Who gets hurt most by Rhode Island taxes? The obvious answer is the rich.

After all, someone with a view of Newport's Ocean Drive pays more taxes in one year than a Pawtucket factory worker makes in total wages in two years. But the actual answer is that the poor and middle class have more reason to gripe.

People at the bottom of the economic ladder pay a higher percentage of their incomes in state and local taxes than do those at the top. For example, a Providence family with the achingly low income of $7800 a year might pay about 14 percent of that meager amount in sales, property and income taxes. In contrast, the Ocean Drive crowd loses only about 10 percent of its income to taxes.

Moreover, the poor seem to have lost ground in the yearly tug-of-war over taxes at the State House. An analysis of nine tax breaks or proposed changes debated in the past decade show that the rich have a slight edge:

RICH -- 2 wins, 2 losses

POOR -- 1 win, 2 losses

TIES-- 2

The rich won with a nine percent reduction in the income tax over the past five years, and with scuttling of the capital gains tax scheduled in 2008. They lost when their income tax rates were hiked briefly in the 1990s. More recently, they failed to get a special income tax rate cut. The poor won with expansion of property tax breaks for low-income homeowners and renters. But they lost with a big hike in the cigarette tax, and with the legislature's continuing refusal to improve an income tax break pegged at the working poor.

Two other measures are probably ties: Both rich and poor benefit from the phase-out of the property tax on cars; and either side may be able to craft future tax benefits now that the rigid "piggyback" method of setting the income tax rate has ended. The box scores, though, don't tell the whole story.

Individual savings for the rich probably are personally more profitable than are benefits won by the poor. For example, the rich last year won a stunning victory that could mean lower taxes down the road: repeal of Rhode Island's capital gains tax. That's a victory, because wealthy taxpayers currently pay the most taxes on profits made when stocks and similar investments are sold. Take the Ocean Drive resident. His average capital gains taxes in a good stock market year might be $7700. He'll save all of that when the tax is killed.

One estimate is that only five percent of all taxpayers -- about 4800 people or families -- will get 65 percent of the $57 million that the state could lose from the tax. Meanwhile, when the poor lose in the tax wars, the impact can be relatively painful. In Pawtucket and other working class strongholds, taxpayers suffered a defeat last year when the state tacked 29 cents onto the cost of a pack of cigarettes, for a total tax of $1 a pack.

That's a loss because whenever a levy costs everyone exactly the same, people at the bottom pay a bigger percentage of their small incomes for the tax than those at the top. Rich people smoke, but poor smokers pay a heavier burden. Take smokers with a pack-a-day habit, meaning taxes of $365 a year. A poor smoker earning $25,000 a year pays nearly one-point-five percent of his income in cigarette taxes. A rich smoker earning $250,000 pays less than zero-point-15 percent. It's similar with lottery tickets, which are played more extensively by, and take a bigger chunk of income from, low- and moderate-income players.

Many might argue that the cigarette tax is actually good. A painful tax on a cancer-causing product makes it harder to indulge in a dangerous habit. Similarly, the proponents of the repeal of the capital gains tax have argued that there's an equal social good in freeing the wealthy from that levy. They contend that the capital gains tax has been scaring rich people away from the state. That hurts, reducing the number of rich taxpayers here, and losing the jobs that their companies might provide.

This is one reason the tax wars are so hard to follow. Not only is the language of the tax war foreign to most human beings -- "capital gains," "adjusted gross income," "refundable earned income tax credit." But trying to sort out the "good" tax breaks from the "bad" is hard, if not impossible. However, there is a simplistic method of separating winners from losers, and that's to figure out whose personal finances are hit hardest by taxes. A Washington, DC, think tank called the Institute on Taxation and Economic Policy worked out these figures for Rhode Island:

* People with incomes lower than $13,000 a year are at the bottom one-fifth of the economic ladder. Their taxes take about 14 percent of their income.

* Middle-income taxpayers, earning between $25,000 and $39,000, pay 11 percent in taxes.

* But the top one percent of taxpayers, with average income of $640,000, pay a little less than 10 percent in taxes.

It's true that rich taxpayers fork over more actual dollars: $64,000 in this example, compared to $1100 for the poorest taxpayers, and $3400 for people in the middle. But the impact does seem harshest for those with the least money. There is an explanation for this: not all taxes hit various groups the same way. Here's how it plays out when it comes to the state's three major taxes:

* Sales tax: Everybody pays the same rate: seven percent when buying a TV or a car. But the poor lose more than eight percent of their income when they shop. Middle-income taxpayers about five percent. The very rich, less than one percent.

* Property tax: Again, all residents of a city or town pay the same rate, although tax rates are shockingly different from community to community. For houses, rent, and cars, the poor pay about six percent of their income in property taxes. Middle-income taxpayers pay four percent. The rich three percent.

