Budgeting for Disaster: Taxing
History
Is it really too soon to modify our tax
code?
In the discussions of taxes at the State
House, one line you hear a lot this year is that our state’s new income tax
code is new and we should give it time to see how it works out.
That’s what House Speaker Gordon Fox has said, and I’m
hearing that it’s the line of the day on Smith Hill, available from any of the
House or Senate leadership.
This is, of course, a silly point to make.
The tax changes made last year basically just baked in the low taxes on
rich people offered by the “flat tax” alternative.
It used to be that a
rich person could choose whether to pay tax under the tax code everyone else
uses or using the flat tax limit, and now the flat tax limit is part of the
code everyone else uses.
This part may be new, but the overall “strategy”
at issue — lower taxes on rich people, expect economy to get better — has been
the order of the day in Rhode Island
for a long time. To illustrate what’s really been going on in Rhode Island tax policy,
I put together the following graph.
The blue line is the effective RI income tax
rate on a fairly typical taxpayer in the top 1% over the last 16 years, with
the various cuts that taxpayer has received indicated. These cuts don’t
count tax credits like the film production or historic structures credits,
which are typically only available to high-income individuals and which make
the effective rate even lower.
The black line indicates the effective tax
rate on the median taxpayer (the 50th percentile). You can see a slight
decline in the 1997-2002 period, but the other changes didn’t do much of
anything for them.
The unemployment rate, of course, has
nothing to do with the tax rate, except as a rhetorical club used to beat
people about the head and neck. There is no evidence that it has any
causal relationship with the state tax rate (in either direction), but the
relationship between taxes and “job creators” is commonly invoked to persuade
lawmakers to support lower taxes.
I’ve included the unemployment rate on
the graph as a service, so you can see how little is has to do with the
movement of taxes.
One more thing you should know about this
graph. There is some evidence available that the 2012 tax changes raised
taxes substantially on the middle percentiles of taxpayers.
Unfortunately, it’s premature to say more than that, since the data won’t
be available until later this year, at the earliest.
The House Finance Committee held a hearing
on several bills designed to raise taxes on the top 1% Tuesday afternoon at
4:30pm in State House room 35.
Rep. Maria Cimini (D-Providence) is the
prime sponsor (with 36 co-sponsors) of a bill to raise the taxes on people
earning more than $250,000 per year by four percentage points, with that top
rate coming down as the unemployment rate also goes down.
Think of it as
a “pay for performance” clause for rich people. There are also bills by
Rep. Larry Valencia (D-Charlestown,
Exeter, Richmond) and Scott Guthrie (D-Coventry) that will have more or less
the same effect, though the income limits and tax changes are slightly
different (neither of those bills have the unemployment clause).