Too Taxing for You?

Too Taxing for You?

By Patrick F. Cannon 

As the Republicans in the House and Senate wrangle over the final form of the so-called tax reform bill (reform takes 500 pages?), I thought I would throw out some facts that you might find of interest.

Approximately 45 percent of taxpayers pay no income tax at all. Indeed, nearly 20 percent are eligible for the earned income tax credit – in effect, they not only pay no taxes but the Federal government actually gives them money! In addition, most are also receiving food, housing and other assistance. The new tax bill would not fundamentally change any of this.

Nor is it likely to fundamentally change who actually pays the income taxes. The top earners – the reviled one percent – pay 40 percent of the total, while the top 10 percent pay 71 percent. The problem isn’t who pays the taxes – the problem is a Congress that historically doesn’t seem to care if the income and expenditure columns match.

Of course, this doesn’t mean that the lowest earners don’t pay any taxes. The payroll tax – for Social Security, Medicare, unemployment and disability insurance, etc. – is paid by everyone who gets a paycheck. The rate is currently 7.65 percent, matched by the employer. Taxable income is currently capped at $127,200. I have always thought that one way to make the fund at least partially viable would be to eliminate the cap. It wouldn’t exactly be fair, but hey, everyone likes to soak the rich, right?

Here’s one for you Illinois residents. We have the fifth highest tax burden of all the states, and the highest paid state employees at an average of nearly $60,000 a year (adjusted for cost of living). They also enjoy much better health benefits than you do (unless you too work for the State or are a member of Congress). Oh, and they have pretty nice pensions. Alas, there still isn’t enough in the pension funds to pay them without even more tax increases. Why be number 5 when you could be numero uno? Then at least we could lead the country in something.

Although it can be a bit more complicated, you can now deduct your state income and local property taxes from your Federal return. Although hard to believe, the Illinois income tax rate of 4.95 percent is not even close to the highest (thank you California); it is the total tax burden that gets us to number 5.  Although it’s hard to predict what the final tax bill will look like, one version would eliminate the deduction for state income taxes and limit the real estate tax deduction to $10,000. If you’re in Wyoming, Texas, Nevada, Florida or Alaska, this would be a matter of little concern.

As a matter of interest, the average deduction for real estate taxes in Illinois is $6,500. I couldn’t find a breakdown, but I suspect the average is higher in Chicago and the so-called collar counties. In any event, for most taxpayers, the $10,000 limit would not be a problem. Again, it will be the upper middle class and the wealthy who would be most affected.

Are you sufficiently bored? I am, but let me leave you with this final thought. I’m retired and I’m not the least bit tempted to move south, but I know quite a few people who have established permanent residency in states like Florida and Texas to avoid Illinois’ high taxes. In many cases, they get to spend the good weather months in the Chicago area before heading south for the winter (six months and 1 day is the usual). And I won’t even begin to talk about the cost of doing business in Illinois. Let me close by mentioning that my son lives in Florida. He works for one of America’s major banks, which is in the process of moving all their computer operations from high tax areas to the Sunshine State. People are even moving to Wisconsin and Indiana, for God’s sake!

Copyright 2017, Patrick F. Cannon

4 thoughts on “Too Taxing for You?

  1. Life in Lincolnland must be terribly arduous if it drives people to seek refuge in places like Indiana. (Wisconsin at least has cheese, fireworks and ….. did I mention cheese?)

    In fairness, Hoosiers do pay less tax: 3.3% on income, 7% on sales, and 1% on assessed valuation of residential property. Their state budget is balanced, and the cost of living is low. On the same salary, a fellow can live in Indianapolis for 18% less than in Chicago and pay about 34% less for housing.

    Now Indy is no Chicago. It has a Circle instead of a Loop and it lacks a big lake. There is no major league baseball (maybe the White Sox might be interested). The restaurant scene is decent, provided you don’t like Italian food. Crime, as in Chicago, depends on where you live. The climate is comparable if slightly less harsh; there is a nice zoo (ranked second only to San Diego’s). Fishers, a town on Indy’s NE border with an 11.6 projected job growth rate, is ranked by Money magazine as the best place to live in the US (nearby Carmel, which earned top ranking a few years ago, came in at No. 16). But the Chicago area also has ranking suburbs.

    So why are Illinoisans running with their wallets for the border? You mention state employees, but Indiana has about the same number per capita as Illinois. Illinois collects plenty of taxes; where is the money going? One answer might be pensions and salaries. Indiana has the lowest household burden in the US to fully fund public pensions. It also pays its employees about a third less.

    The biggest factor, though, may be political. Indiana was lucky to have finance genius Mitch Daniels, and later frugal Mike Pence, both honest men, serve as governor. A few years ago the state actually reimbursed taxpayers because it had a budget surplus! Illinois has had the snake Madigan and his crawling minions in control for decades. The effects of corruption often escape statistics but are felt by everyone.

    If Congress removes the state and property tax deductions but lowers the top tax rate, the productive people of Illinois and other high tax states may catch a break. However, do you see much chance of Durbin and Duckworth or the eleven Democratic representatives supporting tax cuts for Trump and the filthy rich?

    Liked by 1 person

  2. Except for businesses tax bill is more or less a wash. Had hopes for reform but no one wants to give up their cut. It’s about best one can expect in this era of strict party voting.

    Liked by 1 person

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