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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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Comments:

According to your article "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." Most of the wealthier Rhode Islanders may find deductions to lower their taxes but it is next to impossible to pay no income taxes. In addition, the state of RI changed the deductions this year hurting most middle and upper income wage earners.

The real story here is that most low-wage earners don't pay income taxes and in fact receive thousands of dollars from the federal government in the form of an earned income credit. Where does that come from? It comes from those of us who pay taxes. I would have pressured Logan for an exact figure on the small sliver of wealthier Rhode Islanders. He didn't provide one because it is statistically irrelevant. If you make over $380,000 a year you hit the 35% federal tax bracket. Then there is Medicare, Social Security, TDI, and state tax which push you to around 50%. By the way when you die the government still isn’t done with you. If you are financially well off and leave a sizable estate, they step in for another 3rd on what is left. (Keeping in mind you already paid taxes on the money you earned) Do you think they paid enough yet?

To state that the low income earner pays sales, gas and other taxes is ridiculous. Why, because they get a heck of a lot more out of the system in the earned income credit, paid day care for their kids, low priced or free medical, food stamps, etc. While the upper income earner pays much more in property taxes, sales taxes (because they spend more).

If you continue to wage war on the individuals who actually pay taxes in RI, you will have none left as they all exit our state to pay less in other states. What you will get is more of the individuals who pay no income taxes and need more services the rest of us pay for resulting in higher taxes on the middle class. The most disturbing fact in this story should be, “the top 10 percent of earners shouldered 71 percent of all federal income tax revenue.”
How about an article on how much small business owners pay in taxes and fees to government here in RI ? That would be very eye opening.

Comment #1 by guy smily on 2012 07 13

PLEASE - another skewed GoLocalProv article.
The fact is the wealthy benefit far more from the government and social infrastructure than low income people. Without that infrastructure they could not make their money. Thus, they should pay more.
Just one example - UPS/FedEx benefit more from taxpayer-paid roads than I do, so they should pay more taxes. The same is true for all other businesses who generate wealth for their owners/stockholders.

Comment #2 by Daniel Dupuis on 2012 07 13

Mr. DuPuis:

Are you part Cherokee by chance?

This argument: "The fact is the wealthy benefit far more from the government and social infrastructure than low income people." is utterly ridiculous. Every living breathing citizen benefits from "government and social infrastructure". Everyone uses the roads and/or buses and/or sidewalks. Everyone uses electricity. Everyone is protected by the police and fire departments. Everyone can use the public schools. This idea that just because someone has more money in a bank account or a bigger house that they benefit "more" from these things is sophmoric. Not to mention that all these big bad evil corporations and rich people (who actually employ most workers and generate consumer goods and services that we all benefit from as well) DO pay more in taxes, utilities etc. as it is - a lot more in fact.

Under your logic, if I had children and sent them to private school (or didn't have children at all) I should be able to refuse to pay any taxes that go to fund my city's public school system. Because I have private health insurance that pays most of my medical care I should be able to refuse to pay any portion of my taxes that goes to pay uncompensated care reimbursements for the uninsured who flood our hospitals for primary care. And on and on. Somehow I doubt you would agree with those propositiosn but you couldn't give a logical reason why not based on your earlier post. Give us all a flipping break.

Comment #3 by Common Sense RI on 2012 07 13

Well said Common Sense RI, I don't think I can improve on that.

Comment #4 by Joe M on 2012 07 13

implement a flat tax so everyone pays the same rate - maybe that will take the "fairness" mantra out of public policy discourse.

there is only talk about taxes in RI; how about hammering the notion that the state needs to cut spending in a major way to address the annual shortfalls?

get rid of things like the recycling calendar and state subsidized vehicles for public employees. utilize teleconferencing to cut back on travel expenses.

robbing Peter to pay Paul does not work.

Comment #5 by Mateo C on 2012 07 13

@Daniel Dupuis--- You use the highways and roads more than you think. Unless you purchase nothing at any retailer.

