By John Patterson
Daily Herald State Government Editor jpatterson@dailyherald.com
Posted Tuesday, May 22, 2007

SPRINGFIELD — Arguably the single greatest selling point of Gov. Rod Blagojevich’s proposed business tax is his contention it would finally stick it to those big corporations that use the system to avoid paying their fair share of state taxes.

But before you jump on the business-bashing bandwagon, better ask yourself if you, too, aren’t perhaps enjoying a little tax loophole or two. Chances are the answer is “yes.”

Tax breaks on everything from groceries to Grandma’s Social Security check annually reduce the state’s tax take by billions.

For the 2005 budget year — the most recent available, which covered the last half of 2004 and the first half of 2005 — myriad tax breaks enacted over the years reduced the state’s cash flow nearly $6.6 billion.

And while it’s true businesses enjoy lucrative loopholes, many of the biggest breaks are items the average taxpayer takes for granted.

For instance, the single largest tax break is the nearly $1.3 billion the state doesn’t get from the collective grocery and medical shopping tab of Illinois residents.

Usually the state taxes goods at 6.25 percent with the state keeping 5 percent and the remaining 1.25 percent going to the local government, which often charges its own, added sales tax. But the state taxes food, prescriptions and over-the-counter medicines only at 1 percent, with all of the money going to the local government.

Similarly, the state income tax is not applied to retirement income — whether from an IRA, pension or Social Security. If it were, there’d be nearly $828 million more for the state to spend each year.

Of note, the federal government generally taxes such retirement income. Only two other states — Mississippi and Pennsylvania — that have an income tax also exempt all retirement income. Seven others have no state income tax.

Of course few in Illinois view these to be heinous tax loopholes, and any thought of eliminating them is considered political heresy — just ask anyone who’s ever suggested some seniors might be able to pay the state income tax.

A couple of years ago, the Chicago-based Center for Tax and Budget Accountability proposed overhauling the state’s tax system, and among the many changes was a plan to begin taxing pensions and retirement income over $75,000 a year.

The backlash was quick, and that provision was dumped quickly — but not before it essentially made the proposal politically radioactive. Senior opposition forced lawmakers such as state Sen. Susan Garrett, a Lake Forest Democrat, to pull their names from the sponsor’s list.

“Clearly, it was a situation of politics and rhetoric trumping good policy,” said Ralph Martire, the executive director of the Center for Tax and Budget Accountability.

“We really have a hard time, not just in Illinois, but in the nation, having an honest discussion about how to properly assess taxes, so we end up with rates higher than we want them to be because we keep finding things we want to carve out,” Martire said. “There are always winners and losers.”

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