Sasse Calls for Increasing Taxes on Rhode Islander Earning Over $400K to Fund Education

Sasse Calls for Increasing Taxes on Rhode Islander Earning Over $400K to Fund Education

I am urging the RI General Assembly to add a bracket to the state’s individual income tax for those earning over $400,000 at a tax rate of seven percent provided the proceeds are earmarked for educational enhancements.

As some may recall, I chaired the Governor’s Tax Policy Workgroup whose March 2009 recommendations set the stage to reform Rhode Island’s income tax system. Soon thereafter the General Assembly took a positive step by reducing the top marginal rate from 9.9% t0 5.99%, reducing the number of brackets and tax credits, increasing the standard deduction for most taxpayers, and eliminating the state’s alternative minimum tax and optional flat tax rate. At the time of these tax reforms Rhode Island’s piggyback income tax of 9.9% was found to be an outlier placing Rhode Island at a competitive disadvantage. Rhode Island’s income tax was not only uncompetitive, but being anchored to federal income tax system was unnecessarily complex.

These changes have accomplished the General Assembly’s tax reform objectives. Not only has the individual income tax been a reliable and economically sensitive source of revenue, but the Rhode Island’s competitive tax position has markedly improved. In 2010, the Tax Foundation’s Business Tax Climate Index ranked the Ocean State’s income tax as 39thout of the 50 states. Today the Index has us ranked 29th.

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The questions that the legislature needs to consider is debating whether or not to increase the income taxes wealthy Rhode Islanders pay are as follows. Can the top marginal income tax rate be increased without having a demonstrated negative impact on the economy and jobs? If “yes” how large an increase would not cause economic dislocation and also generate resources to enhance opportunities?

Adding a fourth bracket starting at $400,000 at a seven percent tax rate should not adversely impact competitiveness based on comparative marginal rates in the northeast. Connecticut’s top rate is 6.99%, Maine’s 7.15%’ Vermont 8.75%, New Jersey 8.97% (10.75% over $5 million) and New York’s is 8.82%. While Massachusetts has a flat income tax rate of five percent it applies to the first dollar of taxable income. We would be happy to furnish the Committee with a comparative picture showing bracket ranges as well as deductions, exemptions and credits for each state.

In considering whether to add a new bracket and higher marginal tax rate on upper income filers the Committee needs to also consider questions of equity. Since enactment of Rhode Island’s income tax reform legislation in 2011, there has been a growing income inequality. For example, the Congressional Budget Office estimated that between 2016 and 2021 income is distributed less equally in 2021 than it was in 2016. At the same time simply increasing state taxes on the wealthy will not maximize equity unless the proceeds are allocated to improve access to equal opportunities and good jobs. Simply taxing the wealthy more to balance the budget may not be a sustainable fiscal policy as opposed to using such funds to invest in everybody’s future.

In my opinion, enacting a new tax bracket for personal income exceeding $400,000 at a seven percent rate should not have a negative impact on economic competitiveness provided that the proceeds are earmarked to enhance educational opportunities for kids to succeed in the 21St Century post-pandemic economy. In fact, it could represent a win-win strategy for equitably investing in our future well-being.

 

Gary Sasse is the Founding Director of the Hassenfeld Institute for public Leadership Bryant University. He can be reached at [email protected]