It’s not often that state lawmakers agree on 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. reform, but Rhode Island seems to be an exception. Governor Lincoln Chafee (I) has proposed lowering the state’s 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 from 9 percent to 7 percent, phased in over three years. The measure would make Rhode Island’s rate the lowest among its neighbors and in the greater New England area. Revenue losses would be offset by closing or reducing certain carve-outs, such as the Jobs Development rate reduction.
In 2010, the state enacted a significant income tax reduction measure that flattened the state’s five 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. brackets into three and brought the top rate down from 9.9 percent to 5.99 percent. Certain progressive and labor groups have rallied to raise taxes on high-income earners this legislative session, however, by means of a new top bracket (HB 5196, HB 5751, HB 5805, and SB 527). All await action in the each chamber’s respective finance committee.
Despite the pushback on the former tax changes, the legislative leadership seems to be in favor of keeping the cuts. Senate President M. Teresa Paiva Weed (D–District 13) has voiced reluctance at raising individual income taxes. According to the Providence Journal, she “repeated her opposition to changing the state income tax so close on the heels of the 2010 revisions lawmakers made,” making the important point that “businesses need predictability and consistency in tax policy.” The chair of the Senate Finance Committee, Daniel Da Ponte (D–District 14), noted that the new system was “a simpler, fairer tax formula.” House Finance Committee Chair Helio Melo (D–District 64) was one of the sponsors of the 2010 legislation.
Hopefully Rhode Island can add to its past tax reform success. The House Finance Committee is set to discuss the governor’s budget recommendations next week, but business leaders have already testified in favor of the corporate rate reduction. Governor Chafee had the right idea when he asserted that lowering the corporate rate would promote business growth and investment. One of the reasons Rhode Island scores poorly on our State Business Tax Climate Index (it ranks 46th overall) is its high top corporate income tax rate—lowering it would most certainly give the state a competitive edge
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