March 27, 2009

Rhode Island’s “Business-Friendliness” Ranking Would Improve Dramatically Under Governor’s Plan

Proposal to Phase Out Corporate Income Tax, Simplify Personal Income Tax Would Move Ocean State’s Business Tax Climate from 46th to 16th in the Nation

Washington, DC, March 27, 2009 – According to new analysis, a tax proposal from Rhode Island Governor Donald Carcieri (R) would dramatically improve the ranking of the state’s business tax climate. Had the proposal been in effect for 2009, Rhode Island would have moved from 46th to 16th in the nation when it comes to “business-friendliness.”

Carcieri’s plan would phase out the state’s 9% corporate income tax over four years, making Rhode Island one of just four states without a major business tax. The plan would also simplify the individual income tax by cutting marginal rates, reducing the number of brackets and eliminating many deductions. The new top marginal rate would be 5.5%, down from 9.9%. Currently, the state offers an optional flat tax (at a 6.5% rate for 2009) and a reduced tax rate for capital gain income, both of which would be eliminated. The plan would also increase the estate tax exemption from $675,000 to $1,000,000. Additionally, the cigarette tax would be raised by $1 to $3.46 per pack, which would be, by a wide margin, the country’s highest state cigarette tax.

“Rhode Island faces a tough tax situation because it has significantly lower per-capita income than its two neighbors, and therefore must impose higher taxes to raise revenues in line with its neighbors’,” said Tax Foundation staff economist Josh Barro. “Unfortunately, those high tax rates add further incentive for wealthy people and businesses to leave Rhode Island for its lower-tax neighbors, or for other parts of the country.”

Barro, author of the 2009 State Business Tax Climate Index, (a study that measures how well a state’s tax system encourages investment by maintaining a broad tax base and low rates), analyzed the tax proposal’s effects on Rhode Island’s business tax climate ranking. Based on current law, the Ocean State ranks only 46th best out of 50 states. Neighboring Connecticut is 37th; Massachusetts, defying the “Taxachusetts” moniker, is second-best in New England at 32nd. With Carcieri’s plan in effect, Rhode Island would have stood at 16th in the nation, 30 places higher than its actual performance. Instead of scoring 40th on the corporate income tax component of the Index, it would tie for first. The state would jump nine spots on the income tax portion (42nd to 33rd) and three on the property tax portion (43rd to 40th) because the Rhode Island corporate tax includes an assessment on corporate net worth. It would drop one position on the sales tax measure (30th to 31st).

“While small states can face competitive disadvantages with their larger neighbors (especially if those neighbors are wealthier), they also have an opportunity to specialize in attracting a certain kind of capital or business activity,” Barro argues. “Now, Gov. Carcieri has identified an opportunity for Rhode Island to step out from its neighbors’ shadows.”

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.


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