Chicago and the State of Illinois must find billions of additional dollars to fund pensions and pay bills.
There’s no getting around it.
The only honest question is, who’s going to pay?
Should we hit up, say, a middle-class truck driver who earns $50,000 a year? Should he or she pay more in state income taxes?
Or should we first hit up a retired corporate lawyer whose income in retirement tops $1 million a year. Right now, that lawyer doesn’t pay a dime on any pension he might have.
We’re on the side of the truck driver, and we bet you are, too.
Of the 41 states that levy an income tax, Illinois is one of only three that exempts all retirement income — no matter how wealthy you are — and that is not fair to middle-class working people. Income is income, whether from a paycheck or a pension check, and the rich are rich, whether they work a job or are retired.
It is only right to include high-income retirees in any tax plan to resolve our city and state’s financial crises. And should a graduated income tax come to Illinois — sometimes called a “fair” tax — it will be more right than ever.
A graduated tax, much more so than the current flat tax, would protect the pensions of middle-class retirees while forcing higher-income retirees — like that corporate lawyer — to pay their fair share.
Spending cuts won’t be enough
The need for more revenue cannot be denied. Chicago faces an immediate budget deficit of $838 million, and the shortfall will grow only worse in the long run as the city grapples with $30 billion in unfunded pension liabilities. The state, meanwhile, must contend with its own $134 billion in unfunded pension liabilities.
No matter what anti-tax extremists would have you believe, the city and state simply cannot cut spending enough to set things right.
We have supported a change to the Illinois Constitution to allow the state to rein in the growth of pensions by eliminating automatic annual 3% percent cost-of-living increases. But that’s a political non-starter now. Gov. J.B. Pritzker and the Legislature’s Democrats will never go for it, and there’s a good argument that changing the constitution for this purpose would be unconstitutional in itself.
It also would be breaking a promise to current and retired employees.
Other ways to raise new revenue, though, such as licensing more casinos and taxing legalized recreational pot, will get the state, its largest city and other municipalities only so far.
When it comes to Chicago, a host of solutions put forth at a press conference last week by members of the Chicago City Council’s Progressive Caucus and a number of community groups struck us as largely unrealistic.
A 3.5% city income tax on Chicagoans earning more than $100,000 a year, as the coalition called for, looks to us like an excellent way to drive the middle-class to the suburbs. A 66% increase in the city’s hotel tax — already among the highest combined taxes in the nation — looks like an excellent way to kill the city’s tourism and convention business.
Chicago must remain competitive with neighboring states and other big cities.
It all begins with a progressive tax
The centerpiece of Pritzker’s solution to the state’s financial troubles is a progressive income tax that would, by his office’s estimates, generate an extra $3.4 billion. It’s up for a statewide vote in November 2020, and we heartily support it.
It would raise taxes only on people who earn $250,000 or more a year and maintain the current rate of 4.95% — that flat tax — on incomes between $100,000 and $250,000. It would reduce the tax burden on incomes of $100,000 or less. That extra $3.4 billion would go a long way toward making it possible for the state to get its finances in order.
Expanding the state’s income tax to include six-figure pensioners could provide additional revenue that could help Chicago and other local governments that are struggling with underfunded pension plans.
It would generate hundreds of millions more in revenue, if not in excess of $1 billion, depending on exactly where the income thresholds are set. This would make it entirely feasible for the state to start to come to the rescue of Chicago and other municipalities. To our thinking, state government could take over municipal pension funds or pass along some of that new revenue to them.
Recipients of public pensions still would get their cost of living increases each year, as protected by the state constitution. But the effective cost of those pensions to the taxpayers would be reduced by taxing — under a progressive tax — the highest retirement incomes.
A middle class government retiree living on a retirement income of, say, $60,000, would continue to see those 3% cost of living bumps each year and not be taxed. But retirees with incomes in the middle six or even seven figures — which might include pension income — would be taxed like all other upper-income folks.
Same goes for a relatively rare but still noteworthy group of private- and public-sector workers who retire in their 50s with $75,000-plus and $100,000-plus pensions and go on to get other high-paying jobs. Their retirement earnings would count toward their total earnings.
That’s a far sight fairer than jacking up taxes again on ordinary working people.
Wide support for taxing retirement income
Finance experts on both the left and right generally agree that if a state is going to tax income, there’s no good argument for exempting retirement income. All income, from whatever source, should be treated equally.
Here in Illinois, some form of a tax on retirement income is supported by the Civic Federation, a nonpartisan government research organization, as well as by the Civic Committee of the Commercial Club, which represents local corporate interests. It’s also supported by the more politically progressive Center for Tax & Budget Accountability.
As the Baby Boomer generation ages, retirement income will grow faster than wages, forcing younger workers to shoulder an increasingly unjust tax burden.
So let’s get on with it and do right by the young people of Illinois. They didn’t create this pension mess. Those of us with a little gray in our hair did. We looked away as the state, Chicago and other local governments made big pension promises for decades but failed to sock away the money.
Opponents warn that taxing high retirement income would prompt wealthier retirees to leave the state, but we see no proof of that. On the contrary, studies show that young people starting out in their careers are the most likely to move from one state to another, while retirees of all income levels are the least likely to do so. Their roots are too deep.
When older people do move, it’s seldom about taxes. It’s about warmer weather and wanting to live closer to children and grandchildren.
So any way you cut it, we believe, it’s just a matter of time before Illinois has no choice on this issue. The question is where do you start: Retirement income of $250,000 and up? $200,000? $100,000?
Pritzker’s progressive income tax plan can set the stage for far greater tax fairness.
Next, that tax should be expanded to include the highest retirement incomes.
And then comes helping Chicago . . . and other towns that need it.