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Rhode Island Income Tax Reform Would Improve Business Tax Climate

2 min readBy: Joseph Bishop-Henchman

An 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. reform being considered by Rhode Island officials would improve the state’s business 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. climate from seventh-worst to tenth-worst, according to a new Tax Foundation analysis of the proposal.

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 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 (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. that most taxpayer claim while eliminating itemized deductions; allow only a handful of tax credits, and eliminate the optional flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. .

Minor differences between House and Senate versions remain to be worked out, but if the outline of the proposal were in place in 2010, Rhode Island would rank 41st in the State Business Tax Climate Index instead of 44th. This indicates the plan would be a modest but positive change for the state’s tax system.

The state should not get rid of the optional flat tax lightly but the proposal under discussion is an improvement, albeit a modest one. Tackling the state’s high 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, particularly as they eliminate credits and deductions used by many businesses, may be politically essential. But the plan echoes the advice of tax experts everywhere: broad bases and low rates.

The Providence Journal today reports on developments:

A key goal is to make Rhode Island more competitive, from a tax standpoint, with its neighboring states, proponents said.

The state Office of Revenue Analysis is working on a report to show the House bill’s impact on taxpayers, said the agency’s chief, Paul L. Dion. Calculations for the Senate bill, based on tax returns for the 2008 tax year, include the following:

•302,500 taxpayers would see a tax decrease, totaling $79.2 million, an average of about $262 apiece.

•103,434 taxpayers would see no change.

•91,404 taxpayers would see a tax increase, totaling $56.3 million, an average of about $616 apiece.

Overall, under the Senate bill, taxpayers would save in taxes and the state would lose in revenue about $22.9 million.

More on our analysis of the proposed plan here.

More on Rhode Island here.