income tax – RI Future

January 4, 2015January 7, 2015

RI’s tax cuts for the rich were 2nd biggest of decade

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Kansas’s tax cuts for the rich were one of the biggest state policy stories of 2014. Sam Brownback, an ambitious conservative Republican, swept into the Governor’s office in 2010 and pushed for massive tax cuts for the rich. And he got them. By 2014, the top marginal income tax rate had fallen by 1.65 points, and by 2018, if the law isn’t repealed, the rate will have fallen a full 2.55 points.

The results, predictably, were disastrous. The revenue promised from miraculous economic growth never materialized, and Kansas’s credit rating got cut. Moderate Republicans were livid. And Democrats came within four points of unseating Brownback in the middle of the 2014 red wave.

Since this debacle, there’s been a wave of think pieces about how income tax cuts for the rich as big as Kansas’s are just way too extreme, even for Republicans. But here’s the thing—Rhode Island’s tax cuts for the rich were even bigger. From 2006 to 2010, Rhode Island slashed the top marginal income tax rate for the rich by 3.91 points. That’s compared to 2.55 points in Kansas.

This all got me thinking about a question I’ve been wondering about for a while: In the past decade, has any state cut income taxes for the rich by as much as Rhode Island?

To answer this question, I compiled a list of the top marginal individual income tax rates for each state in both 2004 and 2014, using a database put together by the Tax Foundation, a right-wing think tank.

The only state with bigger cuts than Rhode Island was Montana. At 4.1 points instead of 3.91 points, they weren’t much bigger. And when you start digging into the details, it’s clear they weren’t as extreme as Rhode Island’s.

When Montana’s tax cuts were passed, they were barely projected to cut the wealthy’s tax burden at all. That’s because Montana also capped the deduction for federal income tax at $5,000 (or $10,000 for married couples). Before the law, a wealthy Montanan could deduct the 35% of their taxable income in the top federal tax bracket they paid in federal taxes. Because it’s a big giveaway to the rich, most states don’t do this. The idea was that this system effectively gave a top rate of 7.15 points, so capping the deduction and switching to a top rate of 6.9 points would barely represent a cut for the rich at all. This was key to selling the package.

Now, it turns out that the budget projections Montana Republicans put together were completely wrong. A lot of complications, including the AMT, kept them from raising as much money from capping the deduction as they said they could. The original budget projections showed a mere $6 million decrease in income tax revenue from households making $500,000 or more. The actual reduction was $48 million. Still, capping the big deduction for federal taxes kept Montana’s tax cuts from giving as much to the wealthy as Rhode Island’s. And when they passed the bill, Montana Republicans claimed they were barely cutting taxes for the rich at all.

Montanans weren’t fooled. The next year, the Democrats ran on a message of economic populism. They captured the state House, the state Senate, and the Governor’s mansion—all while Bush was thumping Kerry by twenty points.

Montana and Kansas reveal a lot about why so few Tea Party state governments have gone the full Rhode Island. They’re afraid of a revolt from their own Republicans. When they try, that’s what usually happens.

In Louisiana, Governor Bobby Jindal proposed an even bigger tax cut for the rich than Rhode Island’s. He wanted to eliminate the income tax and pay for it by hiking taxes on the poor and middle class. But Republicans revolted. Even the state’s top big business group opposed the plan. So Jindal had to scrap it.

In North Carolina, a similar proposal died because conservative megadonor Art Pope opposed it. (Pope funds a network of conservative think tanks and politicians, and he got himself appointed state budget director.)

In Alaska, there are no income or sales taxes, since the state gets so much money from oil taxes. So when Republican Governor of Alaska Sean Parnell slashed taxes for the oil companies, even Sarah Palin thought he had gone too far. She was so mad about the tax cuts that she endorsed the Independent-Democrat fusion ticket, which successfully unseated Parnell in the middle of the 2014 red wave.

Sometimes, smart people portray Rhode Island’s experiment in right-wing tax policy as a sort of moderate conservatism, on parallel with today’s more restrained Republican state governments. To be honest, I used to see it this way.

After all, a lot of the policies of the conservative machine that has taken over the Rhode Island Democratic Party really do fall in the mainstream wing of the national Republican Party. Our abortion restrictions, for instance, while more severe than any other blue state’s (according to NARAL’s ranking) are more mild than the extreme TRAP laws some Tea Party governments have pushed through.

