Economic Progress Institute responds to Rhode Island Public Expenditure Council report on taxing of high income filers

It is time for a new standard narrative, one more reflective of the data about interstate migration, tax rankings, and how we measure and do business competitiveness.

From the Economic Progress Institute:

INTRODUCTION 

Potential. This is the key word in the title of the April 2025 Rhode Island Public Expenditure Council (RIPEC) report “Taxing Top Earners: The Potential Effects of a Proposed Income Tax Hike in Rhode Island.”¹ The report presents many claims as to what might happen if Rhode Island policymakers enact a 3% surtax on income above approximately $625,000 in taxable income (or $750,000 in pre-tax total income) yet is weak on evidence that these outcomes are likely or that the feared outcomes would be significant rather than marginal at most. The Economic Progress Institute (EPI) has reviewed the report and this response addresses many of the claims made in the report. 

The central claim of the RIPEC report is that the adoption of a 3% surtax on taxable personal income above approximately $625,000 in taxable income (or $750,000 in pre-tax total income) of the Top 1% of the state’s tax filers, approximately 5,700 single and joint filers out of a total of well over 500,000 tax filers, would damage the state’s competitiveness and do so in a way that would more than offset the estimated $190 million in annual revenue this surtax would generate. This claim is reminiscent of the long discredited “trickle-down effect,” that somehow if the highest-income and wealthiest people hold onto more of their money, they will invest it in productive ways and trigger a surge of economic activity and job creation. 

The RIPEC report seeks to support its claims of competitiveness and substantial economic harm by pointing to tax competitiveness rankings, interstate migration, pass-through business income, and cases from other states. 

As the following pages will demonstrate, the RIPEC report fails to make a convincing, data driven case about the potential effects of enacting a Top 1% surtax.

TAX COMPETITIVENESS RANKINGS 

The RIPEC report points to Rhode Island’s standing on the Tax Foundation’s annual State Tax Competitiveness Index and the fact that Rhode Island has declined in these rankings. Predicting a further drop in the Tax Foundation rankings, RIPEC argues that policymakers should not adopt the Top 1% surtax proposal.

The Tax Foundation ranking (and similar rankings) serve mostly as clickbait, and we pay far too much attention to them, making them, at most, self-fulfilling prophecies. For a more thorough critique of the rankings, please see the Economic Progress Institute’s March 2024 Top 10 Reasons Business Climate Rankings Don’t Matter. 

The RIPEC report confuses notions of competitiveness. Given how the Tax Foundation does its rankings, it is indeed likely that Rhode Island would have a lower tax competitiveness ranking if the Top 1% surtax is enacted, but this does not at all mean that Rhode Island would be less competitive in the real world. Here are some problems with the Tax Foundation’s approach: 

• It considers only official tax rates, not effective tax rates or what people actually pay after deductions and tax credits; this means that taxpayers in one state may pay less in taxes than taxpayers in another state that, on paper, has lower rates. 

• It most heavily weights personal income tax rates, even though one might argue that property and corporate taxes would be more important to business owners.

• It includes only tax rates and not any other measures of competitiveness, such as business launches or job growth. 

• There is no evidence that moving up on the Tax Foundation’s rankings leads to significant business growth in the real world (or that moving down has a negative effect). 

The focus on these rankings remains rank speculation. There are so many other factors that affect a state’s business climate (including the actual climate). The RIPEC report points to these rankings without quantifying the effect or establishing that any effect is more than marginal in the lives of actual business owners.

Although the RIPEC report does not specifically mention Hasbro and the possibility of the longtime Rhode Island company leaving the state, we should be clear that last year, when the buzz started, there was no talk from Hasbro itself about personal income tax rates, but the company concerns were focused on access to reliable transportation and talent pools. Indeed, Hasbro showed a willingness to pay higher real estate costs with a move to downtown Boston, and top executives seem willing to pay the higher income taxes passed by Massachusetts in 2022. Although the handful or two of Hasbro’s top executives earn multi-million-dollar salaries, the thousand or so other Rhode Island based employees – the artists, product developers, brand managers and even software engineers – are not making salaries that would be affected by this surtax. If anyone thinks that keeping personal income tax rates where they are, or even lowering them, is going to persuade Hasbro to stay or would lure other large businesses to the state, they are wrong. 

THE MYTH OF MASS TAX FLIGHT 

The RIPEC report raises the specter of a substantial negative effect due to out-of-state migration, yet fails to provide the context or data to substantiate such a substantial effect. In March 2025, the Economic Progress Institute released a policy brief, Moving Beyond the Mass Exodus Tax Flight Myth, that presents local and national data to dispel many of the myths repeated in the RIPEC report.²

Perhaps most importantly, the EPI report shows that the highest-income filers are less likely to move than others, and there has simply never been a wave of mass migration of high-income filers in response to changes in marginal tax rate change. In Rhode Island, despite a slight loss of residents due to out-migration, the highest-income group (with $200,000+ income) has had a positive net-migration rate, with more moving in than out of the state in 5 of the 6 years from 2016 through 2022.

