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Half of Rhode Islanders Don’t Owe Income Taxes

Friday, July 13, 2012

 

At least half of all Rhode Islanders don’t owe any federal income taxes and likely no state income taxes either, according to Internal Revenue Service figures—raising new questions about the health of the state economy and the fairness of the tax code.

IRS estimates show that, at most, 558,293 Rhode Islanders ended up owing federal income taxes in 2010. With a population pegged at just over one million, according to the recent U.S. Census, that represents half the population.

The other half that don’t owe anything are comprised of those who are on public assistance, dependent children and college students, low-income retirees, and people who are out of work. It also includes a number of lower middle-class residents who may have paid withholding taxes throughout the year but ended up owing nothing when credits, deductions, and exemptions for dependents are taken into account—earning them a refund at tax filing time.

(See below summary table and explanation for how figures were calculated.)

Who doesn’t owe

Those who end up not owing span a wide range of income, age, and employment status. They include the following:

■ The very poor: At the lowest end of the income spectrum are those who earned so little that they not only did not have any tax liability, they qualified for the earned income tax credit (EIC), a form of public assistance. “This is really a way to subsidize the working poor,” said Brown University sociologist John Logan. In 2010, nearly one out of every five tax returns—or, 81,051 out of 509,091—filed in Rhode Island was for the EIC. (The figures include joint and single filers.)

■ Some of the unemployed: The recession has also taken a toll, but the impact is less clear. The number of tax returns reporting unemployment compensation was almost equal to the number of EIC returns—74,785. But, unemployment compensation is taxable. Whether someone ends up owing, would, like other earners, depend upon individual circumstances—such how long that person was out of work during the year and how much was earned beforehand, among other factors.

■ Low income retirees: The same goes for retired residents taking Social Security: some will end up owing, others won’t. In Rhode Island in 2010, there were about 151,000 residents at or over the normal Social Security retirement age of 65. An elderly couple whose income exceeds $44,000 will owe taxes on 85 percent of their Social Security income.

■ Dependent children: In Rhode Island the number of dependent exemptions claimed was 280,199—a figure almost identical to the number of residents 21 and under who were counted by the U.S. Census, which was 281,295.

■ The rest: The rest of those not paying taxes includes a small sliver of wealthier Rhode Islanders who one way or another have been able to manipulate the tax code, legally, so they may not owe any income taxes in a particular year, according to Logan. For lower middle income earners, new tax credits can also reduce or eliminate their tax liability. For example, 2008 saw the institution of the first-time homebuyer credit, which initially was worth up to $7,500.

‘Not everyone has skin in the game’

“Talking about national statistics, one of the complaints is that only 50 percent of the people pay taxes. One of the problems is not everyone has skin in the game,” said Grafton “Cap” Willey, a managing director at CBIZ Tofias, an accounting firm. “I think everybody should be paying something, even if it’s a nominal amount because they all should have skin in the game as far as supporting the federal government.”

Recent national reports have shown that half of all U.S. residents owe taxes. GoLocalProv’s own analysis of IRS figures bears that out: about 156.7 million people who filed returns—either singly or jointly—owed taxes, out of a 2010 population of 308.7 million.

The pattern also holds true for other New England states, according to Peggy Riley, a regional IRS spokeswoman.

Willey said the system has been skewed, with the highest earners paying the bulk of the income tax burden in the country. For example, the top 10 percent of earners shouldered 71 percent of all federal income tax revenue in 2009, despite making 43 percent of income, according to the Heritage Foundation.

“The problem is we are becoming a country where there are more takers than givers in the system and more people are dependent on the government for support,” Willey said.

Willey said the system will only perpetuate itself as the 50 percent who don’t owe income taxes vote for politicians who won’t raise their taxes. Elected officials, in turn, will tend to support tax credits and other broad-based tax credits to curry favor with voters, he said.

Poverty advocate: poor do pay more in other taxes

But some caution that the figures on income taxpayers should not be interpreted to mean that the poor and lower-income aren’t contributing or paying their fair share.

