Illinois pension crisis would devour ‘millionaire tax’
Illinois needs to spend $4.9 billion more annually to pay for pensions, but the “millionaire tax” would only raise an estimated $3-$4.3 billion. That’s too little for the pension bills and would leave nothing for property tax relief.
Proponents of a push to scrap Illinois’ constitutionally protected flat income tax and add a 3% income tax hike on those earning more than $1 million claim increased revenue could be used for property tax relief.
Don’t count on it.
Analysis shows all new revenue from the tax would likely be consumed by Illinois’ growing pension crisis. That would leave nothing for property tax relief. It would also set up other taxpayers for a much larger income tax hike.
Illinois’ five state-run pension systems currently receive nearly $11.2 billion in annual funding from the state’s budget, representing more than 20% of the state’s General Funds budget. Despite these massive contributions, state actuaries said contributions really need to be nearly $16.1 billion annually for the state to pay off its pension debt.
In other words, Illinois lawmakers are shorting the systems by nearly $4.9 billion every year. Each year the state fails to make a full, actuarially determined contribution, the more likely it is the state’s $142 billion pension debt increases along with the amount required each year to pay off this debt.
Illinois’ pension crisis is the main reason the proposal to eliminate Illinois’ constitutionally protected flat income tax and add a 3% income tax increase on those earning above $1 million would fail to provide the property tax relief it promises. Estimates based on the most recent Illinois tax return data available and Freedom of Information Act requests from the Illinois Department of Revenue show the “millionaire tax” could yield $3-$4.3 billion in additional revenue, assuming no negative economic effects or changes in tax reporting from the tax hike. Even under the most generous revenue assumption, the proposal would still be $570 million short of raising enough revenue for the state to begin making a true, full pension payment and possibly as much as $1.87 billion below what is required.
Illinois’ pension costs completely dwarf the maximum revenue the tax hike could hope to raise. Making matters worse, the most recent budget forecasts from the Governor’s Office of Management and Budget estimate Illinois is facing a budget shortfall of more than $1.4 billion, creating further costs that would likely need to be addressed before lawmakers could even entertain the idea of passing along increased revenues to local governments to provide property tax relief.
At the local level, where property taxes are directly determined, local governments are struggling with a growing pension crisis of their own. Local governments in Illinois have more than $68 billion worth of local pension debt in their own retirement systems, according to the most recent Illinois Department of Insurance Biennial Pension Report.
Growing pension costs at the state and local levels are part of the reason why, despite a nearly $15 billion increase in annual state revenues since 2019, the typical homeowner’s property tax bill has grown by $756.
Increased state revenues have already failed to provide substantial, permanent property tax relief. Illinoisans should consider the potential for higher taxes on everyone when deciding whether the “millionaire tax” is right for Illinois.