“The enormity of Illinois’s financial challenges demands a solution of the same magnitude,” Msall said. “While the federation remains cautiously optimistic for the upcoming budget year, Springfield unfortunately has a long record of attraction to accounting gimmicks and shortsighted maneuvers.”

Zachary Sigelko of One Illinois pulled together a new video on the progressive tax, including Pritzker’s remarks in his inaugural address on what the governor calls “a fair income tax.”