Illinois is the national poster child for state budget messes. My home state faces a $7.4 billion general fund deficit and a $12 billion revenue shortfall. One proposed idea for plugging at least part of the horrific shortfall: tax retirement income. But our new governor, Republican Bruce Rauner, has rejected the idea.
Illinois exempts all retirement income from state taxes – Social Security, private and public pensions, and annuities. We’re leaving $2 billion on the table annually, according to the state’s estimates. And we’re hardly alone: 36 states that have an income tax allow some exemption for private or public pension benefits, and 32 exempt all Social Security benefits from tax, according to the Institute on Taxation and Economic Policy (ITEP). States currently considering wider income tax exemptions for seniors include Rhode Island and Maryland.
With the April 15 tax day upon us this week, it’s a timely moment to ask: What are these politicians thinking?
Income tax exemptions date back to a time when elderly poverty rates were much higher than they are today (federal taxation of Social Security began in the 1980s). As recently as 1970, almost 25 percent of Americans older than 65 lived in poverty, according to the Census Bureau; now it’s around 9 percent. Today, it still makes sense to tread lightly on vulnerable lower-income seniors, many of whom live hand to mouth trying to meet basic expenses. And the number of vulnerable seniors is on the rise.
But much of the benefit of state retirement income exemptions goes to affluent elderly households. The cost of these exemptions is high, and it’s going to get higher as our population ages. In Illinois, the number of senior citizens is projected to grow from 1.7 million in 2010 to 2.7 million by 2030. That points to a demographic shift that will mean a shrinking pool of workers will be funding tax breaks for a growing group of retirees.
So there’s a real need for states to target these tax breaks to seniors who really need them. Yet many states are headed in the opposite direction. Learn more at Reuters Money.