Report: Proposed tax changes would mostly benefit top 1% of R.I. earners

THE INSTITUTE ON TAXATION AND ECONOMIC POLICY created a chart that shows how the proposed tax reform package would affect Rhode Islanders. / COURTESY INSTITUTE ON TAXATION AND ECONOMIC POLICY
THE INSTITUTE ON TAXATION AND ECONOMIC POLICY created a chart that shows how the proposed tax reform package would affect Rhode Islanders. / COURTESY INSTITUTE ON TAXATION AND ECONOMIC POLICY

PROVIDENCE –  The latest proposed tax reform framework supported by President Donald Trump and U.S. House Speaker Paul Ryan would disproportionately benefit the top 1 percent of earners in Rhode Island, according to an Institute on Taxation and Economic Policy report issued last week.

Sixty-five and two-tenths percent of tax breaks would be for the top 1 percent of earners in the state, those making more than $528,800 a year. The average tax cut for this bracket would be $55,510 a year. The organization said that the gains would in large part come from a reduction of the corporate income tax rate.

The top 1 percent would receive an average tax cut of 3.1 percent as a share of total pre-tax income, a reduction that is proportionately disparate from every other tax bracket in the state. The second-closest reduction in taxes as a share of pre-tax income was for the second-lowest 20 percent of wage earners, with an additional average tax reduction of 0.8 percent of per-tax income.

The report also said that if the proposed framework were to be instituted in 2018, 18.8 percent of households in Rhode Island would have their taxes increased. The report attributes this to the elimination of specific itemized deductions.

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“Tax cuts that largely benefit the wealthy often come with a heavy dose of cuts to vital programs and services,” said Rachel Flum, executive director of the Economic Progress Institute, in a release in response to ITEP’s report. “Reducing investments in health care, education, food assistance, disability insurance and other programs is too steep a price to pay to give the wealthy a tax cut.”

The following is a breakdown of tax bracket reductions:`

  • Rhode Islanders whose earnings fall in the lowest 20 percent, those who make less than $21,800, would receive, on average, a $90 tax break a year, or 0.7 percent of pre-tax income. The tax cuts would account for 2 percent of the total tax cuts in the state. About 73 percent of taxpayers in this bracket would receive a tax break that would average $120. Three and nine-tenths percent of the lowest bracket would experience an average of a $50 tax increase.
  • The second-lowest bracket, those with a yearly income of $21,800 to $38,900, would receive on average a $250 tax reduction over the year, a 0.8 percent change as a percentage of pre-tax income. These tax breaks would account for 5.8 percent of total tax breaks in the state. Eighty-one and two-tenths percent of this bracket would qualify for a tax cut, which would average $320, while 5.2 percent would see an average tax increase of $220.
  • The taxpayers in the middle 20 percent of the income distribution would save $390 per year, 0.7 percent change as a percentage of pre-tax income, accounting for 8.8 percent of the total tax breaks in the state. This group earns between $38,900 and $67,100 per year. Of those who would qualify for a tax cut in this bracket (81.7 percent), the average tax reduction would be $630 per year. Fifteen percent of this group would see an average tax increase of $870.
  • The next highest bracket, the fourth 20 percent, those who earn $67,100 to $112,700 per year, would receive an average of $400 in tax breaks per year, accounting for 9.7 percent of all the tax reductions. Of those who would receive the tax cut (72.5 percent of this group), the average break would be $1,140. Twenty-seven and one-tenth percent of those in this bracket would experience a tax increase under the plan, an average of $1,560 per year.
  • Those making $112,700 to $216,400 would experience an average tax cut of $80. Of those that qualified for a cut (55.1 percent), the average reduction would be $2,020. Nearly 45 percent of taxpayers in this bracket would experience a tax increase that averages $2,320 per year. This income bracket would account for 1.3 percent of the total in tax breaks.
  • The 96th to 99th percentile of wage earners in Rhode Island, those making $216,400 to $528,800 per year, would receive an average tax cut of $1,510 per year, accounting for 7.1 percent of the total. The tax break would apply to 54 percent of those in this bracket in Rhode Island, for an average tax break of $5,860 per year. The rest of those in this bracket, 46 percent, would experience an average tax increase of $3,610.
  • The 1 percent in the state in the highest income bracket, those who earned more than $528,800 per year, would receive an average tax cut of $55,510 per year (65.2 percent of the total in tax cuts for the state). The share of those eligible for tax cuts in this bracket is 87.7 percent, with an average cut of $63,990 per year. The average tax increase for this bracket of $4,930 would affect 12.3 percent of earners.

The report calculated these numbers assuming the following would be accomplished:

  • Repeal the Alternative Minimum Tax
  • Repeal personal exemptions and increase the standard deduction.
  • Replace current income tax brackets with three brackets, 12 percent, 25 percent, and 35 percent.
  • Increase non-refundable child tax credit and new non-refundable credit for other dependents.
  • Eliminate all itemized deductions except those for charitable giving and home mortgage interest.
  • Repeal the estate tax.
  • Special tax rate (25 percent) for businesses that do not pay the corporate income tax.
  • Repeal special tax breaks for businesses and reduce the corporate tax rate from 35 percent to 20 percent.
  • Allow businesses to write off full costs of investment in the first year.

Chris Bergenheim is the PBN web editor.

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