January 18, 2011

Giving Away the Store, or Maintaining a Base?

Justin Katz

Yesterday, I showed that the number of high-income tax returns increased every year in Rhode Island from 2002 to 2007. In fact, the rate of growth among taxpayers in every income category above $50,000 was greater in Rhode Island than in its neighboring states through 2004, when things began to change.

During the decade, Governor Carcieri and the General Assembly enacted various tax reforms, agreeing to phase out the capital gains tax in 2002 and beginning a stepped reduction of an alternative flat tax in 2006. Of course, during this same period, especially the latter part of the decade, the state government faced massive budget deficits year after year and used one budget gimmick and one-time fix after another to muddle through.

The question arises, therefore, whether the tax reforms needlessly gave away money that the state could have used (although it never came close to equaling the deficits) or the tax reforms were a positive influence despite larger problems. I'm not sure that it's possible to collect enough data to declare the question answered, but today, I'll add some charts to the mix that I believe continue to point in the direction of my thesis: that tax policy helped Rhode Island to maintain and increase its base of wealth, which could have been a spark of capital for entrepreneurs and other producers, but heavy regulations, mandates, and taxes stifled growth and motivation among "the productive class," which therefore didn't act as kindling to get Rhode Island's economic fire going.

The following charts, drawn from this data, show the amount of state income taxes claimed on IRS tax returns for those filing in Rhode Island, Massachusetts, and Connecticut, respectively:

Once again, it appears that the dot-com bust that began the millenium did not affect Rhode Island as deeply as it did Massachusetts. From that footing, with the implementation of the capital gains tax phaseout and a reduction of the state's nation-leading top tax bracket on the horizon, Rhode Island led the three states in the rate at which it increased the revenue drawn from the upper brackets. The numbers throughout the decade are as follows:

% increase in $100,000-200,000 taxpayers 2002-2004 19.2 10.4 12.2
% increase in $200,000+ taxpayers 2002-2004 27.0 19.3 17.2
% increase in $100,000-200,000 state taxes 2002-2004 14.0 9.1 17.9
% increase in $200,000+ state taxes 2002-2004 26.0 34.5 30.9
% increase in $100,000-200,000 taxpayers 2002-2007 56.4 43.2 43.0
% increase in $200,000+ taxpayers 2002-2007 73.4 73.1 60.9
% increase in $100,000-200,000 state taxes 2002-2007 44.1 38.2 47.0
% increase in $200,000+ state taxes 2002-2007 64.2 124.4 104.0
% increase in $100,000-200,000 taxpayers 2007-2008 1.5 2.9 2.0
% increase in $200,000+ taxpayers 2007-2008 -8.6 -5.1 -4.0
% increase in $100,000-200,000 state taxes 2007-2008 5.8 8.0 8.6
% increase in $200,000+ state taxes 2007-2008 -4.0 -2.1 -2.4

During the early part of the decade, Rhode Island led in the rate of increase of wealthy taxpayers, although that healthy development for the state overall did reduce the rate of growth in revenue that the government drew from them. Tax policy, however, wasn't to blame for Rhode Island's slowed growth during the latter part of the decade. Something else was, and I'd argue that the improving attitude of the government toward taxation prevented Rhode Island from doing worse, comparatively... until that attitude started to change in a vocal way during and after the debate over the flat tax.

The IRS also provides taxpayer migration data, which compares the location from which every American files his or her return to his or her location the year before. The years shown for migration are those in which the returns were filed, which means that the taxpayer moved during or just after the tax year (which is what the years used thus far in these posts have referred to).

Not that it matters; Rhode Island's loss of taxpayers has been consistently between 2,000 and 4,500 for the entire decade:

The bars at the top of the chart show the migration of actual people, and the line at the bottom shows the net loss of taxable adjusted gross income. That is, from 2003 to 2008, after subtracting the incomes of people who came to Rhode Island, former Rhode Islanders took with them almost $1 billion in income. With the exception of the two years that the revenue loss moderated, the average adjusted gross income of those leaving was greater than those arriving:

In the past, I've looked at the data of migration to counties abutting Rhode Island on the theory that such people aren't leaving the region but, rather, wanted to stay within work-and-play reach of Rhode Island:

The image that emerges is a pull of wealth away from Rhode Island. The fact that the wealthy were increasing in number, within the state, suggests that they continued to find Rhode Island to offer a friendly environment. Some other income range must account for those thousands of lost taxpayers, and I'll take a closer look in that direction tomorrow.

