Cutting Through the Noise of Retirement Tax Claims
The Illinois State Capitol at dusk.
The two sides of the battle over changing tax rates in Illinois have started a new battle over taxing retirement income in the state.
Earlier this week, the Illinois Policy Institute filed suit against Secretary of State Jesse White and members of the Illinois State Board of Elections claiming the graduated income tax question on the November ballot could cause voters to unknowingly impose a tax on retirement income. Retirement income from 401k’s, pensions, IRA’s, Social Security, or other sources are not currently taxed.
UPDATE 12:50 P.M. (10/9/20):
One clarification on the taxation of retirement income.
It is exempted by statute in the form of a subtraction from federal adjusted gross income.
A coalition of groups, including the Illinois Chamber of Commerce, Illinois Farm Bureau, and National Federation of Independent Business, attempting to stop the amendment are using language in their ads, delivered by a kind-looking elderly woman, claiming the amendment would make it easier to tax retirement income. Supporters of the amendment, propped up by around $55 million in donations from Governor JB Pritzker, say the argument isn’t true.
Who is right? Who is wrong? Are they both wrong?
We started by diving into the state constitution itself, which is silent on the issue of retirement income specifically, but that an income tax shall be a “non-graduated rate.” That is the current tax rate of 4.95% on all income, commonly known as the “flat tax.” There is no language in the state constitution addressing taxing retirement income. That’s a decision left for state law, like the tax rate, speed limit, or the state budget.
The argument that the amendment can make it easier to tax retirement income has been made, in part, by the libertarian leaning Illinois Policy Institute.
“By removing the flat income tax protection, Illinois lawmakers can go after certain segments of the population - including retirees - for the first time,” said IPI Senior Budget and Tax Policy Director Adam Schuster. “While retirement income is currently exempt from taxation, this constitutional amendment would give lawmakers the power to tax retirement income at a different rate from other forms of income and to create varying brackets for a retirement tax. This enables divide and conquer tactics, making it much easier to create a new tax on retirement income and expand it over time.”
The debate kicked into high gear when Democratic State Treasurer Mike Frerichs seemingly opened the door to taxing retirement income.
"One thing a progressive tax would do is make clear you can have graduated rates when you are taxing retirement income," Frerichs said at a Des Plaines Chamber of Commerce event in June. "And, I think that's something that's worth discussion."
Frerichs has since walked back the comments.
It isn’t the first time taxing retirement has been discussed. Former Chicago Mayor Rahm Emanuel suggested taxing retirement income over $100,000, The typically conservative Civic Committee of the Commercial Club of Chicago has recommended taxing retirement income over $15,000 per year. Neither suggestion would currently be possible under the flat tax.
“The facts are absolutely clear: the Fair Tax does not tax retirement income, nor does it make it any easier to do so,” said Quentin Fulks, the Chairman of the Vote Yes for Fairness committee, “Treasurer Frerichs supports the Fair Tax because it helps our working families and like the governor and the General Assembly, opposes taxing retirement income.”
IPI advocates seem to consider tax rate promises from Democrats little more than lip service.
"All 32 states with a progressive tax system also tax retirement income in some form. Illinois retirees deserve protection,” said IPI’s Schuster. This broad new taxing authority in Springfield would be the exact opposite; combined with Illinois budget troubles, it would make a retirement income tax virtually guaranteed."
Charles Johnson, a former Director of the Illinois Department on Aging spoke at an AARP news conference this week and called attempts to bring retirement income into the discussion is designed to “mislead and scare” seniors.
“No matter who has said it or how they have said it, the simple truth is that switching to a graduated income tax does not allow the state to tax retirement income,” Johnson said. “What I see in some of the opponents' commercials is that it’s older people saying this is going to give the opportunity for politicians to tax older people and retirement income. That’s not true. They can do it now if they want to.”
The bottom line appears to be both sides are telling their own version of the truth. While taxing retirement income could be done by the General Assembly tomorrow, it would apply to every senior, from retired teachers to billionaires. That’s a politically untenable position for many legislators.
Would it make it easier to pass a tax increase on retirement accounts over a certain amount? Politically, one can easily make that argument. The act of passing a retirement tax increase would be no easier or difficult than it would be today.