A Talking Point in Need of Revision
Lefty Rhode Island wonk Tom Sgouros apparently hasn’t had a chance to review the latest data available from the IRS, because he’s still insisting — as if it’s obvious — that recent upper-income tax cuts are the cause of our current financial woes:
Today, though, our fiscal crisis is the result of events very much under our control, the result of a tax cut overdose administered long before the economy tanked. The Governor and Assembly leaders knew this crisis was coming — and have known for years — because they caused it. The Assembly leadership is more responsible than the Governor for most of the tax cuts, but it’s not as if he’s objected to them.
The union leadership is in a hard spot here. For years, they have played the inside game at the state house, cultivating and protecting personal relationships with Assembly leaders and members. But over the last many years, those relationships have won them very few victories. Last year they won a provision to make it harder for the Governor to privatize state services, but they’ve also lost big time in the pension “reform,” the casino, health care options and more. Given the circumstances of 1991, it’s easy to see why a compromise happened. Given the circumstances of today, it is going to be hard for union leaders to explain to their members why they should compromise with this Governor. This year, we’re in year three of a five-year cut to the taxes of the wealthiest individuals in our state. Are they telling their members to take less pay in order to preserve those tax cuts?
To the contrary, as I pointed out last week, state taxes paid by those in the upper brackets are up dramatically from the time before the tax cuts were passed:
While preparing to cite that data again, I noticed an error in the following from my prior post, but it’s one that actually enhances the point:
In summary, from tax year 2005 to tax year 2006, Rhode Island imported 6,976 “households” with income under $50,000, lost 32 with $50,000-74,999, and gained 1,757 with $75,000-99,999, 4,794 with $100,000-199,999, and 1,011 with $200,000+. Among those totals are 24,817 returns filed with the federal government from new hometowns outside of Rhode Island. It could be that the increase in the upper bounds came from middle-classers who’d sold their houses and moved out of state, but the fact that the average income of incomers was higher suggests that something different occurred.
The error is in my assessment that the state-level IRS data allocates returns according to their residences during the tax-year in question, when actually they are sorted by the address that the taxpayer lists on the form when paying his or her taxes the following year. What confused me was that the IRS migration data — which literally tracks individual taxpayers by their Social Security numbers — showed a net loss of taxpayers from tax year 2005 to tax year 2006 of 3,733. If emigrants aren’t included in the above chart, how does one account for the fact that Rhode Islanders filed 14,506 more tax returns in 2006?
After some time away from the computer, it occurred to me that the 2006 tax year — filed in 2007 — brought a substantial giveaway from the federal government to taxpayers with children. No doubt, many residents whose income negates the need to file tax returns annually did so for the purpose of claiming that prize. That would explain why the amount of state taxes claimed on federal returns of lower-income filers flat-lined even as the number of such returns jumped up. It’s also in keeping with the turnabout by which those moving to Rhode Island had a higher average income than those leaving.
If we may presume that those in the “the rich” brackets file income tax returns as a matter of course every year, then increases of them in 2006 would have to indicate advancement of households from the lower brackets or immigration from other regions. Since the numbers of taxpayers in lower categories also increased or stayed pretty stable it seems likely that some significant number of them left (to account for the net loss of taxpayers). To get to the point: the number of high-income taxpayers increased even more than the charts indicate on their face.
To decry the revenue “lost” to the tax cuts, I believe that Sgouros takes the taxes received and recalculates it as if the rate had been higher. Clearly, when migration is a factor, it is inappropriate to assume that the increasing numbers — and the increasing revenue — that we’ve been seeing would have materialized if Rhode Island’s tax structure had been more punitive.