Testimony in Support of a Personal Income Surtax on Millionaires: S-2355 Senate Committee on Finance

Last updated: June 17, 2024

The Economic Progress Institute supports Senator Murray’s S-2355 to create a new 3% surtax for taxable income above $1 million. This would impact approximately only 2,134 taxpayers, those with Adjusted Gross Income (AGI) above $1,000,000. Furthermore, the 3% would apply only to taxable income above this amount. All income below it will continue to be taxed at current rates, according to the existing three-bracket system. This means, for example, that a taxpayer with AGI of $1,001,000 would pay only an estimated $30 more per year, and a taxpayer with $900,000 would pay nothing additional. S-2355 would also direct the new revenue into a Restricted Receipts account, with the funds devoted to child care and education, roads and bridges, and public transportation – policy areas including programs suffering from underinvestment. 

Tax Fairness 
Although Rhode Island’s Personal Income Tax is moderately progressive, the state’s overall tax structure – including property and sales taxes – is regressive. This means that Rhode Island’s lowest income earners pay a larger percentage of their income in taxes than do the highest earners. The bottom 20 percent pay 1.55 times as much as the top 1 percent (13.3 percent of income vs 8.6 percent), as shown in Figure 1. S-2355 would prove a modest measure in reducing this gap, with the top 1 percent paying 9.7 percent of income and bringing them more in line with the next highest 79 percent in income. 

Revenue Planning for the Future 

Although Rhode Island received a considerable amount of much-needed COVID-19 relief funds from the federal government, these funds were designed to provide temporary aid for short-term recovery needs and for one-time investments. What these relief funds did not provide was the ongoing revenue base to build for the longer term, to support the services Rhode Islanders and Rhode Island businesses require to thrive. 

S-2355, once enacted, will not take effect until Tax Year 2025, meaning that much of the revenue will not reach the state until Rhode Islanders file and pay their taxes in 2026, not quite two years from now. If we wait until the one-time relief funds completely disappear to address Rhode Island’s revenue challenges, it will already be too late. We need to plan now, and S-2355 accomplishes this by raising – from millionaires – an estimated $126 million in revenue per year, possibly considerably more. With such funds, we will be able to build upon the successes of our recovery investments in education and infrastructure.

Racial Equity and Tax Fairness 

Decades of racist tax and other public policy – such as redlining for providing and denying mortgages – have resulted in large racial and ethnic disparities in both income and wealth across the country. Tax policies on the state and local levels play a role in maintaining or even worsening the existing wealth and income gaps. In Rhode Island, Black filers account for 5.8% of all filers yet only 0.7% of those in the top 5% of income. Latino Rhode Islanders account for 15.5% of filers yet only 3.9% of those in the top 5% of income. A millionaires surtax, which would affect less than one half of one percent of filers, would decrease racial and ethnic disparities. 

Good for Small Businesses 

Most small businesses simply do not have taxable income within range of this tax. For 2018, the median income for self-employed Rhode Islanders with incorporated businesses was $53,794, and for those with unincorporated businesses, the median income was $32,639. Not even all the 2,100 or so taxpayers affected by this proposal would be small business owners. 

The vast majority of small business owners will see NO change in their taxes. The proposed tax would only apply to business owners whose income after all expense deductions is above $1,000,000. For almost all small business owners, there will be no additional taxes. The revenue from S-2355 will provide education, childcare, road, bridge, and public transportation investments that will benefit Rhode Island’s economy and thus small businesses and small business owners. 

A Popular Proposal 

Although politicians worry that no one likes any sort of increase in anyone’s taxes, this is not the case. Poll after poll – across the country and in Rhode Island – demonstrate that proposals like S-2355 win large majorities of support among constituents. In a 2021 poll of Rhode Islanders, voters were asked specifically about creating a new tax bracket on income above the 1% threshold, and the results are striking: 72% supported a new top 1% tax bracket, with 51% strongly supporting it, and only 25% opposing it.

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