Shared from the 1/11/2018 The Providence Journal eEdition


No revenue windfall likely for R.I.

State income tax rate tied to adjusted gross income, not federal tax liability



PROVIDENCE — The Raimondo administration is not counting on the big windfall that some other states expect from the GOP tax overhaul in Washington, but neither is it ruling out the possibility of any gain.

The primary reason? “Rhode Island is generally less dependent on the federal personal income tax system than other states,” according to the state tax department.

Expectations rose in recent days with the publications of articles such as this one in The Hill, headlined: “Trump tax law poised to create windfall for states.”

The premise: Some states may see “hundreds of millions of dollars in new revenue” as a result of the massive tax overhaul that the GOP-led

Congress passed and President Donald Trump signed last month. The working theory: While the “reform package” lowered rates, it also broadened the tax base at both the state and federal levels by eliminating or capping some deductions.

That means that taxpayers could soon be on the hook for higher state tax bills in some states that are already publicly debating what to do with the windfalls.

But Rhode Island lawmakers for the most part uncoupled the state income tax from federal tax liability — and the vicissitudes in Washington — several years ago.

In the past, Rhode Island collected a percentage of a taxpayer’s federal income-tax liability. No longer. A 2010 state-tax overhaul eliminated a number of deductions, reduced state tax rates and pegged the new rates to federal “adjusted gross income,” or AGI.

“So when the feds cut income tax rates, no impact. When they change the standard deduction, no impact. When they change personal and dependent exemption amounts, no impact, because all of those things occur after Line 37... [on] the front page of the 1040,” Paul Dion, Rhode Island’s chief of revenue analysis, said in an interview on Monday.

“The bill is huge. It’s 500-plus pages. There’s a lot of moving parts in there. I am not going to lie to you and tell you I understand all of it,” Dion said. Much could depend “on how you realize your income.”

Timing is also an issue. If there is a revenue impact for Rhode Island, “it will show up in [2018 tax year] returns we receive in April 2019,” he said, or later, if higher-income taxpayers seek extensions.

Dion’s best guess: “There are some gains ... and there are some potential losses.” The net effect? “I have not quantified them yet, so I can’t tell you for certain.”

“There is potential for increased revenue to Rhode Island, but we may not know much more until the May Revenue Estimating Conference,” added administration spokeswoman Brenna McCabe.

On the plus side, from a revenue point of view, the new law clamps down on certain interest deductions on business loans. On the other, it allows “faster expensing” of capital purchases by so-called pass-through entities, such as sole proprietorships, where people own businesses and get their income from those businesses.

“The impacts for us are going to be felt through the business side of things, not very much on the personal, individual wage-earner,” Dion said.

What does that mean for the tax, spending and deficit-aversion budget that Democratic Gov. Gina Raimondo proposes to lawmakers next week? Not much. Raimondo is required by law to use the revenue-projections arrived at by the top fiscal advisers to the House, the Senate and the governor in November.

The new tax law was not yet finalized when these revenue-estimators last met. But they added about $15 million to their personal income tax projection for the budget year that begins on July 1, 2018. That represented their best estimate, at that time, of “capital gains realizations that have been delayed because of uncertainty surrounding the federal tax code,” according to Senate spokesman Greg Pare.

At the State House, where the House traditionally takes the lead on budget matters, House Speaker Nicholas Mattiello said: “Every state is different, therefore national reports often lack needed context.

“Personal income tax revenues for a state like Rhode Island, that uses federal adjusted gross income [AGI] as its base, are largely unaffected by changes in ... [the] calculation of federal taxable income. For example, a limit on itemized deductions affects how much of one’s income the federal government will tax, but does not affect the calculation of what the state taxes.

“There may be a state revenue impact from federal changes to what is taxable for corporations. State revenues from them are volatile and therefore difficult to estimate even without tax law changes in the mix.”

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