How, pray tell, do you think groceries get to the market for you to buy? Home goods to the builders supply store or department store?

So yes the manufacturers and distributers are using the roads to move their goods, they are moving their goods to you and your neighbors.

Comment #6 by Wuggly Ump on 2012 07 13

@Mateo C, I couldn't agree more with a flat tax.

Comment #7 by Wuggly Ump on 2012 07 13

Seeing as how the numbers are consistent over time and consistent with the national average, this hardly seems to be news. As far as the "skin in the game" argument some are making, are they suggesting toddlers and the homeless should be paying income tax on income they don't make? Is a tax collector going to make the rounds, demading the homeless hand over some of the small amount of cash they may have on them (and need for survival)? And, perhaps more to the point, does anyone actually think that the revenue brough in from this "skin in the game tax" that would be leveled on the homeless, very poor, small children and the elderly could ever offset the overhead costs associated with processing this revenue?

Comment #8 by Mike Cournoyer on 2012 07 13

The idea that the high earners in the US don't pay their fair share in taxes is just insane. It's a convenient rallying cry for the Occupy Wall Street deadbeats and nothing more. The fact is that 94% of all federal income taxes are paid by only the top 20% of US earners. That comes from the Congressional Budget Office report issued yesteterday (look it up). There will be no real fairness in the US tax code until ALL Americans must pay taxes, including the 50% who currently pay nothing. Flat tax would solve that in a hurry.

Comment #9 by Captain Blacksocks on 2012 07 13

By the way, nobody is suggesting that small children and the seriously poor and disabled be forced to pay taxes when they have no income. If they have no income, obviously their tax bill will be zero. The 50% of US citizens who pay no fed income tax are able-bodied adults and many could and should pay something. If they don't pay taxes, what are they doing except sponging off society? Where is the pride in that.

Comment #10 by Captain Blacksocks on 2012 07 13

More nonsense from FoxNewsProv

Comment #11 by Donnn Roach on 2012 07 13

Actually, as the article above mentions, over 50% of the 50% are children:

"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."

And then about 15% of the overall number is over the age of 65:
"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."

So when you take away children and these other population groups that we both agree need not be forced to pay taxes when they have no income, the 50% gets knocked down to somewhere around 10%. There's debates we could have about what is the best approach for that 10%, but my point here is that this notion that 50% of the population are able-bodied freeloaders is terribly misleading.

Comment #12 by Mike Cournoyer on 2012 07 13

Mike C,

The problem isnt that kids, poor and retired who have no jobs, no income need to be taxed. The problem is that a very large portion of the US who are working are paying very little in taxes and the top 10-20% of the population is paying almost 100% of the burden. It's not right. You can tell me that it's only 10% of able-bodied Americans who are not paying taxes. Part of the problem is that 30% or so of America is on welfare for life and should not be. Way should someone receiving public assistance not pay an income tax on it? It would teach them a little bit about being a responsible citizen and contributing to society. See the CBO report about who pays what:
Distribution of Federal Taxes Across the
Income Scale
The federal tax system is progressive—that is, average
tax rates generally rise with income. In 2009, households
in the bottom fifth of the before-tax income distribution
paid 1.0 percent of their before-tax income in federal
taxes, households in the middle quintile paid
11.1 percent, and households in the highest quintile paid
23.2 percent (see Figure 1 on page 8). Average rates were
higher for higher-income groups within the top quintile,
and households in the top 1 percent of the before-tax
income distribution faced an average rate of 28.9 percent.
Because average federal tax rates rise with income, the
share of federal taxes paid by higher-income households
exceeded their share of before-tax income, and the opposite
was true for lower-income households. In 2009,
households in the highest quintile received 50.8 percent
of before-tax income and paid 67.9 percent of federal
taxes; households in the top 1 percent received 13.4 percent
of income and paid 22.3 percent of taxes

Comment #13 by Captain Blacksocks on 2012 07 13

Attention Mike Cournoyer, you need to do your homework. Whereas GOLocal may have looked at RI and overall population, national averages look specifically at wage earners, and not children. In Fact, the Top 10 Percent of Earners Paid 71 Percent of Federal Income Taxes. The bottom 50 percent of wage earners paid 2 percent of income taxes.