While the net loss of 3,027 residents – mostly lower-income or modest-income Rhode Islanders – is regrettable, this accounts for only 0.28% of the population. There is no evidence, and the RIPEC report presents no evidence, of a likely wave of out-migration of the highest-income tax filers or of Rhode Islanders in general. And despite reference to some anecdotal evidence of a few dozen accountants in Massachusetts about clients’ considering that state’s millionaires tax as a factor in a decision to maybe move out-of state, there is no evidence of Massachusetts millionaires flocking to Rhode Island or elsewhere.

The Massachusetts Fair Share Amendment millionaires tax has proven a huge success. Annual revenue collections well above $2 billion have far exceeded early estimates – with hundreds of millions of dollars now being allocated to public transit and education, including funding school meals for all children. And although it’s possible there have been a handful of millionaires who were happy with everything else and had not contemplated leaving the state previously and who have left or will leave the state over the Fair Share Amendment, there has simply been zero evidence of a wave of such migration, which has never occurred anywhere else.

As for the RIPEC report’s claim about loss in Adjusted Gross Income (AGI), Appendix C of the recent EPI report demolishes the myth that AGI leaves a state when people leave:

• To the extent that a job or business remains in a state, the job-holder or business owner will still owe taxes to that state, regardless of their new home address.

• For someone who leaves their job, that job will likely be filled by someone else, and not necessarily a new in-migrant, so the wages or salary remain in the state.

• Business owners are likely to sell their businesses to someone else, so those businesses and jobs and income remain in the state.

• For someone with clients, like a doctor or lawyer, leaving the state usually means selling the business and client list; after all, people in the state still need these services.

• Likewise, when someone retires, whether they move or not, their income might decrease, but their job or business goes to someone else.

If policymakers are hesitant to enact a surtax on the Top 1% out of a fear that large numbers of the Top 1% will uproot themselves and their families and their businesses in a mass exodus, they absolutely should not fear this. It will not happen.

PASS-THROUGH INCOME AND IMPACT ON BUSINESSES 

Instead of paying corporate taxes on business profits, many Rhode Island business owners can and do “pass through” their business income to their personal income tax filings, in order to benefit from paying a lower tax rate. The RIPEC report claims that because a majority of high-income filers claim pass-through income on their personal income taxes (accounting for 20.3% of their total income), the proposed surtax would “have a particularly large effect on businesses.”

There are two problems with this claim. First, as the RIPEC table shows, the 55.6% statistic applies only within this income group. The 3,550 filers claiming pass-through income accounts for only 12.4% of all filers. Furthermore, this is for all filers with $500,000 or more in total income, below the estimated $750,000 in pre-tax income of filers impacted by the tax. This clearly means that over 90% of filers claiming pass-through income will not be impacted by the proposed surtax. And this makes sense. With over 100,000 businesses in Rhode Island and only an estimated 5,700 filers affected by the surtax, there is no mathematical way the surtax could affect the vast majority of Rhode Island’s small businesses and their owners. Secondly, the claim of a “particularly large effect” is vague and unsupported by any data to measure such an effect or the presentation of any clear mechanism to produce such an effect.

THE RELATIONSHIP BETWEEN PERSONAL INCOME TAX RATES AND ECONOMIC GROWTH 

The claim that increasing or decreasing top tax rates drives business activity remains unsupported by the evidence: 

• Out of the seven states plus the District of Columbia that instituted millionaires taxes between 2000 and 2022:³

  • 7 of the 8 had per capita growth in income at or above the rates in neighboring states

  • 6 of the 8 had state Gross Domestic Product (GDP) growth, a standard measure of economic growth, similar to or higher than neighboring states

  • 5 of the 8 had job growth at or above the rates in neighboring states

• The five states that cut their personal income taxes the most in the wake of the Great Recession of 2007-2009:⁴

  • 4 of the 5 had personal income growth below the national rate

  • All 5 had weaker GDP growth than the nation overall

  • 4 of the 5 had job growth below the national rate

• Out of 20 studies published in academic journals between 2000 and 2018, 15 studies concluded that there were no significant effects of personal income tax rates on state economic growth (and one provided inconsistent results).⁵ 

TWO CASE STUDIES 

The RIPEC report points to the cases of California and New Jersey to suggest calamity from instituting higher marginal tax rates, yet the data do not support the RIPEC claims, as the Economic Progress Institute’s migration policy brief made clear earlier this year.

