So What's the Answer?

On Monday, I presented the growth trends among different income groups in Rhode Island. Tuesday, I dipped into the state income taxes that they've paid and the numbers of taxpayers leaving the state. And yesterday, I looked at the trends of each income group to get a sense of where the shifts are occurring.

So who is actually leaving the state?

I hastily wrapped up yesterday by noting that Census data shows there to have been an increase of 25,274 households claiming income of $100,000-$199,999. According to the IRS, 16,426 of them are directly attributable to an increase in joint tax returns. That leaves 8,848 households, which would equal 17,696, if they were all two-income households filing separately. (I'm not saying that they are, just illustrating the maximum of what I believe to be the trend.) As it happens, the increase in non-joint tax returns with $50,000-74,999 in income over the same period was 17,912; very close. It's interesting to note, as well, that the increase of joint returns among those making more than $75,000 could (as a hypothetical maximum) account for 72% of the losses in joint returns with income below that number.

The picture that begins to emerge is of older, more-established, working-to-middle-class households selling their homes at large enough profits to rocket them up the income scale for a year, with younger households — still single or still filing separate returns — partially filling the gap. Consider that the Census's American Community Survey shows 12,472 fewer Rhode Island households overall in 2008 than 2003, but the IRS shows an increase in tax returns of 12,646, with the growth entirely among categories over $75,000. Yet, IRS migration data that tracks actual taxpayers by their social security numbers shows large losses of taxable income as thousands of taxpayers move away each year, 17,221 of them from 2003 to 2008, bringing with them higher incomes, on average, than those who move in.

The increase in returns, that is, derives from people who were already here, and those leaving had greater wealth. Some of the former are likely to have been young adults graduating from high school and college, but living with their parents and (perhaps) not counting their income as part of the "household" total.

In the trend that I'm suggesting, many of those who've sold their houses have simply left rather than returning to their previous income brackets. Meanwhile, those who've arrived had to over-leverage debt to afford the houses in which they'd invested, leaving many of them underwater and foreclosing when the market took a dramatic downswing.

This narrative ties in very well with a study that the Ocean State Policy Research Institute is releasing today that looks at the data from a slightly different angle. OSPRI focused more on the policies and qualities of the states with which Rhode Island has exchanged residents. Not surprisingly, "people move to states where the weather is warmer, taxes are lower, union membership is lower, population density is lower, and the cost of housing is lower." Moreover, "the most significant driver of out-migration is the estate tax."

I've long argued that the people leaving the state are families in the beginning of their careers who need greater opportunities for advancement, families in the middles of their careers who have turned their attention to the need to advance more quickly as they head toward retirement, and retiring families who need to make their dollars go farther. Meanwhile, improvements in the tax climate for wealthier residents and those investing in the state helped Rhode Island to maintain and grow its base of wealthy individuals while making property a worthwhile investment for families able to handle some years of the opportunity cost that Rhode Island imposes on its working residents.

To some extent, the shift could be a healthy one, assuming that younger families (1) work more cheaply and (2) are willing to put more productivity into the economy in order to advance. However, Rhode Island can't continue to stifle them with mandates, regulations, and taxes, and the state government can't afford to continue losing taxable income based on migration patterns.

Unfortunately, the state has recently been moving in precisely the wrong direction, and Governor Lincoln Chafee and House Speaker Gordon Fox and Senate President Teresa Paiva-Weed's General Assembly promise to continue that error. Arguably, beginning to phase out the capital gains tax early in the decade greased the path for the housing bubble to be worse in Rhode Island than elsewhere by decreasing disincentive to sell and increasing incentive to buy. But the state killed that policy soon after the accelerating market began to come apart — slamming on the brakes when it really needed to ease toward a more reasonable speed. Eliminating taxes on property sales would certainly have helped in that regard.

Last year, the General Assembly killed the phasing-out high-income flat tax by effectively freezing it within a larger tax reform. Worse, by increasing the standard exemption at the expense of those who benefit from itemization (because they've bought property, had children, and invested in their careers and businesses), that tax reform shifted the burden precisely toward Rhode Islanders who are striving to build families and advance in their careers. In addition, as OSPRI's report explains, 2005 changes in federal law led Rhode Island to create an estate tax, and "only two other states have a more punitive" one.

So, older members of "the productive class," as I call upwardly mobile working and lower middle class families, may now be stuck in Rhode Island, unable to sell houses that they're counting on for nest eggs and facing a large tax penalty for selling them. However, the need to find a more hospitable environment in which to advance and retire has not changed, and they're staying put in the jobs they have, blocking the early-career advancement of younger residents. In addition, the policies by which Rhode Island stifles entrepreneurship and innovation are locking the economy in place — the mandates, regulations, and taxes, of which Governor Chafee's proposed sales tax increase (and other policies to expand its reach in one way or another) is a fine example, as is legislation to require registration and insurance among landscapers.

If my interpretation is correct, the data to be released in coming years will not be cause for optimism, to say the least.

Tomorrow, I'll address a study that some folks cite (notably Anchor Rising commenter Russ) as evidence that Rhode Island has a booming "knowledge economy" and show how, even in the positive light, it's possible to see how detrimental the state's governing mindset can be.