Retiree Tax Is on the Table

Illinois Senate President John Cullerton on Monday floated the idea of taxing some retirement income as part of a possible revenue-neutral overhaul of state taxes.

“If we want to talk about taxing some of that retirement income — maybe tax retirement income up to age 65 — if we want to expand the tax base in the sales taxes, we can do that and then lower overall rates,” Cullerton said in an address to the City Club of Chicago. “I’m all in favor of that. That would be tax reform.”

The state could raise $1.6 billion annually if all retirement income was subject to the 5% personal income tax rate. Illinois earlier this year raised the rate from 3% to help address a $15 billion deficit.

Cullerton said if such a tax was implemented, retirees with more modest incomes and Social Security should be exempt. While some have suggested the state should enact such a tax to help offset the rising costs of pensions, the Chicago Democrat said the new funds would go to offset other forms of taxation or to provide tax credits.

Last week he released a report written by his chief counsel that contends any bid to cut future benefits for current state employees would run afoul of the state’s constitution. Illinois’ unfunded liability rose to $75.7 billion in fiscal 2010 from $62.4 billion in fiscal 2009. That lowered the system’s funded ratio to 45.4% from 51%, among the worst in the nation.

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