The ‘fair tax’ would double taxation and take from retirement income for folks in Illinois

Illinois Policy breaks down what the tax would do to retirement income and local taxes

The Annie Frey Show
July 15, 2020 - 3:53 pm
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Senior budget and tax research director at Illinois Policy Adam Schuster said the Fair Tax would open up Pandora’s Box.

“This opens the door to double or triple taxation,” he said. “Even proponents of this plan are admitting that this is step one towards taxing retires incomes.” ​

From Illinois Policy's website:

Under a progressive income tax, Illinoisans could also see:
 
A statewide retirement tax

Illinois State Treasurer Michael Frerichs is the most recent proponent of the progressive income tax to admit it opens the door to additional taxation, saying at a Chamber of Commerce event in Des Plaines last month: “One 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’ statement is accurate, as a progressive tax would let politicians decide who should be taxed how much.

Across the nation, 32 states have a progressive income tax system. They all tax retirement income. Nearly 3 in 4 Illinoisans oppose taxing retirement income, according to a 2019 poll from the Paul Simon Public Policy Institute.

Connecticut, the last state to pass a progressive income tax, has been taxing retirement income for the past 10 years. The rate of residents older than 65 moving out is now more than double the rate for prime working-age adults. Since 2011, IRS data shows Illinois has been able to retain residents of this age group better than every other group.

Local income taxes

The original language of the “fair tax” amendment explicitly banned local income taxes in Illinois. Lawmakers removed that protection before passing the plan to voters.

Chicago lawmakers have backed city income taxes in the past, and under the amendment, the city could implement similar graduated tax rates to New York City, with a bottom rate of 3.078% for individuals earning less than $12,000 and a top local tax rate of 3.876% for individuals earning more than $50,000 per year. 

Double taxation and special surcharges

The Illinois Constitution currently prohibits taxing the same $1 earned more than once, but that protection would vanish if voters approve Pritzker’s “fair tax” amendment.

Double or even triple taxation would be allowed were the constitution’s flat tax protections removed, thanks to language swapped into the proposal shortly before state lawmakers placed the tax hike on the Nov. 3 ballot. 

This could take the form of a special income tax levied on top of normal rates for public safety or pensions, for example.