Rhode Island Tax Writer Threatens to Repeal the Best Feature of the State’s Tax System

In State Tax Today (subscription), Neil Downing reported from Providence yesterday that a key Rhode Island lawmaker wants to eliminate the state’s alternative flat income tax.

Enactment of this alternative flat tax 5 years ago was hailed by the financial press as one of the best tax improvements of the year, not just in Rhode Island but nationwide. Rhode Island legislators that year followed the classic advice of tax reformers: plug loopholes and use the extra revenue to lower the tax rate.

The alternative flat income tax allows no deductions, exemptions or credits, making it the perfect income tax for a state government to impose on high-income people because it reassures the public that the rich are not taking advantage of obscure tax-reducing loopholes that only studious, expensive accountants are aware of. All low- and middle-income people get a better deal from the regular income tax; they are permitted to file under the flat tax, but no one uses it because they would owe much more.

The legislator proposing to wipe this excellent tax off the books is, unfortunately, the House Finance Committee Chair, Steven Costantino (D).

In his statements, he hardly talks about the alternative, flat income tax; instead his headline is that he want to repeal the 9.9 percent top rate from the state’s regular income tax to make Rhode Island “more competitive with neighboring states.”

“We have to get that 9.9 percent monkey off our backs,” he said yesterday.

State Tax Today reports that Costantino has long been irked by national surveys that consistently rank Rhode Island among the highest-taxed states based mainly, or solely, on the top marginal rate.

The Tax Foundation publishes one well known ranking that uses income tax rates to rate the states, and the study does penalize states with especially high top rates, the State Business Tax Climate Index. However, the author, economist Kail Padgitt, took note of Rhode Island’s unusual parallel tax systems and decided to tally Rhode Island’s top income tax rate as the flat tax rate, 6% this year and 5.5% next year. That’s why Rhode Island has improved in the Index ranking every year for several years, although it still ranks rather poorly because of its high business taxes, property taxes and unemployment insurance taxes.

Any repeal of the flat income tax would hurt Rhode Island’s ranking in our study, even if the 9.9 percent rate were repealed because the next highest rate is 9 percent, which would still leave Rhode Island with one of the highest top income tax rates in the country.

The article says Gov. Don Carcieri (R) has long favored a reduction in the state’s top income tax rate, but unless he has changed his policy, he certainly does not favor scrapping the alternative flat tax.