Weayonnoh Nelson Davies & Patrick Crowley call out vague claims and weak evidence in RIPEC's anti-millionaires' tax report
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The Economic
Progress Institute (EPI) and Rhode Island AFL-CIO find
that the Rhode Island Public Expenditure
Council (RIPEC)’s recent report, Rhode
Island’s Millionaires’ Tax Proposal: The Economic Risks of Becoming Less
Competitive and Losing Taxpayers, falls woefully short on data
or evidence to justify its claims and opposition to raising taxes modestly on
the state’s highest-income filers.
Here are the Top 5 reasons why the report is unreliable
and misleading – plus a critique of the report’s main data point and
statistical claim:
Reason 1: Failing to connect claims of state tax competitiveness with actual business activity.
RIPEC frequently calls for improving the state’s tax
competitiveness ranking, without ever demonstrating that a better ranking would
lead to “long-term economic growth.” Here is one of RIPEC’s three
recommendations to policymakers: “Instead, policymakers should focus on
improving Rhode Island’s tax competitiveness to support long-term economic
growth. Rhode Island currently ranks 40th on the Tax Foundation’s State Tax
Competitiveness Index (11th lowest), reflecting a relatively weak
competitive standing. Tax reforms, including those to the income tax, would
better align Rhode Island with its peers and improve its position.”
The Tax Foundation’s Index is based on posted tax rates, not even effective tax
liability, and the Tax Foundation has never demonstrated that a state’s
ranking on the Index has any correlation with business starts, expansion, or
hiring, let alone produces these effects. RIPEC wants Rhode Island to
maintain or lower tax rates to improve our ranking on the Index, but there is
no evidence that this would do anything except… improve our ranking on the
Index. Indeed, it would appear that RIPEC’s call for the state to “improve its
position” refers merely to our ranking on the Index rather than to actual
economic activity. Also, what makes Rhode Island – or any state – more
attractive to business owners and families is great schools, affordable housing,
clean and safe communities, better roads and bridges, etc. That is where the
additional revenue from our highest-income filers can go, so Rhode Island
becomes more competitive.1
Reason 2: Overestimating the role of tax rates in
migration decisions.
While RIPEC argues that a new income tax on the
highest-income filers is too risky, it acknowledges that tax rates are
not the only factor in migration decisions. “While taxes are rarely
the sole reason individuals or businesses relocate,” the report reads,
“evidence suggests taxes influence decisions at the margin, particularly when
differences between states are large or when households have greater flexibility
in where they live and work.” RIPEC often cites the Tax Foundation, which
recently concluded that “variations in state tax competitiveness explain
roughly 11 percent of people’s decisions to move between states.”
Interstate migration rates are consistently low, in the low single digits, and
even a major opponent of tax proposals like this says that taxes account for
only 11 percent of an already small number, because net interstate migration
rates rarely go beyond the low single digits. This undermines the weight of
RIPEC’s warnings. Hasbro, for example, recently moved from Rhode Island to
Massachusetts, a state with a millionaire’s tax.
Reason 3: Providing big numbers without context.
RIPEC’s first key takeaway is, “In tax year 2023, 55 percent
of Rhode Island income tax revenue was generated by households earning $200,000
or more, despite these taxpayers representing just seven percent of returns.”
This percentage is meaningless without more context, such as the share of
income, changes in percentages over time, and personal income taxes relative to
total taxes. For example, when you factor in other taxes such as property,
sales, and excise taxes, low-income Rhode Islanders pay a higher share of their
income in state and local taxes than the top one percent, which affects the
overall distribution of tax liability. Additionally, the income gap has widened
over the last few decades, so it is not surprising or unfair that those with
the highest incomes pay more in income taxes, but even that is not shown in
RIPEC’s report. Seemingly big numbers prove nothing without the appropriate
context.
Reason 4: Misrepresenting IRS Adjusted Gross Income (AGI)
data.
Another claim is that “Massachusetts experienced heightened
net domestic out-migration since 2020, totaling roughly 68,000 filers and $12.4
billion in associated adjusted gross income (AGI)
between 2020 and 2023.” The claim of $12.4 billion in AGI loss to Massachusetts
is a fundamental misreading of the Internal Revenue Service (IRS)
data. Most income does not migrate. When someone leaves their job and moves out
of a state, someone else usually takes their job and the income from that job;
the income does not move with the person leaving. If the person leaving is a
professional with clients or patients, those clients or patients will transfer
to a different professional, who will receive the income. In both cases, the
income stays in the state. Looking only at migrants moving into and out of
states overlooks the fact that total employment and aggregate income generally
grow across all states, including Massachusetts and Rhode Island, regardless of
top tax rates.
Reason 5: Making claims sound more substantial than they
actually are by not quantifying them.