* Income tax: Here, tax rates climb with income. So the poor pay just zero-point-two percent of their incomes in taxes. Mid-level people pay nearly two percent. The rich pay about six percent.

In the arcane language of the tax debate, a flat-rate levy like the sales tax is "regressive," because it hits the poor relatively harder than the rich. But the income tax, with its rates steadily climbing as income rises, is said to be "progressive," because it asks more of those who have the most money. Looked at purely in class terms, the poor benefit from the progressive income tax, and the rich lose the most. Similarly, the poor get hurt the most by regressive sales and property taxes, and the rich have less to lose.

Advocates for lower-income taxpayers keep looking for ways to balance regressive taxes. For example, for several years, they've pushed the General Assembly for a tax break with the awkward title of "refundable earned income tax credit," or EITC, for low-income workers. The EITC cuts income taxes of the poor. And for the very neediest, it provides a "refund" -- actually a government grant -- even when no taxes are paid.

Take a West Warwick family of three earning $18,000. The George Wiley Center in Pawtucket, which advocates for the poor, estimates this family would be eligible for a payment under the proposed "refund" system. The payment would eliminate the $147 tax they owe, and provide an additional $500 in cash. But while the tax break for capital gains was enacted last year, the refund program for the poor failed.

THIS BRINGS UP a logical question:
If there are more low- and middle-income taxpayers than those who are wealthy -- poor taxpayers outnumber wealthy ones nine to one -- how come they've been faring poorly in the tax tug-of-war? Poor and middle-income taxpayers, after all, also outnumber the rich ones in votes.

There are two reasons. One is that advocates for those who pay higher taxes are better financed, better organized, and better armed with facts and technical knowledge than their counterparts. Lobbyists for such groups as the Greater Providence Chamber of Commerce have the time and the money to master a confusing and often boring subject.

A business-backed watchdog group, the Rhode Island Public Expenditure Council (RIPEC), has a long history of studying state taxes, and even opponents credit RIPEC for having the most definitive facts and figures on the subject. A landmark RIPEC study of Rhode Island taxes concluded two years ago that the regressive property tax has too big an effect on the state, and is one reason that both rich and poor suffer from taxes. Two major recommendations of the study -- ending the capital gains tax and severing the automatic link between state and federal income tax rates -- were enacted last year by the General Assembly.

The fight, however, is not one-sided.

A number of groups argue the case for the low and middle classes, including Ocean State Action, a coalition of labor and community groups. The George Wiley Center and The Poverty Institute at Rhode Island College also have developed a working knowledge of taxes. Still, advocates for low-income people sometimes feel outgunned.

"The average Joe Blow doesn't have time, money and energy to sit in the State House while these issues are being debated and voted," says Kate Coyne-McCoy, a member of Ocean State Action and an unsuccessful candidate for Congress in 2000. "But representatives of the 40 largest businesses, RIPEC and others, hire lobbyists and attend fund-raisers," Coyne-McCoy says. "The average guy probably couldn't tell what the car tax was or what he does or doesn't pay in sales taxes."

On a national level, many Americans remain unaware -- or even disbelieving -- of the real impact of economic policies. Although the income of families in the top one percent was 10 times that of typical families in 1979, and 23 times and rising in 1997, as New York Times columnist Paul Krugman recently noted, "focus groups literally refused to believe accurate descriptions of the stimulus bill that House Republicans passed on a party-line vote back in October."

The other reason for the outcome of the tax debate is that it's often intertwined with other issues, namely business development and the health of the state's economy.

For example, Christopher L. "Kip" Bergstrom, executive director of the state Economic Policy Council, which pushed for lower income tax rates and a rollback of the capital gains, objects to even characterizing the debate in terms of a tug-of-war between rich and poor. The concern of the policy council, which looks for ways to bring new business to the state and has helped start more than 50 firms, is to make sure Rhode Island competes effectively with other states, especially neighboring Massachusetts. One way to do that, Bergstrom says, is to keep Rhode Island rates in line with those in Massachusetts.

Money makes the rich portable, Bergstrom says. They can as easily live in Massachusetts as Rhode Island. And when they drop anchor in the Bay State instead of the Ocean State, they take their taxable incomes -- and perhaps jobs in their businesses -- with them. "It wasn't that they wanted to reduce rich people's taxes -- nobody cares about that," Bergstrom said about General Assembly tax changes. "They wanted to make us competitive."

Richard McIntyre, a University of Rhode Island economist, who looks at the issue from the other end of the ladder, scoffs at this argument. "There is no evidence," says McIntyre says, that "the phase-out of capital gains will increase investment in Rhode Island. None. It's blackmail," McIntyre says. "The notion that some people are going to move to Rhode Island because it's a tax haven is ludicrous."

