Last week the Rhode Island General Assembly approved, and the Governor is expected to sign today, a bill cutting the state’s top marginal income 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. rate from 9.9 percent to 5.99 percent and reducing the number of tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. from 5 to 3. The revenue-neutral reform will take effect January 1, 2011.
The vote was unanimous in both houses of the legislature. Elements of the reform:
- Eliminates the option to itemize deductions
- Increases the 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. amounts for most tax payers
- Reduces the number of tax credits
- Eliminates the states alternative minimum tax and optional tax flat system
Under the legislation, the vast majority of Rhode Island taxpayers – those with adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” below $500,000 – would see a tax decrease, House leaders said. The new standard deductions would be $7,500 for individuals and $15,000 for those filing jointly.
The reform was an effort to change the reputation of Rhode Island as a high-tax state. The lower marginal income tax rate, as well as the other elements of the reform, is thought to make Rhode Island’s state tax structure more competitive and effective at attracting businesses and people to the state.
More on Rhode Island:
- Rhode Island Officials Consider Income Tax Reform, by Joseph Henchman and Kail Padgitt, June 2, 2010
- Rhode Island Officials Consider Income Tax Reform, by Joseph Henchman, May 21, 2010
- Rhode Island Tax Writer Threatens to Repeal the Best Feature of the State’s Tax System, by William Ahern, April 24, 2010
- Rhode Island’s “Business-Friendliness” Ranking Would Improve Dramatically Under Governor’s Plan, March 27, 2009
- Trying to Nip It in the Bud: Rhode Island Democrats Attack the New Alternative Flat Tax , by William Ahern, January 22, 2010