Michael McMahon: Look at Conn. , Mass. -- How tax system ravages R.I.

IN THEIR FEB. 24 Commentary piece, "Taxes no threat to Rhode Island economy," Linda Katz and Ellen Frank, of the Poverty Institute, claimed that high marginal tax rates have no impact on economic activity. This claim ignores the facts of the Rhode Island situation:

-- We are the only state in the Union where a mere 20-mile drive allows people to cut their state taxes by as much as 50 percent.

-- On a per-capita basis, we have half the high-income earners of Massachusetts and one-third of Connecticut .

-- Over the last 10 years, only one new company created in Rhode Island (BankRI) has grown to employ more than 250 people. Massachusetts has created 22, Connecticut 9, and New Hampshire 5.

-- From 1995 to 2002, the amount of income reported by Rhode Island 's top income earners has declined by 17 percent. At the same time, top income earners in our neighboring states have reported increases as follows: Massachusetts , 82 percent; Connecticut , 41 percent; and New Hampshire , 35 percent. For the United States as a whole, the increase was 35 percent.

-- Over the same time, families with annual income under $25,000 have increased by 13.2 percent in Rhode Island , while in Massachusetts and Connecticut this group declined by 4.7 percent and .1 percent, respectively.

It does not take a Ph.D. in economics to draw the conclusion that Rhode Island -- with the country's second most generous social-support network, and the third highest marginal tax rate -- could be importing people of low-income means while at the same time driving away high-income earners and company builders.

The General Assembly recognized the impediment that Rhode Island 's high marginal tax rate presents to attracting high-paying jobs when it passed the Jobs Growth Act. Cause and effect: 1,000 new top-paying jobs from Fidelity are coming to Rhode Island . In the current session, under the leadership of House Speaker Murphy and Senate President Montalbano, the leadership is addressing this issue on an across-the-board basis.

Most Rhode Islanders probably do not know that 35.7 percent of our state's total income-tax revenue comes from the top 1.6 percent earners of our state's citizens. It is this shrinking group that our punititive tax structure is driving away. The consequence is that we are shifting the tax burden onto the backs of Rhode Island 's middle class.

What this means is that those earning between $50,000 and $200,000, and who represent 28.2 percent of the state's income-tax filers, shoulder the burden of 54.7 percent of the total state income tax. The result is that 30 percent of Rhode Island taxpayers are responsible for 90 percent of the state's personal-income taxes.

Driving away high-income earners is not just about taxes. The top earners, who represent .38 percent of our population, contribute a disproportionately large amount to our nonprofit organizations. In 2000, Rhode Islanders earning $200,000-plus annually donated $138.5 million to the nonprofit community. In 2003, that number shrank to $113.4 million.

As everyone involved in nonprofit fundraising can attest, it is getting more difficult to keep going back to this same shrinking group of benefactors. In fact, according to the Association of Fundraising Professionals-RI Chapter, in 2003, "The capacity of [ Rhode Island ] non-profit organizations to fundraise and generate sufficient resources to support their work is more challenging every day."

Community wealth comes not only from people who can afford to make financial contributions; it also comes from those company builders who can create and grow companies to a scale at which they provide the combination of high-paying jobs with good benefits and opportunities for employees, sizable corporate contributions, and taxes, both corporate and personal. Small businesses (the single largest group of businesses in our state) also feel burdened by our state's tax structure, and thus impeded from contributing more to the overall community wealth.

As a liberal Democrat who believes in the responsibility of government to provide support to those in need, I also recognize that we can be only as generous as our financial capacity allows us to be. Soak-the-rich tax policies do not work, because the rich vote with their feet. Increasingly, the company builders and nonprofit contributors of Rhode Island are leaving or staying away.

The combination of these facts portends a devastating future for people of need in Rhode Island . We must face the fact that through a combination of being overly generous and at the same time spending these funds ineffectively (we spend more than almost any state, yet we are making little progress), we have created the worst of all worlds: crushing taxes that are increasingly being shifted onto the back of the middle class as we drive away individuals with higher income levels; anemic new company growth; and declining community wealth. The consequences of these negative factors will fall hardest on those who need our support the most.

Can we head off this crisis? Yes. First, by recognizing that in a highly mobile world we must be competitive with our neighbors and bring our social-service spending levels and high marginal tax rates in line. Of equal importance, we must allocate our taxpayer dollars to social-service programs that actually work.

We should respect the efforts of our state's hard-working taxpayers by imposing a reasonable tax burden on them and by spending their dollars wisely. The fact is, we currently do not have a sustainable model to fund programs that have a positive impact on improving the lives of those in need.

We all know where the road paved with good intentions leads. Let us not take that path. Instead, let us forge a different path, one in which a real dialogue centered on financial realities and social-service effectiveness can be conducted with candor and not class-warfare rhetoric.

Ending poverty in our state is not mutually exclusive with creating a friendlier economic environment, laden with ample opportunities for economic growth and prosperity for all Rhode Islanders.

Michael McMahon is executive director of the Rhode Island Economic Development Corporation.