THE FLIP SIDE of a tax break is what happens when tax money disappears.

Rhode Island taxes support an array of vital activities, from schools and highways to programs nationally acclaimed for helping the retarded and providing a much-praised health insurance program for the poor. If you stop collecting one tax, you have to raise some other taxes or cut state spending. For example, Governor Lincoln Almond and the General Assembly agreed in 1997 to drop state income tax rates by nine percent in a phase-out that concluded this month.

This year alone, Rhode Island might have collected $78 million to $82 million if the income tax rate hadn't been lowered. That's more than the estimated $70 million budget shortfall this year. The capital gains cut could cost $57 million a year in lost revenue, although it won't take full effect until 2008.

Already this year, there's controversy about another tax phase-out: elimination of property taxes on cars, which this year alone is expected to cost between $97 million and $110 million. Because the state is looking at big deficits this year and next, Almond has proposed freezing the phase-out two years into the program. It's a hot-button issue because this is a popular tax cut and one that addresses issues of unfairness to poor and rich taxpayers alike.

Here's what happens: Cities and towns are allowed to tax motor vehicles in much the way they do houses. In Providence, someone with a car worth $10,000 could have paid nearly $770 had the phase-out not begun. But this year, state law says that the city can't tax the first $3500 of a car's value. So the tax on the remaining $6500 of the vehicle's value is about $500 -- a big drop.

In terms of fairness, prolonging the car tax also poses problems because rural and suburban towns generally have lower tax rates than do cities. Charlestown, with one of the state's lowest vehicle tax rates, would charge a $10,000 car only about $130. And with this year's value dropped to $6500, it would send a tax bill of only $85. Thus, supporters of the car tax phase-out say one of the most despised taxes would be eliminated by 2007, and poor and low-income persons spared a big chunk of their incomes.

But the rub comes in how the cut is financed. As local communities lower their car taxes, the state reimburses them with money raised from other taxes. The projected cost this year, about $100 million, could rise to $282 million by the time the phase-out ends. This terrifies advocates for low- and middle-income families. "There's not enough money to fund services, and it provides an excuse not to provide service to those who need them," says Kathryn Hopkins, policy director for Ocean State Action.

Thus, Almond gains some unexpected allies as he looks to halt the progress of the car tax rollback. While Ocean State Action has taken no official position, spokeswomen Hopkins and Coyne-McCoy are uncomfortable with allowing the tax cut to go forward. And Nancy Gewirtz, a Rhode Island College social work professor who heads the Poverty Institute, and Henry Shelton and Bill Flynn of the George Wiley Center, are outright opposed to continuing the rollback. "Our position now is that we've already helped low-income people by phasing out the first $1500 or $3500" of a car's value, Gewirtz says. "But now more is going to go to wealthier people, and a lot of elderly and low-income people don't own cars."

Almond and the liberals could face a fight not only from some legislators -- it was the brainchild of Representative Antonio J. Pires, former House Finance Committee chairman and an early contender in the next race for governor - but forces such as RIPEC.

Gary Sasse, RIPEC's executive director, says the car tax is one of the least fair of all levies, and shifting taxes from the local to the state level is one of RIPEC's major goals. "It's important to get the property tax rate down, and 11 percent of that is the car tax," Sasse says. "The car thing is unfair in part because a $20,000 car in a suburb is taxed the same as a $5000 car in Providence, and that's just plain unfair."

To show how complex the tax debate can get, McIntyre, the liberal URI professor who usually campaigns against regressive taxes like the car tax, wants the car tax kept in place. His reason: high taxes discourage reliance on the automobile. Making cars easier for anyone to afford, by taxing them less, is bad public policy, he says. "It's a horrible idea. Not just bad, horrible," McIntyre says of the rollback. "We have too many cars on the road. We know car accidents are the leading cause of death of young people. We know what impact the internal combustion engine has on the environment."

There may be a middle ground.

RIPEC's Sasse says there are ways to cut some of the money going back to cities and towns without curbing the car tax rollback. That's because the state currently is reimbursing the cities and towns a year in advance for each year of the phase-out. For example, this year the state is promising reimbursements as if the towns were cutting the car values by $5000 instead of the actual $3500.

Still, any money saved at the state level will have to be made up at the local level. And that means a hike in property tax rates, which most agree are unfair. The state could raise the income tax. But that's not likely in a recession, or in the face of a powerful business lobby. It could cut programs, not humane in a recession, and not easy for a liberal General Assembly with a reputation for fostering social programs.

That's the real trouble with taxes. Making them fair isn't easy.

Brian C. Jones can be reached at brijudy@ids.net..

Issue Date: January 25 - 31, 2002