Testimony in support of raising the income tax on high income households

May 09, 2012

Submitted by Kate Brewster, April 24, 2012

The Economic Progress Institute supports revising the personal income tax to add a new  bracket, with a higher tax rate, for upper-income households.  This would improve the equity and adequacy of the personal income tax, generating new revenue to invest in programs and infrastructure to move our economy forward.

Adding a new bracket will help improve the equity of our tax system by increasing the progressivity of the income tax by offsetting the regressive sales and property taxes.  Our current tax structure asks the lowest-income Rhode Islanders to contribute twice as much of their income towards taxes than the highest-income households.  I think that most Rhode Islanders would agree that those with the greatest ability to pay should contribute more – or at least the same share – of their income towards taxes as those with the least ability to pay.

The proposals you are considering today will impact a small number of Rhode Islanders. I have provided a handout from ITEP, The Institute on Taxation and Economic Policy, a national non-partisan research organization, that estimates the impact of the different proposals on Rhode Island households.  For the proposals that add a new top rate on taxable income above $250,000, less than 2 percent of taxpayers would see a tax increase and more than 90 percent of the tax change would be paid for by the top 1 percent of taxpayers, those with average incomes of close to $1 million.  If the new top rate was applied to taxable income of  half a million dollars or more only the top 1 percent of tax payers would see a rise in taxes..

It is important to note raising the state income tax will not raise the overall income tax paid by these household by the equivalent amount since state taxes can be written off as an itemized deduction on their federal tax returns.  Because of this “federal offset”, an ITEP analysis found that as much as 30 percent of the state tax increases being debated today will be offset by a drop in federal tax bills.

Second, much of the debate  about raising personal income taxes in Rhode Island has been dominated by the oft-cited myth that there will be an exodus of wealthy households if they are taxed too high.  There is a wealth of research, however, that suggests this simply is not the case. One study looked at national census data from 2008 and 2009, and found that less than 2 percent of households moved to a different state.  Those who did move were predominately young and moving to or from college or to launch a career.

Last, I have provided you with a recent ITEP report examining the economic performance of eighteen states at opposite ends of the spectrum for top marginal tax rates: the nine with the highest top income tax rates, and the nine with no income tax at all.  The found that the nine states with the highest top tax rates were actually doing better than average in terms of growth in economic output per capita and growth in median income, and were exceeding most of the states without income taxes as well.  While this is not to suggest that a higher income tax is a guarantee of faster economic growth, it does suggest that lowering tax rates is not the answer to jump starting the economy.

Business owners need customers, not tax cuts.  Rhode Island’s recovery and future competiveness depend on our ability to educate our current and future workers through strong schools, affordable higher education, and effective job training.  I am sure most of you saw a series that ran in the Providence Journal recently about reinventing Rhode Island, and a recurring theme was the need to improve the skills of our workforce to be able to compete.  Yet last year we cut overall state investments in workforce training by close to 20 percent.  We need to raise adequate resources to invest in these building blocks of economic growth, or we will limit Rhode Island’s opportunities and undermine our own progress.