Like most Republican states, we do have voting restrictions, including an ID law, but they aren’t quite as strict as what the reddest states have pushed through. Our war on workers, while severe, isn’t quite as bad as what has gone on in states like Wisconsin. And in a few select areas, like marriage equality, our policies have actually aligned with the national Democratic Party.

But when it comes to tax policy, the conservative Democratic machine that runs Rhode Island falls on the extreme right fringe of the national political spectrum. Even the most right-wing Republican state governments balk at tax cuts for the rich as large as what Rhode Island Democrats have done.

August 8, 2014August 8, 2014

Wingmen: Should PVD implement an income tax?

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Would an income tax on people who work in Providence help the local economy by replacing a regressive tax with a progressive one? Justin Katz and I debate the merits and drawbacks to the idea on this week’s episode of NBC 10 Wingmen.

News, Weather and Classifieds for Southern New England

April 3, 2013April 3, 2013

Economists Agree: Income Tax Cuts Didn’t Work

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While conservative activists claim the Ocean State can cut its way back to prosperity, most academic economic studies agree that lowering income tax rates hasn’t worked that way, according to a new report from the Center for Budget and Policy Priorities.

In fact, the study uses Rhode Island’s recent income tax cuts as an example of how not to grow an economy.

Rhode Island, Arizona, Louisiana, New Mexico, Ohio and Oklahoma, says the report, all “enacted significant personal income tax cuts. In every case, proponents claimed the tax cuts would improve the state’s economic standing, just as proponents of similar cuts today are claiming.”

But, according to the study, “that has not worked particularly well in the past and is not supported by the preponderance of the relevant academic literature. The results make clear that deep personal income tax cuts are no panacea for state economies.”

The report uses a quote from then-majority leader Gordon Fox praising the 2010 income tax cuts (here’s the article the quote comes from):

“This new tax rate. . . is certain to create new jobs, spur economic development, put money back in taxpayers’ pockets, and otherwise bring Rhode Island to a position of twenty-first century economic leadership in the region and, indeed, in the country.”

As has been well-documented, the tax cuts were followed by a sharp economic downturn in the Ocean State. According to the new CBPP study, in Rhode Island personal income fell by 2.4 percent; unemployment increased by 3.7 percent and the state’s share of the gross national product dropped by 3.9 percent between instituting the flat tax in 2010 and 2011.

Legislation before the General Assembly this year would reverse the tax breaks for those who earn more than $200,000 a year.

January 30, 2013January 30, 2013

Report Confirms Rhode Island Taxes Are Regressive

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ri regressive taxes — Chart courtesy of WhoPays.org

A new report confirms what progressives have saying for several legislative sessions now: Rhode Island needs tax equity.

According to the nonpartisan Institute on Taxation and Economic Policy report the poorest Rhode Islanders will pay more than twice as much in percentage of income than will the richest residents of the Ocean State. Rhode Island has the eighth highest taxes on the poor in the nation, according to the report.

Executive Director of ITEP and an author of the study Michael Gardiner said:

We know that governors nationwide are promising to cut or eliminate taxes, but the question is who’s going to pay for it. There’s a good chance it’s the so-called takers who spend so much on necessities that they pay an effective tax rate of 10 or more percent, due largely to sales and property taxes. In too many states, these are the people being asked to make up the revenues lost to income tax cuts that overwhelmingly benefit the wealthiest taxpayers. Cutting the income tax and relying on sales taxes to make up the lost revenues is the surest way to make an already upside down tax system even more so.

The report also lists as one of the most regressive features that the state “Fails to require combined reporting to calculate the corporate income tax.” Gov. Chafee’s proposed budget last year suggested implementing combined reporting but the legislature decided to study the issue instead.

Read the entire report here. Or read the Kathy Gregg’s front page ProJo here and Ted Nesi’s blog post here. Nesi and Gregg are Rhode Island’s two most influential journalists, and influential progressives often complain that both have editorial biases against liberal economic policies.

This report forces both writers to acknowledge Rhode Island’s very regressive tax structure, which is something progressives feel is often ignored by the local media even though it is very popular in both the General Assembly – where almost half of the legislature co-signed a tax equity bill last session – and among Rhode Islanders in general – a Fleming poll last year showed almost 70 percent favored a less regressive income tax structure.

This alone will be regarded as a small victory for progressive Rhode Islanders who feel that the mainstream media turns a blind eye to Keynsian economics.

