Taxing Retirement Income: Adding a Second Story to a House with a Crumbling Foundation

The Chicago Tribune recently reported (behind its paywall):

“[Republican Senate Leader Christine]Radogno said lawmakers likely will consider hiking the state income tax or taxing retirement income, rather than increasing the state sales tax or instituting a tax on services.”

If this is what passes for thoughtful consideration of tax policy in this state, we’re doomed. There could not be a single more compelling reason to accelerate the exodus of citizens from Illinois than to add to the tax burden of those who are already leaving in droves.

The Illinois Policy Institute points out:

“Illinois lost 81,000 residents and $4.1 billion of annual taxable income during the 2013 tax year, according to an Internal Revenue Service report. That’s one resident and $50,000 of income every 6.5 minutes. That’s a record.”

Simply adding another level of taxpayers onto a broken tax system is no different than adding a second story onto a house with a crumbling foundation. It’s going to collapse even sooner.

Illinois’ tax system was devised for the day when it was a manufacturing powerhouse. Those days are gone, yet our corporate income tax rate is the fourth-highest in the nation. However, only about one-third of corporations pay the tax. Most corporations have adapted and have structured themselves as “pass through” entities, which means that the shareholders pay taxes on their net income at individual rates. Yet, what company that is traditionally structured and subject to Illinois’ corporate income tax will want to stay or locate here?

Hoping to increase revenue by keeping the current tax system and then taxing more sources of income within that system is a recipe for disaster. Taxpayers are already overburdened by high property taxes and fees, and to tax retirement income would encourage more citizens to vote with their feet.

This pretty much sums up the problem:

“If you were to get all of the nation’s state tax experts in one room and ask them what good policy is, the answer you’d get from 9 out of 10 of them is four words: Broad Bases, Low Rates. In many ways, Illinois does precisely the opposite. The state sales tax is one of the narrowest in the country—exempting many goods and services—but the rate is among the highest. Property taxes are high. And the corporate income tax rate is among the highest in the world. Faced with this uncompetitive rate, companies take and seek the incentives to reduce their tax costs.” (Joseph Henchman “Sensibly Reforming the Tax Structure and Tax Incentive Policies of Illinois” The Tax Foundation, January 17, 2014)

It’s long past time to stop trying to find new oxen to gore. Illinois needs to restructure its tax system so as to generate revenue from those sources that provide the most opportunity for sustainable growth. Once those sources have been identified, then the system needs to be built around a broad base with few exemptions and low rates.

Illinois is like the man who’s fallen out of a 40-story building, he’s 39 stories down and thinks: “well, nothing bad has happened yet.”

h/t: McHenry County Blog