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 The “fair tax” is being sold as a tax on the wealthy, but if
voters on Nov. 3 remove the Illinois constitution’s flat tax protection they
will be granting state lawmakers broad new taxing power that would make it
easier to go after seniors and their retirement income.
Illinois lawmakers in 2019 approved a defining feature of Gov. J.B. Pritzker’s
policy agenda by agreeing to ask voters to amend the Illinois Constitution and
remove its flat tax protection. They also set introductory rates that start
hiking taxes on residents making over $250,000.
Among several other negative policy outcomes, the adoption of a progressive
income tax would make it significantly more likely that Illinois will adopt a
retirement income tax in the future. That’s because removing the flat income tax
protection also removes a key political barrier to imposing a tax on retirement
income.
Lawmakers have the ability to withdraw the amendment in the wake of COVID-19 and
the economic slowdown. If they fail to act and voters are convinced to pass the
progressive tax, then it will start taking billions more from Illinois’ economy
just as the state struggles to recover from the pandemic.
‘Fair tax’ supporters push for a retirement income tax
Illinois elected officials and advocacy groups have proposed taxing retirement
income in the past. Former Chicago Mayor Rahm Emanuel proposed taxing all
retirement income above $100,000 per year in 2019. The Civic Committee of the
Commercial Club of Chicago that year proposed exempting only $15,000 of
retirement income per year.
In fact, proponents of the progressive tax have linked the issues together,
acknowledging that one tax hike makes the other more likely.
The Chicago Sun-Times’ editorial board wrote, “Pritzker’s progressive income tax
plan can set the stage for far greater tax fairness. Next, that tax should be
expanded to include the highest retirement incomes.”
Daniel Biss, a former Illinois state senator, Democratic candidate for governor
and progressive tax advocate, said: “I would only consider taxing retirement
income once we’ve amended the Illinois Constitution to allow for a progressive
income tax …”
Public opposition has historically killed proposals to tax retirement income in
the Prairie State. 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% somewhat or strongly supported the change.
But under a progressive income tax structure, for the first time Illinois
lawmakers would have the ability to raise taxes on certain segments of the
population based on income.
The power to tax different income groups differently makes it inherently easier
to raise taxes, because lawmakers do not have to worry about facing backlash
from all taxpayers at once. Progressive tax powers would enable Springfield to
begin taxing retirement income above only a certain level but then gradually
lower the exemption threshold to raise additional revenue, slowly adding more
Social Security and pension income to the tax base.
Additionally, Pritzker’s amendment would allow for lawmakers to tax retirement
income at a different rate than regular income, making the tax easier to impose
initially. Under current law, any retirement income would have to be taxed at
the flat rate of 4.95%. Under the “fair tax,” lawmakers could begin with a 1%
rate on retirement income to avoid voter backlash and raise the rate gradually
in an effort to raise revenue.
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Illinois is currently one of just three states with
an income tax that exempts all retirement income from taxation. Nine
states do not collect taxes on general income from salaries and
wages.
The lack of a retirement income tax is one of the few competitive
advantages of Illinois’ tax code in an otherwise high-tax state. It
helps minimize outmigration among retired residents. In fact, since
the 2011 income tax hike, Illinois has been able to retain residents
above the age of 65 better than every other age group.
The over-65 outmigration rate has been the lowest among all age
groups on average during the time period and in each year since
2013.
The only state to shift to a progressive income tax structure in the
past 30 years, Connecticut, tells a different story.
Connecticut for the past decade has taxed retirement income,
including Social Security, above $50,000 for single filers and
$60,000 for joint filers – the above-65 outmigration rate has been
more than double the outmigration rate for prime working age adults,
or people ages 26 to 54.
Comparing rates between age groups and within
states helps control for factors that affect migration besides
retirement tax policy. While both states are losing residents among
all age groups, the gap between retirees and prime working age
adults may suggest residents view Illinois as the better state for
retirement.
Illinois has lost population for six years running, driven primarily
by adults in their prime working years leaving for other states. The
most common reason residents give for wanting to leave is the high
tax burden, according to public opinion polling conducted for NPR
and the University of Illinois-Springfield. While people older than
65 have left as well, they’ve done so at a lower rate, which is
likely influenced by the retirement tax exemption.
“The elderly out-migrate significantly less if a meaningful pension
exemption is offered by the state,” according to a large statistical
study published in the Journal of Regional Analysis and Policy. This
matches the moregeneral finding in economics literature that
Americans tend to move from high tax states to lower tax states.
Connecticut – the last state to adopt a progressive income tax in
1996 – has already provided Illinoisans with plenty of evidence
showing the progressive income tax would be bad for the state.
Proponents there made very similar claims to those being used to
push a progressive tax in Illinois, including middle-class tax
relief, balanced budgets and no economic damage. But all of those
promises were broken. Instead, Connecticut’s change to a progressive
tax was followed by a 13% jump in middle-class income taxes, a 35%
increase in property taxes, a sharp increase in poverty and
continued budget deficits.
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.
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