August 2, 2008

A Talking Point in Need of Revision

Justin Katz

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.

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Governor Lincoln Almond left Governor Carcieri a $100 million budget deficit when he left office (but it was balanced budget on paperwork though). The GA had already promised a tax cut and Governor Carcier promised his tax cut.

But to fulfill whatever leadership operations Governor Carcier added the title of Executive Director which was created with a salary above the current Director and Assistant Director positions. So where RI tax payers were only paying for two upper management positions at lower salaries, RI tax payers were suddenly paying three upper management salaries with one above $100,000.00/yr mark till the Director retired or left state service and/or was replaced.

The Fiscal Fitness team was made up of state employees who volunteered to examine other departments to see where cost savings could be made. Those employees (management and union) uprooted a whole law support department; (which was moved into an auditorium so Fiscal Fitness team could have space) were paid at their regular salary plus overtime and their regular jobs were covered by other personnel during the year. The so called published savings and toted by the Governor would have more than offset the budget deficit. However RI budget deficit continued to grow and has grown each and every year. I’m not pointing fingers only making a statement of fact.

Justin you hone in on just one tax reduction package where I believe you quoted Tom as indicating it was a joint failure between both the Governor and the GA to recognize the looming budget shortfalls..

I see your point and I think some on AR also see the same but you must look at the whole picture. I basically made these same comments on AR in an earlier post in response to a similar topic (some of age don’t forget).

I’m not taking Left or Right; Blue or Red sides here because I feel the whole of Smith Hill was at fault, but I can tell you from personal experience, it was a very trying time to watch this all unfold from a federally supported and salaried position working with State of RI personnel who most after 15-20-25 years of working experience were suddenly told by their peers they did not know what they were doing and there was no professionalism.

If I remember correctly, till half way through Governor Lincoln Almond administration, there was no budget deficit.

Current Las Vegas Casino economies are at a 20 year low; Mohegan Sun Casino, CT is reporting an 89% loss and State of RI BUDGET DEPENDANT Twin Rivers video slots and gaming facility is on the verge of bankruptcy. Great planning by everyone on Smith Hill!

I am waiting for someone to tell me Twin Rivers bankruptcy is a ploy by the unions because both the Governor and GA signed on to this risky income.

Posted by: Ken at August 3, 2008 2:22 AM

Tom Sgouros writes "Are they (Union "leaders") telling their members to take less pay in order to preserve those tax cuts."

What utter BS.

NO ONE is taking a pay cut (less pay). Salaries are NOT going down. They just are not increasing at the unsustainable rates previously demanded by the Unions.

With respect to healthcare and pensions, for the sake of argument, put aside tax policy.

The question should be how and why is it fair that a class of employees (i.e. Public employees) should receive (i.e. be ENTITLED) near free healthcare and GUARANTEED pensions in return for minimal contributions (and minimal years of service).

Forget how it is paid for. The first issue is whether or not it is fair as compared to the rest of the working world. The answer is NO, regardless of how it is paid for.

When the cost of healthcare was going thru the roof year after year after year, with the Union members not sharing in those cost increases, did Chairman Mao, I mean Bob Walsh, explain to his flock that they were getting a great and ultimately unsustainable deal? Or did he instead cultivate an attitude of Entitlement, telling his flock that such a deal is a "condition of employment" ...for the Union but not everyone else that has to pick up the tab.

The bottom line is that what the Unions have been getting away with is simply unfair and unsustainable, no matter who is paying for it.

The ultimate answer to Tom Sgouros' screwball question should be: "No. But if any of you Entitlement-minded fools don't like what is being offered, you are free to go find another job, perhaps as a cocktail waitress or broom pusher at one of the Casinos you were all so supportive of, or better yet, go start businesses, become rich and pay your employees what you are demanding."

Posted by: George Elbow at August 3, 2008 9:30 AM

Imagine if the Narragnasett Casino had become a reality and we, the taxpayers, had to make up the losses, as proposed in that referendum, to Twin River. Wow, did we ever dodge that bullet.

All you need to know about the entitlement minded zombies in the union is summed up in one comment made by Comrade Walsh...

Philosophically, we are generally opposed to any premium sharing as we believe that health care coverage should be a condition of employment (at least until the government gets into the act).

Posted by: bobc at August 3, 2008 10:27 AM


Twin River has negotiated another 29-day extension in its forbearance agreement with its creditors, giving the video slot racino until Aug. 29 to restructure its enormous debt.

Twin Rivers owes $557 million related to purchasing and remodeling the old Lincoln greyhound racetrack. Twin River bonds have been downgraded to junk status. It is believed the owners paid such a high price (Atlantic City casino - the Trump Marina Hotel Casino - was sold in May for only $316 million.) was because they thought Twin Rivers racino could be converted into a full 24 hr casino. At least they got the 24 hr on weekends and holidays.

State of RI gets 62% of each dollar played in Twin Rivers which amounts to estimated $250 million to the state budget.

If Twin Rivers has to declare bankruptcy then that will be a large hit to the state budget on top of the already looming budget deficit as the nation and RI goes deeper into recession.

Posted by: Ken at August 3, 2008 6:30 PM


I think you are making the very sound argument that we shouldn't be building a State cost structure that is dependent upon ungauranteed Gambling revenue.

Now if you could just explain that to the Union hacks that push for Casinos every chance they get (e.g. NEA-RI moron #2, Pat "I struggle with basic math" Crowley and his boss Bob Walsh).

Also, wouldn't it have been nice if Bob Walsh, he of Wall St. finance fame & wizzardry, had explained to his flock that the cost structure that was being built to support their nut-bag Entitlement demands was UNSUSTAINABLE through economic cycles.

Oh well ...they'll have to learn the hard way via the unemployment line.

Posted by: George Elbow at August 3, 2008 7:09 PM
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