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Thursday, April 26, 2012

Taxing History

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).