Taxes are more fair when we help those with the fewest resources and least ability to pay. Governor Dan McKee’s FY2027 budget proposal to exempt all Social Security income from state taxation might sound like it is making taxes fairer, but let me tell you why it’s not.
Eliminating state taxation of Social Security income will do nothing to help older Rhode Islanders in greatest need. Not all seniors are struggling, and not all depend only or primarily on their Social Security benefits. The fact is, Rhode Island already exempts Social Security benefits from state taxation for the lowest-income Rhode Islanders. For Tax Year 2025, Rhode Island exempts from taxation such income when a filer’s overall taxable income is $107,000 or lower, or $133,750 or lower for joint married filers. The proposal to exempt all Social Security income would benefit only those filers with higher incomes, including millionaires who happen to claim Social Security income.
At the request of the Economic Progress Institute, the Institute on Taxation and Economic Policy analyzed the governor’s proposal and estimated that 91 percent of the benefit from this proposal would go to the top 20 percent in income, those with a total income of $151,000 and above. Furthermore, 35 percent of the benefit would go to the top 5 percent, and close to 7 percent of the benefit would go to the top 1 percent. The average income of those who benefit would be $429,300, according to the institute’s analysis.
This is a costly proposal at a time when the budget is tight. The governor’s own team estimates the cost of the proposal will reach $60.1 million in FY2030. Rhode Island cannot afford to blow such a sizable hole in state revenue collections at a time when we need to protect revenue in the face of federal cuts.
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A complete Social Security exemption would undermine the current effort to meet critical needs by raising new revenue – whether through the governor’s proposal for a millionaires tax, or the Revenue for Rhode Islanders proposal to raise even more revenue with a top 1 percent tax. The highest income filers are benefiting so much from the federal tax cuts, and the governor’s Social Security tax proposal would help some of these same people, while not benefiting lower-income Rhode Island seniors who already get the exemption. Indeed, the revenue loss could result in cuts to programs that benefit these same lower-income seniors, and other lower-income Rhode Islanders.
Now, there is one valuable piece of the governor’s proposal policymakers should enact. Current law allows the tax exemption to be claimed only by those of full retirement age (65 or 67, depending upon year of birth). This means that low-income Rhode Islanders who elected to take benefits at age 62 – or before full retirement age – are currently unable to claim the state tax exemption.
Given that Rhode Islanders electing to collect their benefits early are probably doing so because they need the income and have few – if any – other options, I completely agree with eliminating this exclusion and allowing all lower-income Rhode Islanders collecting Social Security to claim the exemption. This will cost some state revenue, but only an estimated $3 million annually, not tens of millions of dollars. Policymakers should enact this part of the governor’s proposal and stop there, without increasing the exemption to higher levels of income.
These lower-income Rhode Island seniors need the help, not those in the top 1 percent or 5 percent or even the top 20 percent, and certainly not millionaires who collect some income from Social Security.
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Alan Krinsky is the director of research & fiscal policy at the Economic Progress Institute,
a nonprofit, nonpartisan research, education, and advocacy organization in Rhode Island.