Wednesday, January 17, 2024

Rhode Island's state and local taxes hit low-income people the hardest

Data shows RI's rich pay the least and the poorest pay the most 

STEVE AHLQUIST

The Institute on Taxation and Economic Policy [ITEP] released a report on January 9 entitled Who Pays? a comprehensive report that “assesses the progressivity and regressivity of state tax systems by measuring effective state and local tax rates paid by all income groups.” In other words, the report assesses the fairness of our state and local tax system.

In national rankings featuring all 50 states and the District of Columbia, Rhode Island ranks #31 out of 51 in terms of having a regressive tax structure, meaning that the top one percent, those earning more than $626,200 a year, are paying 8.6% of their income in taxes while those in the lowest 20%, earning less than $22,300, are paying 13.3% of their income in taxes.

I spoke to Alan Krinsky, Director of Research and Fiscal Policy at the Economic Progress Institute [EPI] to dig into the report with me. EPI is a “nonpartisan research and policy organization dedicated to improving the economic well-being of low- and modest-income Rhode Islanders.”

Steve Ahlquist: Rhode Island has the country's 31st most regressive state and local tax system. One thing that jumped out at me is that income disparity in Rhode Island grows larger after state and local taxes are collected. Does this mean that the state's tax policies exasperate the problem of income disparity?

Alan Krinsky: Yes. In other words, before we involve state and local income taxes, there are disparities, [but] once we add in state and local taxes, the disparities are somewhat worse. We want to get to where the state isn't making things worse.

Steve Ahlquist: And maybe we could get to a place where the state is making things a little bit better, especially for low-income people.

Alan Krinsky: Correct. And I think about six states on the list do that.

Steve Ahlquist: The report separates key elements of Rode Island's tax policy into two broad categories, “progressive” and “regressive.” Presumably, we could move towards a more fair tax policy by lessening the impact of regressive policies and improving the impact of progressive policies. So what should we be doing?

Alan Krinsky: I think there are a couple of ways to go about this and things that could be done in the short term during this legislative session. The first thing I would do is make the personal income tax system more progressive by increasing taxes on the top 1%. Looking at the ITEP charts, people in the top 1% of income pay the lowest percentage of their income in state and local taxes compared to the other groups - and a lot less than the lowest 20%.

Doing that, by itself, won't make our tax system equitable. That won't get us to a place where the state is not making things worse than before.

So at the other end would be something like decreasing the tax burden on the lowest 20% by increasing the refundable state Earned Income Tax Credit and creating a refundable child tax credit. Strengthening the estate tax would also help because that's mostly affecting people at the very top of the income chart.

Steve Ahlquist: One thing I hear from the other side of this issue is that sure, the richest 1% are paying less, as a percentage of their total income, but overall, they contribute more to the system than people at the lower end.

Alan Krinsky: In terms of absolute dollars, that's correct. The people who have the highest income - I don't have the numbers - but they are paying more in absolute dollars. But if we think about the tax burden and tax fairness, we can see that the tax burden on them is less than it is on someone who's paying an absolute amount that's less but is consuming a larger portion of their income.

Steve Ahlquist: It seems to me that a truly progressive tax structure would be taxing the top 20% at a level that is higher than those in the bottom 20%.

Alan Krinsky: We do have a somewhat progressive income tax structure, but it's not progressive enough to shift that burden.

Steve Ahlquist: Nationally, we're hearing President Joe Biden talk about what he's calling middle-out economics, and some people even use the term bottom-up economics as opposed to the failed policies of top-down or trickle-down economics.

What ITEP seems to be suggesting is that states can align themselves with these ideas by improving the status of lower-income and middle-income people by shifting some of the burden to the highest-income earners. In this way, we can get to a more fair tax system and also maybe do good things for the economy as a whole. Does that make sense? And does that make sense in the current political climate?

Alan Krinsky: I don't know that I can speak to the political climate in Washington, but it makes sense. One of the interesting things in the ITEP report is that it demonstrates a correlation between the progressivity of the tax system and the amount of revenue that's raised. When the tax system is more progressive overall, you're raising more revenue and providing more and better services. What you're talking about, from a national perspective, fits in with that model.

Another thing I'll point out: Even though Rhode Island ranks 31 out of 50 states overall for our regressive tax system, we are one of the 10 worst states for the lowest income group, the bottom 20%.

Steve Ahlquist: So basically you're saying that the people in the lowest quintile are being hit harder than the data might suggest by our 31st place ranking.

Looking at the following chart, you can see Rhode Island taxes its poorest 20 percent of earners at rates greater than Florida, Louisiana, Arkansas, and Texas.