Could R.I. cash in on D.C. tax cuts? Probably not

by Katherine Gregg
Journal Political Writer

PROVIDENCE, R.I. – The possible moral of this story: Don’t count your windfalls until they hatch.

A report issued by a Washington-based think tank on Wednesday put states across the nation on notice they may get tax windfalls if Congress adopts either one of the “tax reform” proposals touted by candidate-and-now President Donald Trump and Congressional Republicans.

The report by the non-partisan Tax Foundation looks broadly at the potential impact on states such as Rhode Island that use federal adjusted gross income as the starting point for their own income tax calculations – if Congress expands the tax base as a way to lower tax rates.

But it is not clear if Rhode Island is in line for any extra revenue because of changes state lawmakers made to the state’s own tax code in 2011, that eliminated the use of most itemized-deductions and thus, made the state a bit less vulnerable to tax actions by Congress.

“I do not see a windfall based on what I read,” said Paul L. Dion, the state’s chief of revenue analysis, after reading the report.

Among the conclusions the Tax Foundation reached after reviewing the “GOP Blueprint” that House Republicans introduced in June 2016, and President Trump’s tax-cutting proposal on the campaign trail last year:

*”State individual income tax revenues would likely increase due to the large base expansion occurring at the federal level.”

*”The magnitude of revenue of the individual income tax changes would likely be larger than any possible revenue losses from corporate income tax reform.”

While a hypothetical at this point, it is not unreasonable to assume that the GOP-dominated Congress will pass some version.

Both have a similar aim: to reduce the marginal tax rates faced by individuals and businesses while broadening the federal tax base. Both would consolidate the current seven tax brackets into three with rates of 12 percent, 25 percent, and 33 percent, according to the Tax Foundation.

The GOP plan would eliminate all itemized deductions except for the home mortgage interest deduction and the charitable contributions deduction. The largest of the eliminated deductions would be the deduction for state income, sales, property, and real estate taxes. Trump’s plan, rather than eliminating any itemized deductions, proposes to cap them. (The side-by-side comparisons are even more intricate on the corporate tax front.)

In Rhode Island, state leaders say they have not yet given any serious thought to hypothetical revenue gains or losses.

But there is no question that a surge in state tax dollars would help Governor Gina Raimondo make good on her free college-tuition proposal, and House Speaker Nicholas Mattiello on car-tax repeal.

Rhode Island’s current personal income tax rates are 3.75 percent 4.75 percent and 5.99 percent of Rhode Island taxable income. For corporate income taxpayers, the rate is 7 percent of their apportioned net income, unless the company qualifies for a break under the state’s Jobs Development Act. Then it is less.

Since federal AGI is the starting point for Rhode Island’s personal income tax, numerous deductions allowed on a taxpayer’s federal return flow through to a taxpayer’s Rhode Island return, such as: classroom supplies and other “educator expenses,” moving expenses, and student loan interest. Other deductions allowed by Rhode Island include taxable Social Security benefits for people who meet certain age-and-income criteria.

Rhode Island is banking on $3.7 billion in state revenues this year, including $1,267,600,000 from the personal income tax, $167,500,000 from the corporate income tax, and $31 million from the estate tax.

In 1986, state government reaped a massive “windfall,” from taxpayers, as a result of actions taken at the state level in anticipation of a federal tax overhaul that did not turn out as anticipated.

Rhode Island, at that time, was one of only four states with a “piggy-back” tax. The rate was fixed at 22.96 percent of each taxpayer’s federal income tax liability, and state officials anticipated the 1986 federal “Tax Reform Act” would cost the state $24 million in revenues.

At the behest of then-Governor Edward D. DiPrete, lawmakers raised the state’s income tax rate by 7 percent to head off the anticipated losses. By year’s end, however, income tax revenues had surged to $358.8 million, a $73.5 million gain over 1985-86 collections.

Asked about the Tax Foundation report on Wednesday, Mattiello spokesman Larry Berman said the leadership intends to monitor the progress of the tax proposals in Congress and work with tax professionals to “fully understand” how Rhode Island is effected. “Any further speculation would be premature,” he said.

But the Rhode Island Economic Progress Institute, which looks at tax proposals through a prism of how they affect low and modest-income Rhode Islanders, says any gain – if realized – should not be characterized as a “windfall’ if states are devastated by GOP-led budget cuts.

In that case, “it will fall to the states to step in to mitigate the human toll that will result,” said Doug Hall, the Institute’s director of economic and fiscal policy.