But the Providence Journal’s story goes one step farther, implying in the very first sentence that the report could affect the politics of tax equity at the State House. “As the tax debate begins anew on Smith Hill, a new study has identified Rhode Island as one of 10 states with the highest taxes on the poor,” writes Gregg, who is widely regarded as the most astute handicapper of local politics.

The ProJo story quoted Kate Brewster of the Economic Progress Institute to illustrate how the new report could tip the scales toward tax equity this legislative session.

Kate Brewster, executive director of The Economic Progress Institute in Rhode Island, viewed the report as ammunition for the campaign by organized labor and others to persuade state lawmakers to ask the wealthy to “pay a little more” by creating a new tax bracket. Advocates are drafting a bill that would raise the top rate from 5.99 percent to 7.9 percent on those whose household income tops $250,000.

“This report provides clear evidence that our tax structure is very regressive and policies are needed to improve fairness for the state’s low- and modest-income taxpayers,” Brewster said of the study titled “Who Pays?”

Brewster acknowledged that the sales tax hits the poor more heavily than any of the other taxes do, but she voiced hope lawmakers would look at the “combined impact of all state and local taxes.”

“If you look at the overall impact, it appears there is more room to ask upper-income households to pay more, through the personal income tax,” and to help the poor by increasing the size of the refund available through the state’s earned-income tax credit, she said Tuesday.

November 27, 2012November 2, 2013

RI – What Went Wrong: Tax Cuts for the Affluent

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In the previous installment I discussed the devastation wrought by massive austerity, which was the principle cause of Rhode Island’s terrible jobs picture. The traditional justification from austerity apologists is that those public sector cuts were necessary, and Rhode Island was forced to make those layoffs. Of course, this argument makes no sense in Rhode Island not just because the cutbacks began before the second Bush recession but also because the government found the money for a huge income tax cut for the rich, cutting the top rate from 9.9% to 5.99%. This brings me to the subject of today’s column: taxes.

As I noted in the first column, the bottom fell out of the Rhode Island economy in late 2007, nearly a year before the second Bush recession began. Perhaps it is just a curious coincidence that this happened as the effect of the income tax cuts for the wealthy passed in 2006 began to kick in, but I suspect not. Indeed, there is considerable evidence that it was these tax cuts that triggered the collapse of our economy.

The details of the tax cuts are slightly complicated. The original tax cut passed in 2006 and imposed an alternate flat tax rate that you could choose to pay instead of the traditional tax brackets. This rate started at 8% and fell by 0.5 percentage per year, hitting 6% in 2010, but in 2010, the government overhauled the tax code again in a tax cut aimed primarily at the upper middle class. You can see the three different rate schemes in the graph below.

: Rhode Island tax rates before the 2006 flat tax, the rates after the flat tax (the flat tax, which decreased from 8% in 2006 to 6% in 2010, is shown with the 2010 6% rate), and the current tax rates.

Perhaps the most troubling aspect of these tax cuts is that they were pushed largely by Democrats, an act of conservatism that elated the Wall St. Journal’s editorial board. Although they are often called the Carcieri tax cuts, and he vigorously supported them, much of the impetus came from General Assembly Democrats like Speaker of the House William Murphy (D-West Warwick) and Majority Leader Gordon Fox (D-Providence). Fox predicted that “this new tax rate, as it did in Massachusetts, is certain to create new jobs, spur economic development, put money back in taxpayers’ pockets, and otherwise bring Rhode Island to a position of twenty-first century economic leadership in the region and, indeed, in the country.” To say that did not happen is a severe understatement.

Income tax cuts for the wealthy at the national level provide mild, if inefficient, stimulus for the economy because they are offset by increasing the national debt. (Of course, there are much better ways to spend our nation’s money.) At the state level, however, it’s a different story. Because state taxes are deductible from national taxes, which tax the wealthy at a higher marginal rate, state level income tax cuts for the wealthy result in increasing national income taxes. The tax cuts also made it harder for Rhode Island to capture revenue from Rhode Island residents who have income in other states. Because so many wealthy Rhode Islanders work in Massachusetts, this is a serious issue. States can only tax out of state income if their tax rate is higher than the tax rate in the other state. So lowering Rhode Island’s income tax rate for the wealthy results in Rhode Island collecting less revenue from other states and other states collecting more revenue from Rhode Island, on top of sending more taxes to Washington. The net result is a considerable flow of capital out of the state, which is not good for the economy.

