Tax Fairness Policy

The Current System is Broken

Our tax code is extremely regressive. Our state’s wealthiest residents shoulder a far lighter tax burden than everybody else. In Rhode Island, the poorest 20% (people who make less than $21,700 annually) pay 12.1% of their annual income in state and local taxes.[1] The richest 1% (people who make over $467,700 annually) pay only 7.9% of their annual income in state and local taxes.[2] Everybody in the middle pays between 9% and 10%.[3] Clearly, Rhode Island’s richest residents are not paying their fair share.

This did not happen by accident. Over the past few decades, the super-rich have steadily made our tax code more and more regressive by buying off corrupt politicians, persuading them to cut taxes for the 1% again and again. For example, in 2006, the state passed a tax reform package that included, among other things, a large reduction on the marginal tax rate applied to the richest 1%. This tax cut for the top 1% has already cost Rhode Island well over a billion dollars in lost revenue over the last thirteen years.[4] This has caused immense damage to our state. Our public schools are crumbling, our roads and bridges are poorly maintained, our transition to clean energy is too slow, our job training and childcare programs are inadequate, and our public health services are woefully underfunded—all because the super-rich insist on paying lower taxes than the rest of us.

 

The 1% Must Pay Their Fair Share

This ends now. Rhode Island must create a new tax bracket for the top 1% and raise the marginal tax rate on this group from 5.99% to 10.99%. Every member of the top 1% in Rhode Island earns over $467,700 per year.[5] On average, each member of the top 1% in this state has an annual income of $1,123,300.[6] Our proposed reform would charge them just five more cents for every dollar they make over $467,700 in a given year. This proposal would generate over $170 million each year.[7] Our plan will help to reverse the enormous damage that perpetual tax cuts on the 1% have wrought on our state. By ensuring that the wealthiest 1% begin to pay their fair share, Rhode Island will generate money needed to improve our schools, roads, job training programs, public health, and clean energy transition. This is a crucial step towards creating an economy that works for all Rhode Islanders, not just the 1%.

 

The Public Supports Ensuring that the Rich Pay Their Fair Share

62% of Americans believe that the rich pay too little in taxes.[8] This belief is consistent and longstanding. For decades, polling has indicated that a majority of Americans—and usually a large majority—believe that the wealthy should be taxed more heavily.[9] The idea is especially popular among Democrats. Research suggests that 75% of Democrats believe that the rich should pay higher taxes.[10] And 62% of self-identified Independents feel the same way.[11] In Rhode Island, where Democrats substantially outnumber Republicans, our elected officials have no excuse not to heed the clear wishes of the public and force the very wealthy to begin paying their fair share. The Rhode Island Political Cooperative will finally give this majority a voice and promote a progressive tax system that works for the benefit of the many, not the few.

 

The Rich Will Not Leave

When confronted with the possibility that the state might raise their taxes, the ultra-rich routinely threaten to leave. This is an empty threat. Different states already tax the rich at very different rates. So if they wanted to move to a state with a lower tax burden, they already have the ability to do so. But it turns out that the super-rich move less frequently than everyone else, despite the fact that they have the option of moving to lower-tax states. In an average year, only 2.4% of American millionaires move to another state, whereas the general population has a migration rate of 2.9% per year.[12] Furthermore, millionaires receive a net tax advantage only 15% of the time that they do move to another state.[13] This means that, in any given year, only about 0.3% of American millionaires actually move to a state with a lower tax burden.[14] Moreover, three of the five states with the highest concentration of super-wealthy individuals impose an additional, specific tax on their millionaire residents.[15]

A moment’s reflection suggests that this data is actually quite unsurprising. People choose where to live based on a myriad of factors, and the relative tax advantage of different states is only one of them. Additionally, the typical millionaire is not young, which means that they are likely to have a longstanding social network that makes it inconvenient for them to move. Most importantly, the majority of millionaires are married and have children at home.[16] These family responsibilities make interstate migration unattractive.

This Will Improve Our Economy

Contrary to the claims made by the ultra-rich and their political allies, raising taxes on multimillionaires will actually improve our economy. By raising taxes on the 1%, Rhode Island can generate revenue necessary to improve education, job training, childcare, infrastructure, and public health. These are investments that matter a great deal to talented young people who are deciding where to live. Unlike the super-rich, who are largely older and settled, young people are far less likely to be tied to a specific state. In fact, young college graduates are the most mobile group in the country. A recent college graduate is four times more likely than the average millionaire to move to a new state.[17] Ensuring that the top 1% pay their fair share will allow us to invest in repairing our infrastructure, launching new job training programs, and improving our education system. This will make Rhode Island more attractive to young and highly skilled prospective residents, as well as the businesses that rely on them, contributing to a more vibrant and dynamic economy.

 

Citations

[1] Meg Wiehe, Aidan Davis, Carl Davis, Matt Gardner, Lisa Christensen Gee, Dylan Grundman, “Who Pays? A Distributional Analysis Of The Tax Systems In All 50 States” (Oct. 2018), p. 111, available at https://itep.org/wp-content/uploads/whopays-ITEP-2018.pdf.

[2] Id.

[3] Id.

