A decade ago, Mitt Romney infamously remarked that “Corporations are people, my friend.”
Today, business-aligned groups in Rhode Island are inverting Romney’s rhetoric to fend against legislation that would raise taxes on high-income individuals. Their argument: People are businesses, my friend.
Increasing the top tax rate for people at the tippity-top of the income distribution “is really a tax on small business — neighborhood small businesses,” according to Greater Providence Chamber of Commerce president Laurie White at a recent webinar. That’s because, White explained, “business professionals and business owners pay their income tax through their personal income tax.”
Arguments like this start with an uncontroversial truth — that most businesses, in Rhode Island and nationwide, are structured as pass-throughs rather than C-corporations. While C-corporations pay corporate taxes on their profits; pass-throughs do not. Instead, their profits are reported on the tax filings of the owners and subjected to personal income tax rates.
In other words, these people are businesses, at least as far as the tax collector is concerned.
But here’s where the rhetoric veers into pants-on-fire territory. The legislation in question, H5227 from Rep. Karen Alzate and H5229 from Rep. Gregg Amore, would not raise taxes on all personal income tax filers. Far from it, these bills only increase the top marginal tax rate on those in the top 1%. The threshold to be a one-percenter in Rhode Island, according to the IRS, is an adjusted gross income over $451,000. Alzate’s legislation proposes a new tax bracket on income over $475,000; Amore’s for income over $500,000.
For the claim that either bill “is really a tax on small business — neighborhood small businesses” to be true, a substantial share of pass-through owners would have to have income putting them in the top 1%.
As it turns out, only a small number of pass-through owners are at the very top. In 2018, the most recent year with available data, 76,529 tax filers in Rhode Island received profit from ownership of a non-farm sole proprietorship, according to the IRS. Just 1,572 had incomes high enough to put them in the richest 1% of all Rhode Island filers. 26,687 filers received profit from a partnership or S-corp; of them, only 2,993 had incomes in the top 1%.
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This makes intuitive sense. Just under 500,000 people file personal tax returns in Rhode Island each year. Simple math dictates that only about 5,000 can be in the top 1%. It would be impossible for all, or most, or even a substantial number of the nearly 100,000 filers* with pass-through income to fit in this category.
So, yes, some people are businesses. But only a lucky few are in the top 1%.
* It’s tough to know the exact number of filers with pass-through income because one filer can report income from more than one pass-through source.