Bill Knight column for Thurs., Fri., or Sat., Nov. 13, 14 or 15
In cowboy shows, if folks were heading on a route where road agents lurked to rob folks of valuables, they wanted someone to ride shotgun, and in Illinois, AARP may be filling that role as Chicago’s conservative Civic Federation has suggested taxing retirement incomes.
That’s right: Don’t panic, but know that influential interests are eyeing your retirement to benefit their wealthy peers who object to the state’s current 5 percent income tax.
Although Republican governor-elect Bruce Rauner in July said he opposes taxing retirement income, the idea may look more attractive as he takes the reins of a government that has a poor track record of either raising revenues or cutting spending.
This week, a CBS News poll showed that most retirees depend on Social Security as their major source of income, and almost 4 in 10 say even that isn’t enough to live on. Some 64 percent are “anxious” about the amount of retirement savings they have, and 71 percent of those not yet retired say it’s already difficult to save for retirement and keep up with day-to-day expenses.
In Illinois, retirees don’t pay federal income taxes on their Social Security benefits if the sum of half of their benefits combined with all other income is less than $25,000 annually for individuals or $34,000 for couples.
However, adding a state tax would mean about 1.5 million Illinois retirees would have less money and therefore 1.5 million people less likely to be the consumers that the economy needs.
The Civic Federation proposes taxing all retirement income, from Social Security and private pensions to 401(k)s and Individual Retirement Accounts in order to ease the impact of the rollback of income tax rates.
Without legislative action, the state income tax rate of 5 percent will be reduced in January, and the state’s looking at a $4 billion deficit in its 2015 budget when that decrease happens.
AARP objects to a plan exclusively targeting any one group of citizens, especially its core constituency, retirees – people who hadn’t planned for such a reduction in their income when they retired. And the organization has pledged to lobby the General Assembly if the scheme is introduced in Springfield.
“My initial reaction was concern for those individuals who are living on fixed incomes and struggling with rising costs in other areas,” said AARP Illinois state director Bob Gallo. “This would be a double whammy for them.”
The private Civic Federation says, “The Illinois Comptroller estimates that this exemption of federally taxable retirement income reduced the State’s individual income tax revenues by $2 billion in Fiscal Year 2012. The cost of this exemption is expected to increase over time due to a population shift in Illinois. According to the Department of Commerce and Economic Opportunity, the number of senior citizens in Illinois is expected to grow considerably from 1.7 million in 2010 to 2.7 million by 2030.”
However, politically the idea may be a non-starter, especially considering the grassroots support in last week’s election for an alternative answer to the budget shortfall: a tax on millionaires The advisory referendum passed with more than 63 percent of the vote, some 2.1 million ballots.
Further, a new state tax on retirement income could tempt retirees to relocate to more welcoming climates – for finances as well as weather -- such as Florida, Mississippi, Nevada, Texas and Wyoming, none of which tax retirement or Social Security income, according to Marketwatch.com
It’s a treacherous path, but if Illinois’ “passengers” on the road to the future are armed with information and helped by advocates like AARP, retirees could arrive safely.
[PICTURED: Illinois AARP's Bob Gallo, from Active Transportation Alliance's web site activetrans.org]