by Bryce Hill
October 29, 2024 - Illinois Policy
Proponents of a push to scrap Illinois' constitutionally protected flat income tax and add a 3% income tax hike on those earning more than $1 million claim increased revenue could be used for property tax relief.
Don't count on it.
Analysis shows all new revenue from the tax would likely be consumed by Illinois' growing pension crisis. That would leave nothing for property tax relief. It would also set up other taxpayers for a much larger income tax hike.
Illinois' five state-run pension systems currently receive nearly $11.2 billion in annual funding from the state's budget, representing more than 20% of the state's General Funds budget. Despite these massive contributions, state actuaries said contributions really need to be nearly $16.1 billion annually for the state to pay off its pension debt.
In other words, Illinois lawmakers are shorting the systems by nearly $4.9 billion every year. Each year the state fails to make a full, actuarially determined contribution, the more likely it is the state's $142 billion pension debt increases along with the amount required each year to pay off this debt.
Illinois' pension crisis is the main reason the proposal to eliminate Illinois' constitutionally protected flat income tax and add a 3% income tax increase on those earning above $1 million would fail to provide the property tax relief it promises. Estimates based on the most recent Illinois tax return data available and Freedom of Information Act requests from the Illinois Department of Revenue show the "millionaire tax" could yield $3-$4.3 billion in additional revenue, assuming no negative economic effects or changes in tax reporting from the tax hike. Even under the most generous revenue assumption, the proposal would still be $570 million short of raising enough revenue for the state to begin making a true, full pension payment and possibly as much as $1.87 billion below what is required.
Illinois' pension costs completely dwarf the maximum revenue the tax hike could hope to raise. Making matters worse, the most recent budget forecasts from the Governor's Office of Management and Budget estimate Illinois is facing a budget shortfall of more than $1.4 billion, creating further costs that would likely need to be addressed before lawmakers could even entertain the idea of passing along increased revenues to local governments to provide property tax relief.
At the local level, where property taxes are directly determined, local governments are struggling with a growing pension crisis of their own. Local governments in Illinois have more than $68 billion worth of local pension debt in their own retirement systems, according to the most recent Illinois Department of Insurance Biennial Pension Report.
Growing pension costs at the state and local levels are part of the reason why, despite a nearly $15 billion increase in annual state revenues since 2019, the typical homeowner's property tax bill has grown by $756.
Increased state revenues have already failed to provide substantial, permanent property tax relief. Illinoisans should consider the potential for higher taxes on everyone when deciding whether the "millionaire tax" is right for Illinois.
by Patrick Andriesen
October 29, 2024 - Illinois Policy
A non-binding referendum on the Nov. 5 ballot asking whether the state should adopt a "millionaire" tax to support property tax relief could open the door for lawmakers to begin taxing Illinoisans' retirement income.
To institute a millionaire tax, Illinois lawmakers and voters would have to scrap the state's flat income tax guarantee in the Illinois Constitution and approve a progressive tax structure, allowing income to be taxed at varying rates. Once this is allowed, Illinois lawmakers could expand it to several kinds of income taxes, including retirement income.
Illinois Treasurer Mike Frerichs said as much when discussing Gov. J.B. Pritzker's 2020 "fair tax" referendum, which would have replaced Illinois' current flat tax with a progressive tax.
"One thing a progressive tax would do is make clear you can have graduated rates when you are taxing retirement income," Frerichs said while speaking at an event hosted by the Des Plaines Chamber of Commerce. "And, I think that's something that's worth discussion."
The Illinois Policy Institute found all 32 states with a progressive tax also have retirement taxes.
Proponents of the "millionaire" tax claim the progressive policy will provide real property tax relief for Illinoisans, despite estimates showing the savings will fall at least $2 billion short of covering the state's current costs.
In reality, the referendum is a ploy state lawmakers are using to justify the elimination of the state's flat income tax and grant themselves the power to set new and higher taxes, including on retirees, whenever they decide they don't have enough money.
Taxing retirement income is not a new idea in Illinois. Former Chicago Mayor Rahm Emanuel proposed taxing retirees with incomes over $100,000 in 2019, while the Civic Committee of the Commercial Club of Chicago proposed taxing retirement income over $15,000 per year.
The state constitution's drafters in 1970 included a flat tax guarantee in order to ease voters' fears that the state's first income tax - which went into effect in 1969 - could be raised easily by Springfield politicians. Flat taxes treat everyone the same and make it harder for lawmakers to raise rates because everyone is impacted and voters can hold them responsible.
A graduated tax allows politicians to decide who should be taxed how much and allows them to gradually increase taxes on smaller segments of the population, eventually hitting the middle class where most taxable income resides.
It happened in Connecticut, the only state in over 30 years to impose a progressive tax. Middle class taxes rose 13%, property taxes spiked 35%, poverty increased by 50%, more than 360,000 jobs were lost and the state economy took a $10 billion hit. All that, and the state still failed to balance its budget.
The Illinois Policy Institute's Lincoln Poll in 2023 found more than 1-in-3 voters over the age of 65 thought high taxes were the biggest issue facing our state.
If the Land of Lincoln adopts the "millionaire" tax and imposes a progressive income tax that taxes retired workers on their income, we can expect more Illinoisans over 65 to pack up and move to states with better climates and lower tax rates.
