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 There are 2 million Illinoisans of retirement age, and
currently the state does not tax their retirement income. But there is
significant reason to believe the “fair tax” amendment to the Illinois
Constitution would bring retirement taxes if passed.
And then there might be 10,577 fewer of those seniors in Illinois if its
experience with a progressive tax matches Connecticut’s.
Proponents of the progressive income tax amendment are scrambling to cover up
the likely effects of the tax increase on retired Illinoisans. On Oct. 5, three
Cook County retirees joined the Illinois Policy Institute in filing a lawsuit
over the inaccurate language being presented to voters on the ballot. Among
other things, the lawsuit points out that misleading statements mailed to all
voters by the Illinois Secretary of State, “will induce retirees into voting to
impose on themselves a tax on retirement income.”
The lawsuit points to comments by Illinois State Treasurer Michael Frerichs in
June stating that “[o]ne thing a progressive tax would do is make clear you can
have graduated rates when you are taxing retirement income, and, I think that’s
something that’s worth discussion.”
Frerichs planned a press event Oct. 6 to clarify his earlier comments, but
canceled 12 minutes before it was to begin, without providing a reason for the
cancelation. Others have been eager to fill in the reason: Gov. J.B. Pritzker
wants the damage caused by Frerichs’ earlier admission minimized.
All 32 states with a progressive income tax also tax some form of retirement
income, including Connecticut, the last state to enact a progressive income tax.
Connecticut is also one of the few states to lose more retirees to outmigration
than Illinois. If Illinois had experienced the same level of retirees moving out
of state as Connecticut in recent years, Illinois would have lost an additional
10,577 seniors.
Frerichs is the most recent “fair tax” backer to make the
connection between progressive tax powers and taxing retirees, but not the
first. Pritzker’s head of the Illinois Department of Revenue previously proposed
a bill to tax retirees and several prominent amendment backers have admitted
passing the progressive tax is the first step to taxing retirement income in
Illinois.
Attempts to deny progressive taxes are linked to retirement taxes at this late
stage, less than a month before the Nov. 3 election, likely stem from widespread
public opposition to taxing retirement income. 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% supported or somewhat
supported the change. Crain’s Chicago Business columnist Greg Hinz recently
asked, “Is Pritzker’s graduated tax plan in trouble?” He pointed to Frerichs’
comments as one reason the answer might be “yes.”
A retirement tax would likely affect areas of the state differently, as there is
a greater share of retirees in some counties compared to others. Jo Daviess,
Pope, Hardin, Carroll and Henderson counties would likely be the most affected,
as more than 25% of their citizens are seniors.
Progressive tax powers make it inherently easier to raise taxes
on everyone by giving politicians the ability to raise taxes on small segments
of the population, one at a time, rather than facing backlash from all taxpayers
at once. This amendment would enable Springfield to begin taxing retirement
income above a certain level at varying rates, gradually lowering income
brackets to raise additional revenue by slowly adding more Social Security and
pension income to the tax base. The amendment also grants lawmakers the ability
to tax retirement income at a different rate than regular income, which could
allow for rates to rise over time so the hikes generate less unified public
opposition.
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Data proves the exemption of retirement income is
an important tax advantage for Illinois seniors. From 2012 to 2018,
Illinois retained residents 65 and older better than every other age
group.
During that time, those 65 and older left Illinois
at a slower rate than people in every other age group.
The only state to shift to a progressive income tax
structure in the past 30 years, Connecticut, tells a different
story.
From 2012 through 2018, Connecticut taxed retirement income,
including Social Security, above $50,000 for single filers and
$60,000 for joint filers. And 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.
If Illinois taxed retirement income in the same way as Connecticut
and saw the same rate of outmigration among seniors, it would have
lost 10,577 more seniors from 2012 to 2018. Connecticut’s heavy loss
of retirees is likely part of the reason why the state is now
reversing course, and is in the process of expanding income tax
exemptions for middle-income retirees.
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.
Analysis from the Illinois Policy Institute has uncovered a weak
housing market and poor job opportunities as other core causes of
the exodus, which are linked to the tax burden. 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 – which in 1996 became the last state to adopt a
progressive income tax – has already provided Illinoisans with
plenty of evidence showing the progressive income tax would be bad
for the Prairie State. Connecticut sold its progressive tax by
making 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 and a sharp increase
in poverty. Then after all that economic damage, the state continued
running 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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