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updated: 8/2/2017 9:03 AM

How retirement income became exempt from state tax

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  • Terrel E. Clarke

    Terrel E. Clarke

 
 

So unpopular was the Illinois' income tax that it cost Gov. Richard Ogilvie his job.

It was one of the first major pieces of legislation approved by the new Republican governor in early 1969. But by 1973, voters hadn't forgotten about his signature on the bill and he was out.

What few recall is that all income -- including retirement benefits -- was taxed at a rate of 2.5 percent after the income tax went live 48 years and one day ago.

It wasn't until 1971 that the legislature exempted some retirement income, voting to exclude pension earnings accrued before the Aug. 1, 1969, enactment of the state's income tax. But that wreaked havoc on accountants who had to determine how much of a pension had been generated before the income tax took effect.

In 1972, House Bill 4644 was introduced to remedy the headache. But instead of uniformly taxing retirement benefits, the bill made all retirement income tax-exempt.

The cause was championed largely by suburban lawmakers from both sides of the aisle in a Democrat-controlled House and Republican-led Senate. It was first debated for about 20 minutes in the House on June 6, 1972.

Transcripts from that day show legislators hailing the plan as lifting the "burden" of the tax from elderly veterans, firefighters and police officers trying to make ends meet in "their golden years." Legislators were almost wholly consumed by the cost of calculating the tax on pensions rather than the loss of future revenue.

"Present revenue implications are almost nonexistent," said state Rep. Brian Duff, a Wilmette Republican. "It would cost the state absolutely nothing."

Not a single voice of opposition rose from House members who voted unanimously to approve the retirement income exemption. Senators, taking up the bill on June 19, also seemed more concerned about the fiscal effects at the time than what it would mean to exempt retirement income forever. Save for one man.

Western Springs Republican state Sen. Terrel Clarke was the lone voice questioning the future budgetary impact of the exemption, according to the transcripts.

"Is there a cutoff date?" Clarke asked. "So that some time in the future, as this loss grows, it will be changed so that the state won't be losing, because I see here the statement that the long-run revenue loss from the original bill will grow to more than $200 million per year in 30 years."

Clarke never gets a satisfactory answer from fellow senators supporting the bill, according to the transcripts. He keeps asserting the need for a sunset clause on the exemption to keep the tax rate low and maintain equity.

"We have a principle involved here that I think is important that we recognize it even though we may pass this bill," Clarke stated. "And that is that in so doing, we are for the first time providing an exemption to the income tax law. And I think in the general picture that that is a bad thing."

Clarke would continue to voice his concerns throughout the 30 minutes or so of the bill's continued debate, even suggesting the body had a "conflict of interest" in voting on something that would ultimately benefit them.

In the end, 34 senators voted in favor of the bill that day, one voted present and 14 others were absent.

Clarke cast the only vote against exempting retirement income.

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