Reviewing Rhode Island’s New Budget

Rhode Island is one of the worst-scoring in the State Business Tax 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 tax. 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 exemption 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 apportionment 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 inflation every other year. 3.5 cents of the existing gas tax 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.

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 rate 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 base 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.