Rhode Island is one of the worst-scoring in the State 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 each year, but there have been small attempts in the last decade at moving the state toward a more competitive code. In 2010, the Rhode Island brought the top income tax rate down to 5.99 percent, and this year, the corporate rate will be lowered two percentage points, paired with an increase in the exemption of the state’s 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. . On the negative side, the state will institute “combined reporting” of corporate profits with its most recent budget, which will make the code more difficult to comply with. On the whole, however, changes in Rhode Island have been positive. Below is a review of the major tax changes this year.
2015 Budget Reform
Rhode Island’s budget includes several positive tax measures. Biggest of all, and something we’ve recommended in the past, is the reduction of the corporate tax rate from 9 to 7 percent. The budget also brings an increase in the estate tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. from $921,655 to $1.5M, as well as the elimination of the cliff provision for heirs—who, until now, were required to pay tax on the entire estate if its value exceeded the exemption. On the negative side, Rhode Island will also move to a combined reporting method for corporations, which means that a portion of a corporation’s combined income from all affiliated entities (even those outside the state) will be taxed by the state.
On January 1, 2015, Rhode Island will also move to a single sales factor apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. for C-corporations.
The budget also eliminates the Sakonnet River Bridge toll, and replaces it with a 1 cent gas tax for transportation infrastructure costs. The toll permanently expired on July 1, which is when the state’s fiscal year begins. The gasoline tax in Rhode Island is the 14th highest in the nation. Beginning July 1, 2015, the gasoline tax will be at least 32 cents per gallon and indexed for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. every other year. 3.5 cents of the existing gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. will now go to Rhode Island Turnpike and Bridge Authority. As we’ve written previously, the move away from tolls means drivers are less connected to the cost associated with roads.
The real estate conveyance tax has been increased from $2 per $500 of property value to $2.30. This is to pay for the various housing programs.
With these changes, as well as other funding reforms, the budget closes a $67 million gap that stemmed from recently negotiated raises for state employees ($24.3 million) and an unexpected increase in human services caseloads ($42.7 million).
We project that the corporate portion of the 2015 budget means Rhode Island’s overall ranking in our Index will get bumped from 46th to 45th.
|
Current law |
With changes |
|
|
Overall |
46 |
45 |
|
Corporate |
43 |
31 |
|
Individual |
36 |
36 |
|
Sales |
27 |
27 |
|
Unempl Insur |
50 |
50 |
|
Property |
46 |
46 |
Going Forward
There is much more that Rhode Island can do to make its tax code competitive. Rhode Island has seen tax reform proposals in the past that would have substantially increased its Index ranking. Some of these should be revisited for future budgets:
- In 2013 and 2014, Rhode Island considered repealing the sales tax, which would have put the state at 31st in the Index.
- Although the 2010 reform cut the top 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. on individual income, Rhode Island currently ranks 24th highest among states that collect income tax on individuals. Further reductions in the overall burden of this tax would make Rhode Island a better place to work and live.
- Consider additional increases of the estate tax exemption to couple to the federal exemption level ($5 million, inflation adjusted). This reform was enacted in Maryland, New York, and the District of Columbia this year. Estate tax repeal is ultimately most desirable.
- Pursue further business tax improvements, like the removal of the capital stock tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. in the corporate tax, or unemployment insurance tax reform.
The reduction in the corporate tax rate this year is a good move for Rhode Island, but with a continuation in the state’s concerted effort, more can be accomplished.
More on Rhode Island.
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