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A Taxing Problem

3 min readBy: Curtis S. Dubay

This year, Rhode Island has again earned a dubious distinction among the 50 states: dead last in business friendliness.

This is hardly new territory for the Ocean State, however. The 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. Foundation first began measuring the competitiveness of each state’s business tax climate with the State Business Tax Climate Index (SBTCI) in 2003. Rhode Island’s business tax climate ranked 49th then—second worst.

Adding insult to injury, between 2003 and 2006 Rhode Island’s economic performance has been abysmal.

It comes in at 50th—dead last—in job creation.

It ranks 49th in population growth. The nation’s population has grown almost 3 percent in that time, while Rhode Island’s has fallen over half a percent.

In income growth, 48th. The nation’s income has grown almost 19 percent while Rhode Island’s has grown just under 14 percent.

Production growth, 42nd.

And the list goes on.

Currently, the unemployment rate is 5 percent, which is 0.4 percentage points above the national average of 4.6 percent. Lack of government spending in Rhode Island certainly can’t be blamed for the problem. Rhode Island’s state and local spending per capita ranks 9th highest and its spending as a percentage of state output ranks 10th highest.

While Rhode Island’s economy is tanking, its tax system remains one of the worst in the nation. In addition to having the nation’s worst business climate, the tax burden, as ranked by the Tax Foundation, comes in 4th highest.

Many argue that taxes don’t matter to economic development, but the correlation in Rhode Island is impossible to ignore. Rhode Island’s system of high taxes and high spending certainly isn’t creating an economic windfall.

People, companies and jobs are leaving the state for more business-friendly places like Wyoming (1st in the SBTCI and 1st in output growth and 3rd in income growth since 2003), Nevada (3rd in the SBTCI, 1st in population and income growth and second in output growth since 2003), and Florida (5th in the SBTCI and 6th, 5th and 11th in population, income and output growth respectively since 2003).

There is no doubt that other factors like education, transportation infrastructure and crime prevention play a role in the friendliness of a state’s business climate. However, it takes years to educate a child, build roads and reduce crime, but a tax system can be made more competitive overnight.

There is no guarantee that children educated in a state will remain there once their education is complete. Educated people are the most mobile sector of the population. Not only does it take years to build roads, but better roads don’t insure higher economic growth. Just ask the people of West Virginia-the state with the highest spending on roads. And of course, there is no guarantee that increased spending on crime prevention will actually decrease crime.

What is certain is that if Rhode Island’s tax system was made more competitive today, people and business would stop their exodus. By taking a few of the following steps today, Rhode Island could turn its economic fortunes around immediately.

Rhode Island’s personal income tax is among the most progressive in the nation, with a top rate of 9.9 percent—one of the highest rates nationally. If the brackets were made flatter and the rates lower, Rhode Island would benefit greatly. The 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 of 9 percent is also among the highest nationally. It needs to be lowered to increase competitiveness.

Property taxes are spiraling out of control across the country, and Rhode Island is not immune from the spike. If Rhode Island cut property taxes by restraining local spending, its competitiveness would undoubtedly feel a boom.

Lastly, Rhode Island needs to join the 33 states that have either abolished their estate taxes or allowed their tax to expire with the federal estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. .

The economic data is overwhelming and leads to only one conclusion: Rhode Island can’t afford to wait much longer to turn its economic fortunes around.

Curtis Dubay is an economist at the nonprofit, nonpartisan Tax Foundation and author of the 2008 State Business Tax Climate Index.