Report: State’s tax burden sixth-highest in nation

The state’s relative position on the tax scale has risen fast; as recently as fiscal 2000, Rhode Island ranked 13th-highest by that measure, the RIPEC report says.

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By a different measure, taxes per capita, Rhode Island ranks much lower on the scale, 12th, while Massachusetts ranks third. But there’s the rub: The Bay State has a much larger tax base and higher personal incomes, so the impact on taxpayers is smaller.

Gary Sasse, executive director of RIPEC, said several factors have conspired to make Rhode Island’s relative tax burden so high: slow economic growth, slow income growth, rising government costs, and serious issues with schools, including skyrocketing costs and a funding system that relies too heavily on property taxes.

Despite this, Rhode Island’s tax burden per $1,000 of personal income has actually declined, from $118.70 in 2000 (when the state ranked 13th) to $113.63 two years later. The tax burden in Massachusetts, however, has declined much faster: by 13.6 percent from 1992 to 2002, compared with 2.4 percent here. Nationally, the tax burden per $1,000 of income declined by 9.8 percent in that period.

Unlike Massachusetts, which has a flat income tax, Rhode Island also has a progressive tax that is kind to middle-class people but takes 9.9 percent of its wealthiest residents’ income, Sasse said. It’s the second-highest top tax rate in the nation, he said.

The effect, said Sasse, is that Rhode Island has a hard time attracting and keeping upper-income people and the investments they make. “Our taxes have been going in one direction, Massachusetts has been going in a different direction, and it raises questions about competitiveness that we can’t ignore,” Sasse said.

State economic-development officials and Gov. Don Carcieri often speak in similar terms; this is why Carcieri strongly opposed any consideration of an income tax hike to help balance the state budget this year.

But the biggest factor in Rhode Island’s tax ranking is actually property taxes, which are going up in many communities to make up for cuts in state aid, and disproportionately affect urban communities.

Property taxes account for a whopping 40.4 percent of Rhode Island’s tax burden per $1,000 in income, according to the RIPEC study. In Massachusetts, by contrast, it’s 36.5 percent, and nationally it’s 30.8 percent. Rhode Island ranks sixth-highest in the nation in terms of property tax burdens per $1,000 in personal income, while Massachusetts ranks 17th. When it comes to income tax collections, by contrast, Rhode Island ranks 18th, with $24.83 collected per $1,000 of income, compared with Massachusetts’ $31.75 per $1,000, which ranks it eighth nationwide.

Most tax experts consider the income tax more equitable than the property tax, especially in a volatile real estate market such as Rhode Island’s, because people with relatively little money can find themselves living in houses assessed at very high values. This fact recently triggered a small “taxpayer revolt” in Warwick, for example, after revaluation doubled, tripled and quadrupled some property values.

Fast-rising school costs are the primary driver of property tax increases, Sasse noted, and the key to curbing that growth is to create a better system for financing schools, complete with carefully documented per-pupil costs that are equitable across district lines. This legislative season, RIPEC and several mayors advocated a new system that they said would have done all of that, and funded schools through a statewide property tax that equalized the burden across communities. The measure didn’t get far.

Along with school finance reforms, Sasse said Rhode Island needs to control state spending by implementing more efficiencies such as those proposed by Carcieri’s “Fiscal Fitness” initiative. A new income-tax structure is also needed, Sasse argued, with a less dramatic difference in the tax rate for upper-income people.

In addition, Rhode Island needs to understand the “demographic factors” that drive spending, Sasse said. The population is increasingly needy, with growth driven primarily by immigration, and the state needs to ensure that it builds up a strong economic base to make up for it.

“We’re becoming a state where more and more of the population is dependent
on government services, particularly entitlements, and we have fewer people
who are paying taxes to support those programs,” Sasse said. “If you don’t have
a competitive system and you don’t grow the base, the politics becomes even
more difficult when you try to maintain those programs.”