Wealth Tax in Rhode Island Could Raise Millions While Improving Fairness

Massachusetts introduced a “Fair Share” wealth tax, imposing a 4% surtax on incomes over $1 million. This groundbreaking move, aimed at making the tax system more equitable, ha produced positive results and could serve as a powerful model for Rhode Island.

Rhode Island News: Wealth Tax in Rhode Island Could Raise Millions While Improving Fairness

February 19, 2024, 1:42 pm

By Uprise RI Staff

Massachusetts recently implemented a 4% surtax on annual incomes over $1 million, known as the “Fair Share” wealth tax. Analysis from the Institute on Taxation and Economic Policy (ITEP) finds that this tax makes Massachusetts’ overall state and local tax system more equitable.

Specifically, the ITEP analysis shows that prior to the “Fair Share” tax, the top 1% of earners in Massachusetts paid 7.7% of their income in state and local taxes. The bottom 95% of earners paid 9.4% of their income in Massachusetts taxes. With the 4% surtax on income over $1 million, the tax rate on the top 1% of earners rises to 9.1% – still below the 9.4% rate the bottom 95% pay, but an increase in progressivity and tax fairness.

The ITEP data indicates that while the “Fair Share” wealth tax made Massachusetts’ tax system more equitable, there is room for further improvement. Even with the surtax, the top 1% in Massachusetts pay a smaller share of their income in taxes than the bottom 95 percent. This demonstrates that a single wealth tax, while impactful, may not fully flip a regressive system into a progressive one. Regular re-evaluation and adjustment of top-end tax rates may be required to continue furthering tax fairness over time.

Nevertheless, ITEP’s 50-state analysis makes clear that the “Fair Share” surtax, along with other tax changes in Massachusetts last year, have combined to make Massachusetts one of the least regressive states in the country tax-wise. In fact, whereas Massachusetts ranked in the bottom third of states for tax fairness before the recent changes, it now ranks in the top ten for tax progressivity.

The “Fair Share” wealth tax represents a major driver of the improvement in tax fairness in Massachusetts. While nine other states collect a greater share of income from their top 1% of earners, the addition of the 4% surtax on annual income over $1 million went further in Massachusetts than most states’ attempts to tax the wealthy and reduce tax code regressivity.

What does this mean for Rhode Island? While Rhode Island does not currently have a comparable wealth tax, the experience in nearby Massachusetts provides an example of how a similar approach could improve equity in Rhode Island’s tax code as well.

Rhode Island policymakers looking to invest in programs benefiting lower and middle income families may want to consider modeling a wealth tax on Massachusetts’ “Fair Share” surtax. Further analysis would be needed to estimate potential revenue yields from a wealth tax in Rhode Island, and how new funds could be utilized.

However, the clear impacts in Massachusetts can inform initial policy debates in Rhode Island. The ITEP data shows that targeting even marginally higher tax rates on the very highest earners can make state tax systems measurably more fair. Additional revenue generated can provide substantial resources to expand public services that promote broadly shared economic opportunity.

The ITEP data could also help shape discussions in Rhode Island around optimal tax rates and income thresholds for a potential wealth tax. Their analysis shows that while Massachusetts 4% surtax on income over $1 million improved tax progressivity, the state’s tax system remains regressive overall. This implies Rhode Island may need a higher wealth tax rate than Massachusetts or need to apply graduated rates across multiple income brackets to completely flip its tax code right-side up.

Rhode Island ranks near the middle nationally in terms of the tax fairness of its current state and local tax structures. But with thoughtful wealth tax design modeled on Massachusetts’ example, Rhode Island could vault into the top tier of states for tax progressivity.

Massachusetts dedicates its “Fair Share” wealth tax income for education and transportation. Rhode Island revenue could similarly fund investments in areas like infrastructure, affordable housing, healthcare, and education.

For instance, increased access to early childhood education provides perhaps the highest return on public investment available. Enabling more working families to enroll children in pre-K programs yields better academic, social, and economic outcomes over their lifetimes. It also strengthens communities overall by developing future generations of better-prepared, higher-earning workers and citizens.

If modeled after Massachusetts, a wealth tax could provide Rhode Island with hundreds of millions in new annual revenue that could make transformative investments possible. Though only approximately 2,000 high net worth households would pay the wealth tax, benefits would be felt across Rhode Island through expansions of vital public services.

As Rhode Island continues to debate its fiscal future, examining the impacts of a wealth tax on fairness, revenue, and public services can contribute an important perspective. Massachusetts’ “Fair Share” experience shows the potential of targeted tax increases on top earners to further tax progressivity, raise substantial revenue for key priorities like education, and promote broadly shared prosperity. Rhode Island policymakers would be wise to take notice.

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