May 26, 2010
Rhode Island Income Tax Reform Would Improve Business Tax Climate
Washington, DC, June 2, 2010 - An individual income tax reform being considered by Rhode Island officials would improve the state's business tax climate from seventh-worst to 10th-worst, according to a new Tax Foundation analysis of the plan.
"Rhode Island ranked 44th in our 2010 State Business Tax Climate Index," said Tax Foundation Staff Economist Kail Padgitt, Ph.D., who wrote the 2010 Index. "While the complete phase-in of the state's optional flat tax would slightly increase the state's ranking one spot to 43rd, the new reform proposal would further improve its tax system."
By comparison, Connecticut's ranking is 38 and Massachusetts's is 36.
Tax Foundation Fiscal Fact, No. 232, "Rhode Island Officials Consider Income Tax Reform," is available online at http://www.taxfoundation.org/publications/show/26374.html.
The plan would replace the state's current individual income tax structure with three brackets and a top rate of 6%; raise the amounts of the lump-sum standard deduction that most taxpayer claim while eliminating itemized deductions; allow only a handful of tax credits (a credit for taxes paid to other states, earned-income tax credit, statewide property-tax relief credit and a credit for residential lead-paint abatement); and eliminate the optional flat tax.
The optional flat tax allows taxpayers to pay one flat rate on all their income instead of the graduated rate structure coupled with myriad credits and deductions. In 2006, when the stated started phasing in the flat tax, the rate was 7% and has been reduced each year. In 2010, it is 6% and in 2011 it is scheduled to reach 5.5%, where it will remain.
The optional flat tax has improved Rhode Island's State Business Tax Climate Index ranking from dead last (50th) in 2006 to 44th in 2010. Last year, Gov. Don Carcieri (R) proposed a plan to phase out the state's corporate income tax over four years, eliminate many deductions and credits and reduce the top individual income tax rate to 5.5%. Carcieri also proposed to increase the state cigarette tax from $1 to $3.46 per pack, the only part of the plan that was enacted. Still, the plan would have improved the state's 2009 State Business Tax Climate Index ranking from 46th to 16th.
"Rhode Island shouldn't get rid of the option flat tax lightly, but the proposal under discussion is at least a modest improvement from the state's current tax system," said Tax Foundation Tax Counsel and Director of State Projects Joseph Henchman, who co-authored the report. "As the economy improves, capital and investment will flow to those states best positioned for it. Rhode Island has a chance to welcome that opportunity, and frankly, the state has nowhere to go but up."
The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
To schedule an interview, please contact Natasha Altamirano, the Tax Foundation's Manager of Media Relations, at (202) 464-5102 or naltamirano@taxfoundation.org.