Democratic lawmakers and Gov. Bruce Rauner do not appear to be close to a budget deal.
But if they can work out their differences, they are likely to be looking for more revenue to help close the state's massive budget deficit. That could mean higher taxes for Illinois residents.
“There’s no big mystery about filling the state’s revenue gap,” said University of Illinois Law Professor Richard Kaplan, “if there is a consensus that emerges that there at least should be additional revenues as part of the overall solution.”
He says the easiest and most straightforward approach is to raise the income tax rate by restoring the rate that existed in Illinois before Jan. 1. “The statute is already written,” Kaplan said. “All you have to do is just take off the expiration date, and we would go back to the tax rates that were in effect during 2014.”
He said people would be used to that rate, but there’s no requirement for any particular rate.
“There’s a lot of room for compromise. What rate do you want? It’s pretty straightforward as opposed to alternative ways of raising more revenue, such as increasing the tax base, expanding sales taxes, that sort of thing.” -- Prof. Richard Kaplan
During his campaign, Rauner said he was open to expanding sales taxes to services. That idea has been around for about three decades, Kaplan explained.
“The key question is always, ‘Which services?’” he said. “The economy – not just in Illinois but throughout the United States as well as the world – has been moving less toward goods manufactured and more towards services being exchanged. So the sales tax, which is based on an amount that would be added to the purchase of any physical good, is looking a little bit more ‘so last century.’”
He said a number of states are taxing different services, including hairdressers, barbers and auto repair. Taxes could be extended to things like lawyers’ fees or doctors’ bills, or even higher-end things such as yacht maintenance.
Kaplan also weighed in on the politically unpopular idea of taxing retirement income. The Illinois position on retirement income is unusual, he said.
“Some states say that retirement income will be taxed just like any other form of income. Other states have said this will be exempted because they are specifically trying to attract retirees and hold that out, frankly, as bait – or at least as an attraction. ‘Move here, and your pension will be free of state income tax.’”
Most states, like the federal government, allow money to be put into so-called defined contribution plans like 401ks and IRAs tax-free and do not tax funds when they are taken out after retirement.
Some states don’t allow tax deductions when funds are deposited but do not tax funds when they are taken out.
“Illinois gives you both,” Kaplan said. “Illinois is very unusual in allowing people to exclude what they put into a 401k plan and IRAs and then also exclude it when they take it out.”
Previous proposals to tax retirement pensions in Illinois have been vigorously opposed by retiree groups and their supporters.
