Watchdog group: State should reduce income tax but tax retirees

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SPRINGFIELD — Illinois should freeze its income tax rate one year then lower it 20 percent during a three-year ramp-down and begin taxing retirement income like Social Security, IRAs and pensions, a government finance watchdog is recommending.

The Civic Federation’s fiscal blueprint lays out a road map by which the state could pay off its $5.4 billion stack of unpaid bills within five years and stave off drastic budgetary cuts that would result if the temporary income tax hike approved in 2011 is permitted to sunset, as planned, next January.

The temporary income tax that Gov. Pat Quinn enacted is due to lapse next January, with individual tax rates dropping from 5 percent to 3.75 percent and corporate rates dropping from 7 percent to 5.25 percent. If that happens, the state will face what the Civic Federation described as a “revenue cliff,” losing nearly $4 billion by 2016.

The group proposes freezing individual income tax rates for one year, then dropping those rates by .25 percentage points in 2016 and 2017 and .5 percentage points in 2018. At that point, the individual rate would stand at 4 percent.

During that same time frame, the Civic Federation proposes lowering the corporate income tax rate by 1.4 percentage points so that by 2018, businesses would be taxed at 5.6 percent.

As those rates are lowered, the group believes that the state should begin taxing retirement income for the first time. Illinois is one of three states out of 41 with an income tax that exempts pension income. It also is one out of 27 states that doesn’t tax Social Security income.

“The Civic Federation’s five-year plan would eliminate the state’s $5.4 billion backlog of unpaid bills while gradually reducing income tax rates by 20%, broadening the income tax base to include federally taxable amounts of retirement income and building a reserve fund as protection against future economic downturns,” said Laurence Msall, the Civic Federation’s president.

“Politically attractive efforts are no longer enough to address the enormous financial challenges we’ve created for ourselves,” he said. “All Illinoisans will need to share the burden of fixing the State’s problems.”

The group’s recommendations come three weeks before Quinn is scheduled March 26 to deliver his budget address to a joint session of the General Assembly.

The governor has repeatedly dodged questions about whether he intends to pursue an extension of the temporary income tax hike that he enacted in 2011 or whether he intends to let it drop next January, as scheduled, and embark on a massive round of new budget cuts or seek new revenue elsewhere.

Quinn’s budget speech could offer some sense of where he is on that question since his spending blueprint will cover the state fiscal year that begins July 1.

Of the four Republican candidates for governor, three have expressed support for letting the tax rates drop Jan. 1. Treasurer Dan Rutherford is the only one in the Republican field not to rule out the possibility of keeping the tax hike in place.

Retirement income has been off-limits politically for years because seniors make up one of the most reliable blocs of voters in Illinois. Such a move now would serve to only antagonize public-sector unions whose members already are facing cuts in their pensions after Quinn and the General Assembly moved to reel in pension benefits last December.

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