A question for Majority Leader Joe Shekarchi
With
November 3’s results certified, the election after the election has begun. The
race is on to fill outgoing House Speaker Nicholas Mattiello’s
spot as the Ocean State’s most powerful politician.
One
leading contender is Joseph Shekarchi, a Warwick Democrat
who has served as House Majority Leader since 2016. Shekarchi is mobilizing support, capitalizing on his relationships
with colleagues and fundraising prowess.
But
what’s his in legislative record?
In
Rhode Island, the primary vehicle for passing new ideas into law is the annual
state budget, a roughly 500-page document that covers public spending,
taxation, regulation, social services and more — in short, it includes just
about anything legislative leaders want it to include.
As the Speaker’s Number Two in the top-down House of Representatives, Shekarchi has had unique clout to advance his agenda through the state budget.
Legislators who back leadership are often able to find a place for their priorities, just as those who oppose leadership are iced out of the process. With outsized influence and many worthy causes to choose from, a legislative leader’s choice of what to fight for says a lot about that lawmaker.Shekarchi recently made the choice to fight for a big tax loophole for the rich. What should his colleagues make of that?
During
the 2020 budget-writing cycle, the Majority Leader championed a measure to help
business owners avoid paying federal taxes. His proposal, wedged into the budget and signed into law
with the rest of the package in July 2019, was aimed at taxpayers who own
pass-through entities — tightly-held companies whose income is taxed at the
individual level of the companies’ owners, not the corporate level.
Some pass-through owners, like other wealthy taxpayers, were negatively impacted by the federal $10,000 maximum on state and local tax deductions enacted by the 2017 Tax Cuts and Jobs Act. Shekarchi’s legislation offers a workaround to the federal cap, in effect allowing pass-through business owners to report income related to the entity as corporate income instead of personal income.
The
change in reporting allows these taxpayers to deduct state and local taxes paid
from their federal tax calculation with no limit. While the workaround does not
affect state or local government revenue, it does give business owners a big
break on their federal taxes.
“I’m
working hard to push this bill through,” Shekarchi told GoLocal Providence’s Kate Nagle in
March, as General Assembly consideration of the budget was revving up. Shortly
after Governor Gina Raimondo signed the final
budget in July, Shekarchi told Bill Bartholomew on an episode of the Bartholomewtown Podcast, “I’m proud to say that we have a
tax cut in the budget for small business. That’s something that I worked on
very hard.”
In
Shekarchi’s legislation, the biggest breaks go to those with the highest
incomes. But the Majority Leader didn’t sell it that way to colleagues and the
public — and that’s part of the problem. Instead, in many op-eds and media
appearances about the tax break, Shekarchi touted that his tax change would
help struggling mom-and-pops and everyday Rhode Islanders.
The
federal cap on state and local tax deductions “affects about 30 percent of
Rhode Islanders, and they will see a tax cut on their tax returns next year,”
Shekarchi told Bartholomew. “30 percent of Rhode Islanders will see, according
to the Pew Institute, a benefit from this. So why not do it?” He told Nagle
that his bill “affects about 39 percent of Rhode Islanders.”
A Warwick Beacon op-ed cited similar statistics: “In Rhode
Island, 33 percent of filers use [the deduction], and, on average, they claimed
$12,434 in 2015, according to research by Pew Charitable Trusts.
Rhode Island is one of 19 states where the average SALT credit exceeds the new
$10,000 cap.”
In
a press release highlighting his legislation,
Shekarchi even took a jab at President Donald Trump, a driving
force behind the new federal tax law: “Our small businesses are the backbone of
our economy, and face enough challenges without being saddled with new tax
burdens by President Trump’s tax plan. We’ve found a viable method to help
their owners get credit for the taxes they already pay, so their businesses are
not disrupted, forced to make cuts to their workforce or worse, to close.”
Rhetoric
aside, Shekarchi’s tax law and the Trump tax law largely benefit the same
group: the one percent. Let’s break down the Majority Leader’s claims and where
they fall short.
First, there’s the proposition that everyday Rhode Islanders were slammed by the federal cap on state and local tax deductions. The Majority Leader is correct that, before the 2017 federal tax law, a third of Rhode Island taxpayers itemized state and local taxes on their federal filings.
