Rhode Island Sends Approved Budget to the House, Bill Would Improve Business Tax Climate

The Rhode Island House Finance Committee approved a budget Thursday night which includes notable changes to the corporate tax rate and structure, the estate tax exemption, and transportation policy. At $8.7 billion, lawmakers say the 2014-15 fiscal year proposed budget would eliminate the current $67 million gap. The highlights:

• The corporate tax rate, currently 9 percent, would be reduced to 7 percent.
• The budget would implement combined reporting, which means multi-state or multi-national corporations would be required to combine all subsidiaries and pay tax to Rhode Island based on single sales factor apportionment.
• The estate tax credit would increase from $921,655 to $1.5M. Heirs would be required to pay tax only on amounts exceeding $1.5M (adjusted annually for inflation). This is an improvement over the “cliff provision” Rhode Island has now—currently, heirs are required to pay tax on the entire estate if its value exceeds the credit (so it’s really an exemption).
• The real estate-conveyance tax would increase from $2 per $500 property value to $2.30.
• The 10 cent toll on the Sakonnet River Bridge would be eliminated. Instead, the infrastructure fund would be funded by a 1-cent gas tax adjusted for inflation every two years (Rhode Island already has the 14^th highest gas tax in the country), an increase in the vehicle inspection fee from $39 to $55, and an increase in the driving record violation fee from $35 to $60. All vehicle-related fees, which currently go into the state’s general fund, would be eventually redirected to the infrastructure fund over 5 years.

The budget is not stellar, but certainly a step in the right direction. Policymakers should be commended for the plan to reduce the corporate tax rate to 7 percent and raise the estate tax exemption. Rhode Island could even consider making the estate tax reform more robust by moving the exemption up further to match the federal exemption as New York, Maryland, and DC have already done this year.

Less-than-good changes are the introduction of combined reporting (which would add more complexity to the corporate tax code), and the transportation changes, which move away from tolls, meaning drivers are a bit less connected with the costs of roads they use.

All in all though, we’ve scored the corporate tax component of the budget in our State Business Tax Climate Index, and it would improve Rhode Island’s overall ranking from 46th to 45th, continuing Rhode Island’s effort in the last decade of making improvements to its uncompetitive tax code.

Figure 1: Rhode Island State Business Tax Climate Index Rankings Under 2015 State Budget

Note: Index run assumes policy in place on snapshot date of the July 1, 2013.

The budget will be presented to the full House on Thursday, June 12th.

See our recent coverage of Rhode Island budget talks here and here.

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