CHAMPAIGN, Ill. - As Gov. Bruce Rauner readies his first budget address, expect him to propose changes that could have major consequences for certain demographics, a University of Illinois expert on taxation issues says.
According to law professor Richard L. Kaplan, three issues - the taxation of retirement income, an expansion of the sales tax base and an increase in the cost of health insurance benefits for state employees - loom over the Illinois budgetary horizon as potential quick fixes for the revenue-strapped state after the Legislature allowed the temporary personal and corporate income taxes rate increase to expire at the beginning of the year.
Taxing retirement income is an issue that has been considered for many years in Springfield but has never gotten very far, Kaplan said.
"Illinois is one of only three states that exempt all pension income from taxation," said Kaplan, the Peer and Sarah Pedersen Professor of Law. "Changing this policy has not been popular in the past because doing so would affect all retirees. There are about 1.7 million senior citizens in Illinois today, and that number is projected to increase by 50 percent over the next 15 years. That is a sizeable voting bloc."
According to Kaplan, a proposal recently floated in policy circles primarily targets upper-income retirees. But under the proposal, some retirees would be affected more than others.
"Retirement income other than Social Security would be taxed and only for those whose taxable income is at least $50,000," he said. "This year, the maximum annual Social Security benefit for a married couple is $63,912, but persons who are not entitled to Social Security benefits would be taxed once their income reaches $50,000," he said.
Expanding the sales tax base also is a mixed bag, Kaplan said. While most residents probably wouldn't mind seeing chartered flights taxed, they will likely be very concerned about ending the special 1 percent sales-tax rate on food and nonprescription drugs.
"Increasing the tax rate on such items to 6.25 percent would affect most Illinois residents," he said. "Perhaps that is why this change is stipulated to sunset once the state's backlog of bills have been paid off, but that may be a long time coming."
Extending the sales tax to services would be a major change, but only certain services would be targeted for now, Kaplan notes.
"Most items like membership fees in golf clubs or armored car charges do not affect the vast majority of Illinoisans," he said. "But other services like sewage fees on residential property and ministorage costs are much more common expenditures."
Unlike the tax increases on food and drugs, sales taxes on services are harder to implement, Kaplan notes.
"Grocery stores already are in the sales tax system, but many service providers have never collected sales tax before, so they will need to completely revamp their systems to collect these taxes," he said.
A different budget issue affects health insurance for state employees. Many employers across the country are trying to reduce their health insurance costs by raising premiums, annual deductibles and copayment insurance to avoid the Affordable Care Act's tax on high-value health insurance plans, Kaplan said.
"As an employer, the state of Illinois will want to do likewise, quite apart from the state's precarious financial condition," he said.
According to Kaplan, state employees in Illinois already pay 17 percent of their health insurance costs, which is more than the average cost for public employees in the U.S. (13 percent) but below the rate for private-sector employees (21 percent).
"Such cost-shifting to employees might have happened anyway, but the Affordable Care Act is spurring employers to make their health insurance offerings less beneficial to employees," he said.