July 26, 2010

The Illusion of an Improving Tax Structure

Justin Katz

A while back, I pointed out (see the addendum) that what looked, at first, to be an economic improvement — the increased percentage of wealthy people in Rhode Island — turned out to be evidence of the contrary. The percentage improved because the non-wealthy left the state in such great numbers while the decreasing flat tax and capital gains tax maintained our population at the high end.

It seems likely to me that such less-encouraging factors explain the tax-related findings of the Rhode Island Public Expenditures Council (PDF), which Marc mentioned here. From the Providence Journal summary:

From 1998 to 2008, individual income tax collections, as a share of personal income, declined by about 7 percent, sales tax collections increased by less than 1 percent, and property tax collections increased by almost 4 percent.Simmons says the increasing reliance on the property tax in recent years can be attributed, in part, to the state’s decision to cut state local aid for education during the economic recession.

That forced communities to make up revenue losses through a combination of trimming expenses and raising the property tax — its only other major funding source besides state aid.

The silver lining is that Rhode Island's property tax grew at a slower rate than the national average of about 8 percent.

Because these calculations are made based on total income and population, in the state, and since our local economy has been struggling, while population has decreased, and since the General Assembly hasn't actually cut the tax, the sales tax revenue result is likely attributable to declining consumer confidence and increasing incentive to shop out of state, where sales tax is lower. On the income tax front, those who pay in the mid-range brackets have been leaving and out of work, while the tax on the upper range has been decreasing. That Rhode Island entered the recession ahead of the rest of the nation probably facilitated our "improvement" by this measure even more.

This puts a different light on the property tax question. Sure, the immediate cause was the cut in state aid, but the decrease in revenue from state-level taxes has surely been a prior cause (along with excessive spending and an unwillingness to cut state budgets to the necessary degree). That the growth in property taxes was slower than the national average need indicate only that Rhode Island was already closer to the threshold that residents could bear, and since the decrease in tax revenue for the state hasn't corresponded an increase, but rather followed from a decrease, in discretionary income for residents that threshold has, at best, remained stagnant.