People in Illinois Are Going to Have to Pay More Taxes – Except Guess Who

Solving Illinois’s budget problems is going to take sacrifices by everyone.  Illinois has been spending more than it takes in for a long time.  At some point, Illinois is going to have to take in more than it spends.  It’s just the way it is.

There is one group, however, who won’t have to pay higher taxes to pay all of Illinois’s unpaid bills: retired public school teachers and public employees.

Well-designed tax systems cover as much income as possible and keep the rates as low as reasonably possible.  It’s the best way to collect the money you need.  Not surprisingly, Illinois does not have a well-designed tax system.  Among other things, Illinois excludes pension income from the state income tax.  I suppose this was done a long time ago when older people were poorer than average.  It was a way to help them.  Well, retired people aren’t poorer than average any longer (in spite of what AARP may try to tell you).  When taxes go up, people who are getting pensions need to chip in, too.  If the Illinois income tax has to go up, everybody needs to pay the higher taxes.

Most of the people who worked for private companies and have retired will be doing that.  Nowadays, most people who work for private companies don’t get a pension when they retire.  They have 401(k)s, and Illinois taxes income from 401(k)s.  It’s just pensions that are not taxed.

Except for social security, many, if not most, of the people who are getting pensions these days are retired public employees and retired public school teachers.  Which means that, when Illinois has to raise its income tax rates to pay the bills, they won’t be paying more Illinois income tax.  In fact, they won’t pay any Illinois income tax on their pensions.

Which sounds like a pretty sweet deal.  And it is.  But it is one that needs to be changed.
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¹ Social security payments need to be taxed, too.  The federal government taxes most of the social security payments one receives.  Illinois should, too.
MAJOR CORRECTION (7/10/17 5:10 pm):  I have discovered that not only are defined benefit pensions and social security exempt from Illinois income tax, but distributions from 401(s) and IRAs are exempt, too.  I am totally surprised because it makes no sense.  Any logical tax system would tax all of these.  But I got it wrong in this post, and I want to add this correction because I unfairly singled out retired public employees.  I apologize.