We are now in the season of May Breakfasts, and I hope many of you enjoy the occasion. In this week’s letter, I will discuss two ways in which the Governor’s budget proposes changes to the State income tax.
A. The “Millionaire Tax”
1.The Governor’s Proposal
The State’s personal income tax currently consists of three brackets with marginal tax rates beginning at 3.75%, rising to 5.99% of income exceeding $181,650. The Governor’s budget proposes adding a fourth bracket of 8.99% for income in excess of $1 million. In its Presentation, the Governor’s office noted that the new top rate would be comparable to those in Massachusetts, Maine and Vermont. The change is projected to generate additional revenue of $67 million in its first (partial) year, and $135 million in future years.
2.Policy Justification
The Governor justified the proposal on grounds of sustainability and equity. The federal tax law enacted last year (HR-1), reduced federal funding for a broad range of federal aid programs that help Rhode Islanders in need, leaving it to the State to replace as much as $400 million of federal funds with general revenues. The “millionaire tax” fills a portion of this gap equitably, obtaining funds from Rhode Islanders most able to pay, and who received the largest benefit from the tax cuts in HR-1.
3.Proposed Expansion To A “1% Tax”
A coalition of advocates supported Senate Bill No. 2238, which would reduce the income threshold for the 8.99% bracket from $1 million to $640,000. This “1% tax” would raise an additional $34 million above the “millionaire tax” in its first (partial) year, and $68 million annually thereafter.
4.Long-term Sustainability
In my view, sustainability also requires us to balance the State’s long term revenue and expenditure trends. In a Report it issued last year, the Office of Management and Budget issued a five year projection of annual revenue increases of 2.5%, which would be exceeded by annual expenditure increases of 3.7%. Before going beyond the Millionaire Tax, I believe we must look at expenditure savings as well as new revenue sources, and a good place to start is to look for long term savings in the $1 billion per year Department of Transportation budget. In Senate Bill No. 2124, the Rhode Island Department of Transportation Efficiency and Performance Audit Act, I propose an efficiency study of RIDOT. When Providence faced its “Category Five Fiscal Hurricane,” Mayor Taveras combined tax increases (including a temporary surcharge on high value homes) with expenditure reductions to close a nine-figure budget gap. I believe Rhode Island’s state budget would benefit from a similar approach.
B. The Social Security Income Tax Exemption
Current State policy exempts Social Security benefits from income taxation for taxpayers whose income is less than $107,000 (single return) and $133,750 (married filing jointly). The Governor’s budget would, over two years, expand that exemption to apply to all Social Security recipients, regardless of income. Once fully implemented, this proposal would reduce annual State revenue by $61 million. In contrast, federal income tax applies to up to 85% of Social Security benefits received for taxpayers with incomes exceeding $34,000 (single) or $44,000 (married filing jointly. The Governor’s proposal would reduce taxes for elderly Rhode Islanders with incomes exceeding $107,000 (single) and $133,000 (married filing jointly) at an eventual cost of $61 million in annual revenue.
This initiative would therefore be a step backwards in both policy goals of sustainability and equity, part of a broader trend of tax policy that favors the elderly, as noted in this Tax Policy Center report.
C. Conclusion
The Governor’s two tax proposals are both popular from a messaging perspective (“Millionaire’s Tax” and “Ending Taxation of Social Security”) but they are largely at cross purposes from a policy perspective.