The RIPEC report warns of “risk” in its subtitle and in four
other places, without attempting to quantify or assess it. “This shift [if
Rhode Island would adapt a millionaires tax and ‘align itself with the
higher-tax group of states’] carries significant risk because
it could reduce Rhode Island’s ability to retain and
attract businesses and residents—particularly higher-income households that
account for a disproportionate share of economic activity and tax revenues.”
RIPEC cannot and does not claim that the proposal definitely will be
bad for businesses, only that this is a possibility. Also, there is no
explanation of what would constitute a significant reduction
rather than a marginal one. In the context of income from tax proposals that
would raise $135 million to $203 million each year, RIPEC has not shown
anything close to an economic risk on this scale from enacting such taxes.
The Weakness of the Report’s Central Data Point and
Statistical Claim
The main statistical claim (on page eight, with related
Figure 6 on page nine) highlights a 3.21 per 1,000 excess loss of
residents over five years per one percentage point difference in top
tax rates. Here’s why this is neither a surprising nor well-grounded claim:
- While
one might mistake this for an annual rate (and a casual
reader might assume it is), it is actually over 5.25 years, so that it
would annualize to approximately 0.61 per 1,000 residents per year.
That is, even if this measure is a good one, the
difference for a three-percentage-point top tax rate increase proposal –
from say 5.99 percent to 8.99 percent, as with the top 1 percent and
millionaires proposals – would be a loss of fewer than two
additional residents per year, hardly a scary out-migration wave that
could damage the economy in any significant way.
But there is a good reason to believe the RIPEC
estimate inflates and thus overestimates the effect:
As always, this sort of analysis shows a correlation rather
than causation. And the only factor this
statistical analysis considers is the top state tax rates.
- The
analysis does not account for actual, effective tax liability,
which would consider different tax rates for bracket systems, like Rhode
Island has, as well as deductions, exemptions, and tax credits. Someone
looking to relocate primarily based on taxes would want to examine how
much they would actually pay, not just the posted top rate.
- The
analysis includes migration for all income levels – not
just millionaire migration. There is no reason to think that
lower-income and moderate-income households migrating from one state to
another are motivated by the top tax rates, which do not affect most of
them.
- The
analysis does not account for climate. That is, the weather,
not the business climate. People frequently relocate for better weather,
so this ought to be factored in to explain migration.
- The
analysis does not account for housing costs, which differ
across states, and is another reason that drives migration.
- If one
goes with the Tax Foundation conclusion that only about 11 percent of
migration is related to taxes, one might say the effect would be a
loss of less than one-fourth of one person per year for a
three-percentage-point tax increase, from 5.99 percent to 8.99 percent, as
with the top 1 percent and millionaires proposals – hardly a massive
effect or significant risk to the economy.
In addition, there is this critical factor:
- To
anchor the following years in the 2020 decennial census, the data source
for the RIPEC analysis begins with April 2020 data. This was shortly
after the COVID pandemic first hit, disrupting the economy and migration
patterns; those first few months likely saw a lot of migration,
especially college students leaving places like Massachusetts. The
inclusion of this unusual time might have increased migration losses in
some places and gains in others.
In summary, the RIPEC paper provides a weak argument for
rejecting a millionaire’s tax or a top-one-percent tax, which could raise $135
million or $203 million per year in new revenue, respectively. With the
report’s vagueness about the possibility of economic consequences and failure
to quantify risk, RIPEC’s warnings ought not to persuade policymakers or anyone
considering the evidence. RIPEC, along with the Greater Providence
Chamber of Commerce, repeatedly calls for growing the economy and creating
new jobs, but they rarely explain how to do so beyond lowering tax rates on
those with the most resources, placing their faith in trickle-down fantasies
that never seem to materialize.
One should pay the most attention to the report’s last
recommendation and closing paragraph and final ten words: “More broadly,
policymakers should prioritize policies that support economic growth… Sustained
revenue growth will depend on policies that increase incomes, including more
competitive taxes, an improved regulatory environment, and targeted
investments in infrastructure and education to support long-term development.”
Putting aside the unproven approach of enacting “more
competitive taxes,” it could indeed be that an “improved regulatory
environment” would prove beneficial – but it is the targeted
investments that will do the most to boost our economy, including
investments to support directly our state’s tens of thousands of small and
micro business owners. So very few of these are millionaires. Most have incomes
under $85,000, and many need to work second jobs to afford health insurance.
Targeted investments require robust and sustainable revenues, revenues that
Rhode Island can get from a modest increase to our highest-income filers, who
continue to receive even larger tax breaks from the federal government and
whose quality of life will not change.
Weayonnoh Nelson Davies is the Executive Director of the Economic Progress Institute, and Patrick Crowley is the President of the Rhode Island AFL-CIO.
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