You might have heard this one before … a working class couple in New Jersey, struggling to make ends meet, vowing to hold onto what they’ve got. The song, of course, is “Living on a Prayer” by Bon Jovi. It’s the story of young Tommy and Gina, sticking together in their world of underemployment.
Sure, it’s almost 30 years old now, and I’ve heard it a thousand times, but this last time it had me thinking: What if modern-day Tommy and Gina moved from the Jersey Shore to Illinois in 2010 and both land jobs making $40,000 per year and, for the sake of this story, let’s assume it never changes. Gina gets pregnant and gives birth to a healthy baby boy, Jimmy, on Jan 1, 2011. Coincidentally, that’s the same day the Illinois income tax hike takes effect, which raised the rate from 3% to 5%. Now let’s see how this tax hike follows Jimmy through his life.
The higher tax amounts to an extra $1,600/year out of Tommy’s and Gina’s $80,000 yearly income. That’s not chump change for a working couple. Unfortunately for Jimmy, that’s also his college savings. Even worse, he’s too young to understand the concept of future value. You see, $1,600 invested yearly for 17 years, compounded at 8% interest (the same rate of return the public unions assume for their public pensions), comes out to $54,000. So while the state took an extra $27,200 from Tommy and Gina during those 17 years, it’ll cost Jimmy twice that much. But it gets worse.
Jimmy still has to pay for college. Luckily, he qualifies for a loan. A $54,000 loan that, at 5% interest over 10 years, comes out to $68,730 total. So while the state burned through “their” $27,000 long ago, Jimmy is now out $69,000. Sounds bad, but at least that’s the end of it, right? Think again.
Jimmy took a finance class in college and learned the concept of opportunity cost. By having to pay $573 monthly in student loan payments for 10 years, Jimmy forgoes the opportunity to invest that money. Once again, assuming the same rate of return the public unions use for their pensions, the future value of 10 years of those student loan payments is $105,000. Jimmy, 32 years old now, could sure use some good news. Unfortunately, it’s not coming anytime soon, because …
Jimmy needs to retire at some point. Jimmy is no fool, and in spite of all this, he managed to set aside some money into an IRA. But he wondered what might have been. What would that $105,000 amount to at age 67 if it had just sat there and compounded interest for decades? At the time of Jimmy’s retirement, what was the true cost of that “2%” tax hike on his parent’s income while he was growing up?
$1.5 million. Jimmy sighed. Illinois shrugged.
On Election Day, ask yourself, have any of our current elected officials proven they can manage money better than our struggling family here? Whom exactly is the tax hike supporting? Why are they so brazenly leveraging your child’s lifetime financial well-being?
Now I know what Bon Jovi meant when they sang, “You live for the fight when that’s all that you’ve got.” Save us the fight and let the income tax hike expire as promised.
Nick Binotti is an Oak Park resident.