The real devastation from income tax cuts for the rich, though, comes from the spending cuts and property tax hikes that offset them. The previous section discussed the spending cuts, and how they accelerated after the tax cuts. The next section deals with the property tax hikes.

March 6, 2012March 6, 2012

Rhode Islanders for Tax Equity Meets Today

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There’s a broad-based coalition building around a bill that would raise income taxes on the wealthiest Rhode Islanders. The coalition includes legislators, labor leaders, small business owners, parents, college students and a at least one mayor.

Pawtucket Mayor Don Grebian will join the other members of this coalition, called Rhode Islanders for Tax Equity, today at 3:30 at the State House for a press conference to answer questions about the new tax proposal that would raise income taxes on those who make more than $250,000 a year.

“RITE is advocating for a tax policy that will take the burden off of the middle class and ensure the most privileged Rhode Islanders are paying their fair share,” said the group in a press release.

The group estimates the bill could yield $118 million in revenue for the state budget.

Rep. Maria Cimini, a Providence Democrat who sponsored the bill in the House, previously told RI Future: “We’ve really called on low and middle income Rhode Islanders to feel the pain of this recession. I don’t feel that we’ve called on upper income Rhode Islanders to feel that pain or share that sacrifice.”

Cimini will be at the event today, as will the bill’s sponsor in the Senate, Josh Miller, D- Cranston.

Cimini said the bill is different from other tax the rich proposals because the increase would drop commiserate with the state’s unemployment rate. In that way, it will serve as an incentive for the job creator class to actually create jobs.

February 27, 2012February 27, 2012

Proposal to tax the richest Rhode Islanders

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cimini_maria — Rep. Maria Cimini, D-Providence. (photo courtesy of Rhode Island College)

As Rhode Island struggles to pull itself out of the recession many have been asked to sacrifice. Cities and towns have seen drastic cuts in state aid, schools have had their budgets cut, the poor have endured program cuts and public sector employees have had their benefits slashed.

Now it’s time to ask Rhode Island’s wealthiest residents to help out, too.

There are a number of bills before the General Assembly this year that would do this by creating new tax brackets for the state’s wealthiest residents with the most interesting one being a bill sponsored by Maria Cimini, D- Providence.

“We’ve really called on low and middle income Rhode Islanders to feel the pain of this recession,” Cimini said. “I don’t feel that we’ve called on upper income Rhode Islanders to feel that pain or share that sacrifice.”

Her bill, H7729, would increase the amount of income taxes people pay who make more than $250,000 a year from 5.99 percent to 9.99%.

“What this bill does is calls upon people who are better off to chip in during this time of economic crisis,” she said.

A similar bill proposed by Rep. Larry Valencia in the previous legislation was estimated to bring in about $130 million to the state coffers. That’s about a third as much as the landmark pension reform bill passed in the fall saved the state.

The bill would actual restore the tax rate to the exact level that former Governor Donald Carcieri cut it from (at the time, Carcieri said doing so would spur economic development in the state), except instead of being applied to everyone making more than $125,000 – or the richest 20 percent of Rhode Island – it would only apply to those who make more than $250,000 – or the richest 4 percent of the state.

Cimini’s bill also offers an economic incentive for the so-called job creators to actually creating jobs in the state. According to Cimini, the tax rate increase proposed in her bill would drop by one percentage point with every percentage point that the state unemployment rate drops. So if the unemployment rate drops from 10 percent to 9 percent, the tax rate increase would drop from 4 percent to 3 percent. The potential decrease would be capped at the same amount as the proposed increase.

“What this bill does if you do hire people and you do help to lower unemployment in Rhode Island,” she said, “we will recognize those efforts.”

Cimini said there are 37 co-sponsors of the bill – that’s almost half of the 75-member House of Representatives. On the Senate side, Josh Miller, D- Cranston, is expected to introduce similar legislation.

Similarly, Sen. Harold Metts, D-Prov, has introduced a bill that would increase income taxes on people making more than $500,000 by 3 percent. Even Gary Sasse, who helped orchestrate the Carcieri tax cuts, has said that he thinks taxes should be raised on Rhode Island’s wealthiest. But he suggested only raising taxes by less than 1 percent on those who earn more than $400,000 annually, which would only mean an additional $10 million in state revenue.