(The next post in this series is here.)

Comments, although monitored, are not necessarily representative of the views Anchor Rising's contributors or approved by them. We reserve the right to delete or modify comments for any reason.

Well, at least the "flight of the earls" argument appears to be dying.

One thing you neglect to mention is the reason I moved here... the housing bubble pushed the price of my home in the NYC area through the roof, allowing me to purchase a nicer home in RI for the same or less. Jobs, housing costs, schools, quality of life all factored in. Tax issues didn't even cross my mind. You guys have blinders on so that everything appears to be about taxes. Notably the housing bust coincided with a change in the pattern you attribute to taxes... "through 2004, when things began to change." Housing prices peaked in early 2005.

Posted by: Russ at January 18, 2011 1:07 PM

Russ, I'm curious...

By what math did you arrive at Rhode Island? I found that housing itself cost more in Massachusetts, but the overall cost of living was lower (lower property and income taxes, lower insurance payments, lower cost of transportation and heating fuel).

To be honest, the main reason I moved back was because I really like it here, it's where my friends and family are, Providence 'stays up later' than Boston, and I located a kick-butt apartment.

Still, the bang-for-your-buck in Mass was much better when it came to quality of schools and services.

Posted by: mangeek at January 18, 2011 3:25 PM

I moved from the NYC area (Jersey City). The National Association of REALTORS has a "Median Sales Price of Existing Single-Family Homes for Metropolitan Areas" (I'd link to it, but the new spam filter hates that). Here's 2009 data:

Providence 218.5
Boston-Cambridge-Quincy 332.6
New York-Northern New Jersey-Long Island 381.4

If anything, the immediate NYC area is even a bit higher than that regional number would suggest. I wanted to live in/near the city, but it's not like suburban Jersey is any cheaper.

Of course, if you're underwater in your current home you can't up and move without taking a bit of a haircut.

Posted by: Russ at January 18, 2011 3:52 PM

I would be curious to see the comparison of these numbers based on the increases in property taxes over the same period. 2 of teh biggest decisions people make of where they live is Property Taxes and Schools. Living and paying property taxes in Cranston since 2000 I have seen them go from $4000.00 to almost $11,000.00 with no appreciable gain of services.

Posted by: Sean Gately at January 18, 2011 5:26 PM

"Tax issues didn't even cross my mind."

It's hard to believe that any adult moves to another state without considering tax issues. If you sold your house in NJ and bought a nicer one here for "the same or less" (don't know if you paid the same or less?), you could still end up paying more for housing when you add the property taxes. Consideration of a job without factoring in state income taxes leaves you with the same exposure. Same with capital gains taxes (depending on certain factors, or unless you plan to die in your new nicer house, lack of consideration of those taxes could surprise you when you do sell it). And if you have any investments you might want or need to liquidate some day you might want to consider how much you'll pay to the state. If you do live here until death, you need to consider estate taxes. And then there are all the taxes in the form of licenses and permits that impact the cost of doing business and living in any state.

Posted by: riborn at January 18, 2011 7:26 PM

"but the new spam filter hates that"

It only hates if you put the h t t p : / /
(altogether) with a url. If you start with the www, it'll work.

Posted by: Patrick at January 19, 2011 9:00 AM

"It's hard to believe that any adult moves to another state without considering tax issues."

Schools and jobs were a much bigger consideration, so much so as to make the state and local taxes de minimus. And Jersey has considerably higher property taxes. If you work in NYC, you even pay city "commuter" taxes. Guess what, rich folks still live there and talented young kids come year after year, mostly to live in what would be considered a closet in most cities/states.

Posted by: Russ at January 20, 2011 4:08 PM

Again, not a big consideration ($500k in profit is a big exclusion if you're married) and correct me if I'm wrong but aren't capital gains tax rates higher in NJ and NY than in RI? I'm not into house flipping so short-term rates didn't much matter to me.

Posted by: Russ at January 20, 2011 4:27 PM
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