According to the Heritage Foundation, “The percentage of people who do not pay federal income taxes, and who are not claimed as dependents by someone who does pay them, jumped from 14.8 percent in 1984 to 49.5 percent in 2009.” That means 151.7 million Americans paid nothing in 2009. By comparison, 34.8 million tax filers paid no taxes in 1984.

A 2008 study by the Organization for Economic Cooperation and Development, for example, found that the highest-earning 10% of the U.S. population paid the largest share among 24 countries examined, even after adjusting for their relatively higher incomes. "Taxation is most progressively distributed in the United States," the OECD study concluded.

Meanwhile, the percentage of U.S. households paying no federal income tax has been climbing, and reached 51% for 2009, according to a new analysis by the Joint Committee on Taxation.

Comment #14 by guy smily on 2012 07 13

Guy S, thanks for the facts. This country is WAY more socialist than I would have guessed. It's politically incorrect to say that anyone except the "rich" should pay more in taxes, but that's the truth. The 50% who pay no taxes in this country should go out and hug a rich guy today and say "thanks for the free ride." Flat tax....25% for all. Never happen, but it's fun to consider.

Comment #15 by Captain Blacksocks on 2012 07 13

Guy S, thanks for the facts. This country is WAY more socialist than I would have guessed. It's politically incorrect to say that anyone except the "rich" should pay more in taxes, but that's the truth. The 50% who pay no taxes in this country should do out and hug a rich guy today and say "thanks for the free ride." Flat tax....25% for all. Never happen, but it's fun to consider.

Comment #16 by Captain Blacksocks on 2012 07 13

If the dems had their way, they'd be taxing the rich......even more.
It's obvious here, that the rich are already paying the taxes FOR the poor.
I say, tax the poor. We do that by cutting their benefits and FORCE them to look for a job!!!!!! The unemployed don't WANT to work, because the government (ie the taxpayer) is supporting them.

This state is a pathetic waste and should be dissolved as a state. Divide the state and give half to CT and have to MA.
RI doesn't know how to govern itself anyway.

Comment #17 by pearl fanch on 2012 07 14

Great comments and facts here from those arguing for less tax welfare and a fairer tax system where everyone plays at least SOME income tax to their country and state.

I'm always impressed by how the more conservative commenters deliver facts and rationality, while the progressive types deliver comments that can be categorized as emotional propaganda -- and that's being generous.

Comment #18 by Art West on 2012 07 14

I agree that to be part of a society, one must contribute to it, even if it is a very small amount. People often will feel entitled to a benefit by simply receiving it. It is the same with health care. It is extremely costly and should never be absolutely free. Unless there are extenuating circumstances, all should contribute to the functions society. Out of control entitlement is killing this nation!

Comment #19 by Stan Lee on 2012 07 15

Mr. beale....could you please be a little bit more specific as to where in the name of God you are coming up with your information on Rogues islanders and Rhode island State Income taxes!

I am not at all anything close to being RICH! Mt wife and I get Social Security....and I get a lousy, stinking $308.00 Private Sector Employment, unlike our bloated, entitled, Public Sector Employees.

This year My wife and I paid close to $1,500.00 in Rogues Island State Income Taxes....and that is because this God Forsaken freaking State taxes Seniors Social Security Income (Our own freaking money being returned to us) - in addition, with the tax reform of a few years ago, we can no longer deduct our mortgage interest....nor can we deduct our out of pocket medical expenses....which, last year, were $11,800.00!

So here we are, we paid NO Federal Income Tax...actually got a refund....but in so far as the State of Rogues Island, we had to bend over!

Comment #20 by TOM LETOURNEAU on 2012 07 15

Tom, as stated in the story the source is IRS data. Stephen

Comment #21 by Stephen Beale on 2012 07 16




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