To be clear, the “substantial one-time out-migration” noted by the RIPEC report refers in part to an estimated 535 additional out-migrants out of 66,936 filers in California’s 12.3% tax bracket – a net out-migration of 0.8%. When most people read the word “substantial,” they are likely thinking about rates much higher than 1%. In its first year, the new tax brought in over $5.8 billion in additional revenue (far outweighing the estimated $200 million in lost revenue), and the tax was renewed by voters in 2016. In addition, the authors of the study cited in the RIPEC report concluded that the out-migration of millionaires was likely a one-time effect of the tax increase, and most of those who left continued to file non-resident tax returns in California, meaning they continued to engage in activities that generated tax revenue for the state.

The figure of $8 billion in lost income is misleading. This is not a loss of tax revenue. Even the authors acknowledge that their “results do not indicate that the near-term direct income tax losses from tax-induced migration would ever eclipse a state's revenue gain from an income tax increase…”⁶ They estimate a revenue loss of $400 million from this income. Perhaps more significantly, they explicitly refuse to consider in-migration of millionaires during the same period! As the authors of the original study note, “we agree, that out-migration increased after the tax came into effect. However, millionaire in migration also rose after the tax increase, by almost an equal amount. In the wake of a millionaire tax in New Jersey, there was both rising out-migration and rising in-migration of millionaires. Net-migration models show that these two forces mostly cancelled each other out, leaving population largely unchanged.” They point out that the authors of the above claim “acknowledge this in a footnote.” According to the authors of the original analysis, in 2006, New Jersey lost $16.4 million in tax revenue from millionaires who left (for a variety of reasons) from 2004-2007, while the state pulled in an additional $1.08 billion in new revenue in 2006 alone.⁷ 

Whether in these historical examples from California and New Jersey or elsewhere, the amount of revenue loss due to out-migration is dwarfed by the new revenue. There is no realistic scenario where the loss in tax revenue comes close to the estimated $190 million in new revenue estimated for the Top 1% surtax proposal.

CONCLUSION 

No doubt EPI and RIPEC agree that the state should pursue policies that increase economic opportunity and productivity for all Rhode Islanders. Indeed, the RIPEC report clearly acknowledges in its closing sentences that tax policy and lower taxes is not the only tool towards this end: “The best way to ensure the continued increase in state tax revenues is to encourage policies that help Rhode Islanders increase their income and spending power. Such policies include tax reform, as well as the use of existing revenues to make targeted investments in areas like infrastructure and education, which have been shown to enhance economic development.” Where EPI and RIPEC differ is on the effect of state personal income tax policy.

In the context of a state budget gap of over $200 million and threatened federal cuts of $300 million per year or more, EPI argues that the new revenue from the proposed Top 1% surtax would help prevent cuts to critical services and that the loss of these critical services would make Rhode Island less competitive. Businesses, like Hasbro, seek better public services, like a strong public transit system. Workers and business owners alike want affordable child care and healthcare options and excellent schools. We all saw how the infusion of federal assistance during the pandemic and measures like the enhanced child tax credit played critical roles in preventing an anticipated recession.

The Governor, Speaker of the House, the Senate President, State Representatives and Senators, and their advisors all need good data and information as they decide whether to enact the Top 1% revenue proposal to help narrow the budget gap and prevent cuts to services and make targeted investments. For too long, many of our leaders have bought the standard narrative that somehow the Top 1% of earners or millionaires (not even the Top Half of the Top 1%) control the state’s economic competitiveness, that if we make our moderately progressive personal income tax system a little more progressive, this has the potential to spell economic disaster through large-scale migration and harm to businesses.

As EPI’s response to the RIPEC report shows, the data behind the standard narrative and the anxieties generated by it are more a legacy of trickle-down economics than a good reading of the data and case studies available to us. It is time for a new standard narrative, one more reflective of the data about interstate migration, tax rankings, and how we measure and do business competitiveness. Our policymakers should consider this data driven perspective and reject the misleading narrative of impending disaster they are told year after year. We should increase our competitiveness by generating revenue and investing in Rhode Islanders.

1. RIPEC, “Taxing Top Earners: The Potential Effects of a Proposed Income Tax Hike in Rhode Island” (April 2025).

2. Alan Krinsky, “Moving Beyond the Mass Exodus Tax Flight Myth” (March 2025), Economic Progress Institute.

3. Wesley Tharpe, “Raising State Income Tax Rates at the Top a Sensible Way to Fund Key Investments,” CBPP, February 7, 2019.

4. Wesley Tharpe, “Raising More Income Tax Revenue Can Help Pennsylvania, Other States, Pursue a Stronger Economic Future,” CBPP, March 1, 2024.

5. Tharpe, “Raising State Income Tax Rates.”

6. Roger Cohen, Andrew Lai, and Charles Steindel, “State Income Taxes and Interstate Migration,” Business Economics (July 2014), vol. 49(3), pp. 176-190.

7. Cristobal Young and Charles Varner, “A Reply to ‘A Replication of ‘Millionaire Migration and State Taxation of Top Incomes: Evidence from a Natural Experiment’ (National Tax Journal 2011)’,” Public Finance Review (2015), vol. 43(2), pp. 226-234.