At the state level, residents also contribute to the state coffers through the sales, use and gas taxes, said Neil Downing, a chief revenue agent for the Division of Taxation. “The state relies on a different number of taxes … out of fairness because we don’t want to put too much of a burden on any one source,” Downing said.

They may not be paying as much in personal income taxes, but poverty advocates point to other sets of data showing that lower-income residents pay disproportionately more in those other kinds of taxes.

For example, the sales tax eats up about 8 percent and the property tax takes up another 3.9 percent of household income for the bottom 20 percent of non-elderly residents. For the top one percent of earners—those making $419,000 or more— the corresponding figures are .7 and 1.8 percent, according to the Institute on Taxation and Economic Policy.

“Make no mistake about it, low-income Rhode Islanders pay taxes and contribute to the cost of public services,” said Kate Brewster, Executive Director of the Institute for Economic Progress (formerly the Poverty Institute). “They pay through the sales tax, property tax, car tax, gasoline tax, and the payroll tax if they are working. It’s a good thing the federal income tax is progressive because it helps to offset other regressive state and local taxes.”

Another factor to consider: the personal income tax figures also do not take into account those who contribute through payroll taxes to Medicare and Social Security, taxes that Downing described as “hefty.”

It’s all about the economy

For Lisa Blais, spokesperson for the Ocean State Tea Party in Action, the number of actual taxpayers underscores the need to grow the economy more than anything else.

“People who truly need help should receive that help—think about the inscription on the Statue of Liberty,” Blais said. “However, without a robust private sector economy, the country will collapse under our own entitlement programs and will finally hit the fiscal wall of an absolute lack of revenue to pay for public services. In Rhode Island, people who are dependent upon government jobs or who depend on social welfare programs naturally vote with their own self-interests in mind.”

She said the state needs leaders who understand how to create a “legislative landscape” that will lift Rhode Island out of its 50th place ranking in the recent CNBC report on business-friendly states. She also called for leadership on education to “free our public school system from the obstacles that keep us from being considered among the best to educate all of our kids.”

Logan said that, ideally, the state economy should be growing into one in which more people are paying taxes because they are earning a living wage and are in a position to contribute through income taxes.

“That would be the most ideal situation, but we’re so far from that it’s hard to think about,” Logan said.

EXTRA: Understanding the numbers

How were the figures calculated? Data used to calculate the number of federal personal income taxpayers in Rhode Island was obtained from the Internal Revenue Service. In tax year 2010, the year for which the most recent data is available, there were 382,967 tax returns that had an income tax liability—which either could have been withheld throughout the course of the year, made in quarterly installments, paid at tax filing time, or some combination of the above.

The IRS figures do not specify how many returns within the above figure were joint returns. Assuming that it does include everyone who did file a joint return, the actual number of individuals who had a tax liability would be 558,293. That represents the maximum number of people in the state who could have owed taxes. The actual figure is likely less than that, but IRS figures are not detailed enough for one to say just how much lower with any meaningful specificity.

How many federal tax filers in RI are there? For all the reasons mentioned above, not everyone who files a tax return necessarily ends up having to owe anything for taxes. The total number of returns filed in Rhode Island in 2010 was 509,091. However, once again, that includes joint and single returns. When joint returns are broken out into individuals, there were an estimated total of 684,182 individuals who filed a tax return in Rhode Island in 2010.

How many Rhode Islanders pay state income tax? Unlike federal income taxes, exact estimates for those who owed state income taxes are not available. However, the state picture typically mirrors the federal one, state and federal tax officials said. In the most general terms, the number of people who owe state income taxes will be the same as, if not less than, the number who owe federal taxes, according to Neil Downing, a chief revenue agent for the state Division of Taxation.

How many Rhode Islanders file state income tax returns? The state does have figures available on how many residents file state income tax returns. For tax year 2010, the number of state income tax returns filed was 476,383, which includes single and joint filers, according to Downing. The figure is slightly less than the 509,091 returns reported by the IRS because the IRS tally includes amended returns that may have been filed for previous tax years, according to Downing.
 

 

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