Poverty Rate Versus Tax Burden

The Providence Phoenix’s Brian C. Jones puts the idea that high taxes are driving people away from Rhode Island into the category of just-a-theory…

There has been a growing conviction that high taxes drive people away from Rhode Island and deplete the lifeblood of the private economy. Whether the world really works that way is debatable. What is not in dispute is that many economists and policymakers believe it to be the case, including Republican Carcieri, and legislative Democrats.

The theory is actually a bit more complex, that the combination of high taxes and poor-to-average public services in return drives the middle class away, because they can get more bang for their buck by moving elsewhere.

That point aside, data sources exist allowing the history of tax impact on demographics to be examined in some detail. Let’s begin with the U.S. Census Bureau’s yearly data on the poverty rate in each state. According to that data, the poverty rate in Rhode Island has been over 90% of the national rate for four years in a row, the first time the relative rate has been that high for that long since the data series began in 1980. That means in those four years…

1. Poor people have come to the state, or
2. Middle-class people have left the state, or
3. Middle class people have been driven into poverty, or
4. Any or all of the above.

But does the unprecedented relative poverty rate have anything to do with tax policy?

Well, the Tax Foundation has compiled data on each state’s tax-burden ranking since 1970 (Rhode Island is currently ranked 4th). By combining the Tax Foundation data with the Census Bureau data, we can see if there is a correlation between tax-policy and poverty rates. The plot below compares Rhode Island’s relative poverty rate between 1980 and 2005 to its tax-burden ranking from the previous year. The trend is unmistakable…

The high poverty period in the upper left-hand corner of the graph isn’t unique to the here-and-now, it also involves the years 1982-1984, the only other period since 1980 prior to the stretch beginning in 2002 where the RI relative poverty rate was over 88% for three years in a row. You can make the plot in other ways, tax-burden this year versus poverty rate, tax burden over the past two years averaged together, etc. and you’ll see basically the same trend.

Jones’ article includes this bit of analysis from University of Rhode Island Political Science Professor Maureen Moakley…

“Up until the 1980s, we were in the bottom of per-capita income,” Moakley says. “We really were a poor state, and that kind of body politic was very sympathetic with the social-welfare programs, because, ‘we need them.’ We now are a very prosperous state. We have more people doing better and [being] less concerned; there’s less of a critical mass that demands social services.”

From the graph above, if the goal is to generate more political support for poverty programs by creating more poor people, then raising taxes seems to be the way to go!

Here is the Tax Foundation's data on Rhode Island's tax burden ranking, and the Census Bureau's data on Rhode Island's relative poverty rate...

Year	RI Tax Rank	RI Relative Poverty Rate
1980	11	82.3%
1981	8	83.6%
1982	7	88.7%
1983	10	95.4%
1984	13	88.9%
1985	15	66.2%
1986	15	65.0%
1987	14	60.4%
1988	21	75.4%
1989	26	52.3%
1990	15	55.6%
1991	12	73.2%
1992	11	83.8%
1993	15	74.2%
1994	11	71.0%
1995	12	76.8%
1996	9	80.3%
1997	9	95.5%
1998	8	91.3%
1999	8	84.0%
2000	5	90.3%
2001	5	82.1%
2002	5	90.9%
2003	5	92.0%
2004	5	90.6%
2005	4	96.0%