01:00 AM EDT on Sunday, May 21, 2006

WASHINGTON

READERS of The Journal should be forgiven if they believe that the state income-tax cuts passed by the Rhode Island House will stem an exodus of rich Rhode Islanders, fleeing for tax havens such as Massachusetts, and will entice wealthy business people to move to the Ocean State. That's the message conveyed by a May 7 Journal editorial ("Face tax reality") and some recent op-ed columns.

Unfortunately, these authors rely on misleading data from the Rhode Island Economic Development Corporation to send this message. An objective look at the data shows that Rhode Island is not suffering from the "shrinking-pie" syndrome that The Journal describes.

Let's set the record straight on the myths, and realities, surrounding Rhode Island's economic-development climate.

Myth: The number of high-income earners in Rhode Island has fallen in recent years, even as such numbers have risen in neighboring Connecticut, Massachusetts, and New Hampshire.

Reality: Between 1997 and 2003 (the years for which detailed Internal Revenue Service data are available), the number of taxpayers reporting incomes over $200,000 rose 60 percent in Rhode Island -- a greater rate of increase than in Connecticut (37 percent), Massachusetts (51 percent), and New Hampshire (55 percent).

Myth: Wealthy Rhode Islanders are getting poorer. The Journal asserts that the wealthiest saw their incomes drop by 17 percent between 1995 and 2002, while high incomes rose in the neighboring states.

Reality: This misuse of statistics would be almost funny except that the statistics being abused come from my organization, the Institute on Taxation and Economic Policy. The data come from two ITEP reports, which look at two very different groups of Rhode Island taxpayers. An "apples-to-apples" comparison over the same period shows that the average annual income of the top 1 percent of Rhode Island taxpayers rose by $235,000 -- for a healthy 46-percent gain in average family income.

Myth: The number of low-earning Rhode Islanders has increased in recent years, while declining in neighboring states, owing to Rhode Island's high taxes.

Reality: The number of taxpayers in Rhode Island reporting incomes below $30,000 to the IRS fell by 7 percent between 1997 and 2003. Comparable declines occurred in Connecticut (falling by 9 percent), Massachusetts (by 11 percent), and New Hampshire (by 6 percent). But the average income reported by these taxpayers in Rhode Island rose, while it fell in the neighboring states.

Myth: The charitable contributions reported to the IRS by high-earning Rhode Islanders decreased markedly in 2000-03, because of Rhode Island's high income tax.

Reality: High earners in Rhode Island (those with incomes above $200,000) did indeed cut their charitable giving in 2000-03 -- a period when philanthropy everywhere was hard hit by the stock-market crash. According to the IRS, Rhode Island high earners decreased their giving by 18 percent in the wake of the bear market. The neighboring states encountered the same problem, with high-earner contributions declining in Connecticut by 15 percent, in Massachusetts by 34 percent, and in New Hampshire by 20 percent.

In other words, all available data confirm what is obvious on the ground in Rhode Island, from the overheated high-end real-estate market to the plethora of new high-end eateries and cafés: Rhode Island is becoming a more affluent state, where incomes at the top are rising. In fact, according to a recent study by the Economic Policy Institute, the gap between rich and poor in Rhode Island was the 12th fastest-growing in the nation.

Rhode Island is not, as some commentators have argued, in a death spiral, with its economy stagnant while neighboring states' economies are thriving. In 1994-2004, Rhode Island's gross state product grew at a rate (71 percent) nearly identical to that of Connecticut (67 percent), of Massachusetts (71 percent), and of New Hampshire (76 percent). Personal income in Rhode Island rose 65 percent -- about the same as in Connecticut (61 percent), Massachusetts (68 percent), and New Hampshire (76 percent).

The $8 million that Rhode Island would lose in revenue in 2007 and the $75 million it would lose in a few years if the personal-income-tax reduction is implemented are quite real -- even if the data cited by advocates of this regressive tax cut are not. Policymakers should keep this in mind as they complete the state's budget and address the state's serious structural deficit.

Matt Gardner is director of state-tax policy at the Institute on Taxation and Economic Policy, a Washington think tank focusing on state-tax fairness.