Rhode Island Income Tax Reform Would Improve Business Tax Climate

An individual income tax reform being considered by Rhode Island officials would improve the state’s business tax 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 deduction that most taxpayer claim while eliminating itemized deductions; allow only a handful of tax credits, and eliminate the optional flat tax.

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 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.