By not taxing the 91,000 currently retired TRS members with ten or more years of service, the state has so far left $1,323,862,729 in revenue on the table, according to Pension360 calculations.
Of the 41 states that tax income, Illinois is one of only three that exclude pension benefits from its income tax, and one of only two states that includes a blanket tax exemption for all retirement income, including Social Security and private pensions.
Advocates of the policy, including unions, senior associations and some lawmakers, say it gives much-needed tax relief to retirees, and encourages seniors to spend their retirement – and their money – in the state.
But it comes at a cost: billions in lost tax revenue for one of the most cash-strapped states in the country.
The lost tax revenue amounts to about $14,500 in unrealized tax revenue per retiree with 10 or more years of service.
The unrealized revenue figure balloons when including all pension systems; a 2013 study by the Chicago Metropolitan Agency for Planning found that the state is losing out on $2 billion every year by not taxing retirement income.
A 2014 study by University of Illinois professor Jeffrey R. Brown found that there is no strong evidence suggesting retirees will leave a state due to state tax policies.
On the campaign trail last year, Gov. Rauner said he didn’t have a position on taxing retirement income.
“I don’t have a position on that yet,” Rauner said during a gubernatorial primary debate. “What I would recommend we do is look at our entire tax code in Illinois, look at every tax and every tax base and every rate and then compare ourselves to other well-run states that we compete with.”
But his recent budget proposal suggests he won’t touch the issue, at least in this fiscal year.
The idea was last considered seriously in 2011, when Senate President John Cullerton suggested imposing a 5 percent tax on pension benefits above a certain amount – $50,000 was the threshold being thrown around at the time.
But the proposal never picked up steam.
Still, the idea – most recently championed by the Civic Federation in Chicago – has become especially pertinent in light of the recent rollback of income tax rates.
As of last January, the state’s individual income tax dropped from 5 percent to 3.75 percent.
Of all of Illinois’ neighbors – Wisconsin, Iowa, Missouri, Kentucky, and Indiana – only Indiana has a lower tax rate for individuals earning $50,000.
But taxing retirement income remains relatively unpopular: only 24 percent of Illinois residents support the idea, according to a 2015 survey.
“There’s going to be a lot of pushback from a lot of retirees, even though you can argue that Illinois is one of three states that exempts retirement income,” state Rep. David Harris (R-Arlington Heights) told WTTW in February. “Voters don’t vote in other states, they vote in Illinois.”