He appears to be
referencing this 2018 issue brief by the Pew Charitable Trusts,
which finds that 33 percent of taxpayers claimed the deduction in 2015, and,
among those who claimed it, the average deduction was just over $12,000.
But
here’s where the wheels start to come off. Shekarchi’s comments imply that one
in three taxpayers has been harmed by the cap on state and local deductions,
and, in the inverse, one in three “will see … a benefit” from the state-level
workaround. This is nowhere near true — and it masks upside-down distributional
effects of his legislation.
By and large, Shekarchi’s bill only touches the top one percent. That’s because, to benefit at all from the state-level tax change, one must first owe more than $10,000 in state and local taxes and opt to itemize.
People itemizing state and local tax liabilities of this size tend to have high incomes — especially after the 2017 federal expansion of the standard deduction. Rhode Islanders in the bottom 99 percent have been almost universally unharmed by the federal cap, and thus don’t stand to gain from Shekarchi’s workaround.
Among Ocean State taxpayers with incomes below $500,000 (the threshold to reach the top one percent in Rhode Island is $467,700, according to the Institute on Taxation and Economic Policy), roughly 50,000 claimed the state and local deduction in 2018. Their average deduction was $7,236, far below the $10,000 ceiling. The $12,434 average deduction Shekarchi cites is driven to such heights by the one percent, not everyday Rhode Islanders.
Then
there’s the fact that, to see any direct benefit, one must also own a
pass-through business that sees a large influx of cash each year — enough to
accrue more than $10,000 in state and local taxes on one’s share of the gain
(in addition to tax owings from from real estate and other sources).
So
who receives pass-through corporation income in Rhode Island? You guessed it:
the one percent. In 2018, nearly 28,000 Rhode Island taxpayers reported a total
of $1.82 billion in income from pass-through entities including partnerships and
S corporations. 48 percent — half of every dollar — flowed to the richest one
percent, those with incomes over $500,000. The middle class, meanwhile, reaped
far less: Just 14 percent went to individuals with incomes between $50,000 and
$200,000.
There’s one more justification Shekarchi offered for his bill: It was needed to help even out the playing field between big business and small business. The 2017 federal tax law slashed the corporate tax rate paid by larger C corporations and less dramatically decreased the personal income tax rates paid by owners of smaller pass-through companies, the argument went.
And the state-and-local
deduction cap applied to personal income was not applied to corporate income.
“The federal government, when they enacted the Trump tax overhaul last year,
they gave favorable tax status to C corporations, but not to S corporations and
not to small people,” Shekarchi told GoLocal Providence. “So we’ve made some
adjustments — or proposed to make some adjustments — in our tax code that would
level the playing field.”
But this is not entirely true either. Pass-through companies have historically enjoyed a variety of tax advantages over companies that are taxed separately from their owners — advantages which warp the field in their favor. For instance, a pass-through can use business losses to offset personal income taxes, while C corporation losses can only cancel out income within the corporation. And the Trump tax law did, in fact, cut taxes for pass-through owners: It created a new deduction which reduces the top marginal tax rate on most forms of pass-through income from 39.6 percent to 29.6 percent.
As
General Assembly leaders developed the fiscal year 2020 budget, advocates
pressed for measures to support Rhode Islanders. Among their ideas: Raising the
minimum wage, expanding the earned income tax credit, creating a funding stream
for affordable housing, ensuring gender-pay equity, increasing cash support for
out-of-work parents, expanding tuition-free higher education to Rhode Island
College — the list goes on. None of these made it into the final budget.
From
his influential perch, the Majority Leader prioritized a tax loophole for the
rich. And to sell the loophole to colleagues and constituents, he employed
misleading statistics. Why?
It’s
possible Shekarchi was just taking cues from Rhode Island business leaders, and
was unaware that he had been led askew by off-the-mark talking points. Or
perhaps the Majority Leader’s plan for economic development is more closely
aligned with that of Speaker Mattiello: cut social services, cut government,
cut taxes and hope job growth follows. Either way, both colleagues and
constituents deserve an explanation.
By
many accounts, Shekarchi is well-liked and respected by his colleagues. But
before he takes the speaker’s gavel, he needs to demonstrate that he will
govern in the interest of all Rhode Islanders — not just the one percent.
Andy Boardman writes about
economic policy in Rhode Island. He is on Twitter at @_andyboardman.
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