[4] According to publicly available data published by the Rhode Island Division of Taxation, there were 22,335 individuals in RI who filed tax returns above $200,000 in 2017. See Rhode Island Division of Taxation Resident Income Tax Return Summary Tax Year 2017, available at http://www.tax.ri.gov/reports/SOI%20Reports/TY2017/Resident%20Income%20Tax%20Return%20Summary%20-%20TY%202017.pdf. This group of 22,335 individuals cumulatively reported $10.4 billion in adjusted gross income (AGI). The top 1% of income earners represents 20% of the tax returns above $200,000 and receives 57% of that group’s AGI. Therefore, the top 1% within Rhode Island is comprised of 4,467 individuals (because 22,335 x 0.2 = 4,467). The top 1% collectively earned $5.9 billion in AGI (because 10.4 x 0.57 = 5.9). According to the same data published by the Rhode Island Division of Taxation, the current top marginal tax rate of 5.99% translates into an average effective tax rate of 5.4% for individuals earning above $200,000. Collecting 5.4% of the AGI earned by the top 1% currently generates $318 million. Since we know that a 5.99% marginal tax rate generates $318 million in revenue from the top 1%, we can calculate the revenue that the previous marginal tax rate (9.9%) would have generated in each year since 2006 if the state had not reduced taxes on the top 1% to 5.99%. We then adjusted these calculations for each year to account for the average income growth of the top-earning 1% of Rhode Islanders. For more information about the income growth for the top-earning 1% in Rhode Island, see Estelle Sommeiller and Mark Price, “The New Gilded Age: Income Inequality In The U.S. By State, Metropolitan Area, And County” (Jul. 2018), available at https://www.epi.org/publication/the-new-gilded-age-income-inequality-in-the-u-s-by-state-metropolitan-area-and-county/. Lastly, we adjusted the calculations for the years between 2007 – 2010 to reflect the fact that the tax cuts were phased in gradually over that time. This model reveals that the aggregate revenue lost by the state by reducing the tax rate on the 1% in 2006 easily exceeds $1 billion. This revenue calculation model was developed by economic analyst Tom Sgouros.

[5] Meg Wiehe, Aidan Davis, Carl Davis, Matt Gardner, Lisa Christensen Gee, Dylan Grundman, “Who Pays? A Distributional Analysis Of The Tax Systems In All 50 States” (Oct. 2018), p. 111, available at https://itep.org/wp-content/uploads/whopays-ITEP-2018.pdf.

[6] Id.

[7] Using the same revenue calculation model discussed in footnote 4, we can calculate that if a 5.99% rate generates $318 million in revenue from the top 1% each year, then a marginal tax rate of 10.99% would generate an additional $265 million annually. After subtracting one third of this total to account for increased tax avoidance, the aggregate sum of money that would be generated by our proposal to raise the marginal tax rate by 5% on the highest-earning 1% would well exceed $170 million. Additionally, this model does not account for income growth since 2017, so $170 million is a conservative estimate. The true total revenue generated by this tax reform would likely be even higher. This revenue calculation model was developed by economic analyst Tom Sgouros.

[8] Gallup News Service, “Americans’ Views of Corporations, Other Americans and Their Tax Burdens (Trends)” (Apr. 2018), available at https://news.gallup.com/file/poll/232526/180416FairShareTaxes.pdf.

[9] Id.

[10] Frank Newport, “Americans Still Say Upper-Income Pay Too Little in Taxes” (Apr. 2016), available at https://news.gallup.com/poll/190775/americans-say-upper-income-pay-little-taxes.aspx.

[11] Id.

[12] Dacey Anechiarico, “No Need for the MythBusters, the Millionaire Tax Flight Myth is Busted Again” (May 2018), available at https://itep.org/no-need-for-the-mythbusters-the-millionaire-tax-flight-myth-is-busted-again/.

[13] Cristobal Young, “If You Tax The Rich, They Won’t Leave: US Data Contradicts Millionaires’ Threats” (Nov. 2017), available at https://www.theguardian.com/inequality/2017/nov/20/if-you-tax-the-rich-they-wont-leave-us-data-contradicts-millionaires-threats.

[14] Vanessa Williamson, “What Republicans and Democrats Can Learn from ‘The Myth of Millionaire Tax Flight’” (Apr. 2018), available at https://www.taxpolicycenter.org/taxvox/what-republicans-and-democrats-can-learn-myth-millionaire-tax-flight.

[15] Dacey Anechiarico, “No Need for the MythBusters, the Millionaire Tax Flight Myth is Busted Again” (May 2018), available at https://itep.org/no-need-for-the-mythbusters-the-millionaire-tax-flight-myth-is-busted-again/.

[16] Cristobal Young, “If You Tax The Rich, They Won’t Leave: US Data Contradicts Millionaires’ Threats” (Nov. 2017), available at https://www.theguardian.com/inequality/2017/nov/20/if-you-tax-the-rich-they-wont-leave-us-data-contradicts-millionaires-threats.

[17] Vanessa Williamson, “What Republicans and Democrats Can Learn from ‘The Myth of Millionaire Tax Flight’” (Apr. 2018), available at https://www.taxpolicycenter.org/taxvox/what-republicans-and-democrats-can-learn-myth-millionaire-tax-flight.