The Providence Journal reports on yesterday’s signing of Rhode Island’s modest first step at improving their state’s taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. system:
Governor Carcieri signed the legislation, passed by the General Assembly last week, during a ceremony Wednesday afternoon at the State House, amid a large gathering of legislative and business leaders.
The new law, which goes into effect Jan. 1, eliminates the optional flat-tax method of preparing individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. es, reduces the number of tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. s from five to three and lowers the highest marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. , bringing it down to 5.99 percent from 9.9 percent.[…]
The law does away with itemizing deductions. But it allows for increases in the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. for single adults, up to $7,500 from $5,700, and for married couples, up to $15,000 from $9,500.
Peter Asen of Ocean State Action, a coalition of community organizations and unions criticized the law, saying it does not do enough to help taxpayers. He said that some of the credits being eliminated, such as the mortgage-interest deduction, may hurt middle-class families.
According to the Tax Foundation, Rhode Island’s tax competitiveness standing has continued to steadily improve since 2002, when the state was ranked 49th in the country. With these new reforms, the Tax Foundation ranks Rhode Island 41st. We are moving in the right direction, and we are setting a new course for a more robust economy and a stronger, more competitive Rhode Island for future generations to enjoy. We all know that when the economy rebounds, jobs and economic development will occur in states that are best positioned for it. With this legislation, we have positioned Rhode Island to benefit from the upswing in the economy.
Congrats are in order to the various individuals in Rhode Island (the proposal passed the legislature unanimously) that helped bring about this positive step. (I should note that at the last minute, the proposal was made revenue-neutral by phasing out the standard deduction for high-income earners, a tactic also used in Utah and Maine recently. This results in a higher marginal effective tax rate than the statutory rate, but on the whole the proposal was a net benefit even with this feature.)
For the next step, the state may consider looking at its position as tenth-highest in state-local tax burden, the seventh-highest state-local property tax collections, the fifth-highest state-local debt per capita, the high 9% corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate, the high 7% sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. , the highest cigarette tax in the country, and/or the heavy reliance on the usual corporate giveaways through the tax code (job credits, research-and-development credits, investment credits, film credits, etc.).
More on Rhode Island:
- Rhode Island Approves Tax Reform Package, June 9, 2010, by Ryan Forster
- Rhode Island Officials Consider Income Tax Reform, by Joseph Henchman and Kail Padgitt, June 2, 2010
- Rhode Island Officials Consider Income Tax Reform, by Joseph Henchman, May 21, 2010
- Rhode Island Tax Writer Threatens to Repeal the Best Feature of the State’s Tax System, by William Ahern, April 24, 2010
- Rhode Island’s “Business-Friendliness” Ranking Would Improve Dramatically Under Governor’s Plan, March 27, 2009
- Trying to Nip It in the Bud: Rhode Island Democrats Attack the New Alternative Flat Tax , by William Ahern, January 22, 2010