Testimony: A High-Earner Income Tax Surcharge Would Hurt Rhode Island’s Economic Competitiveness

Chairman Abney and Members of the House Finance Committee:

My name is Katherine Loughead, and I am a Senior Policy Analyst & Research Manager at the 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. Foundation. The Tax Foundation is a nonprofit, nonpartisan tax policy research organization that researches and analyzes tax policy issues at the state, federal, and international levels.

I appreciate the opportunity to submit this written testimony regarding House Bill 5473. The Tax Foundation does not take a position on legislation, but I am eager to provide information on the subject matter.

Beginning January 1, 2026, H 5473 would impose a three percentage point surcharge on Rhode Island taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. exceeding approximately $625,000 (in 2025 dollars), with that amount adjusted annually for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. . This would raise the top marginal individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rate in Rhode Island to 8.99 percent and would effectively create a four-bracket individual income tax structure (even though the bill states that the three-bracket structure would remain in place on paper).

If this tax increase were enacted, Rhode Island would go from having the 14^th-highest to the 8^th-highest top marginal state individual income tax rate in the country (not including the District of Columbia). If the tax policy changes contained in H 5473 had been in effect as of July 1, 2024, the snapshot date for the 2025 State Tax Competitiveness Index,[1] Rhode Island would have ranked 43^rd overall and 44^th on the individual income tax component, representing a substantial decrease in competitiveness compared to its current ranks of 39^th overall and 30^th on individual taxes.

The economic literature overwhelmingly suggests that an income tax increase of this magnitude would negatively affect economic growth and opportunity in Rhode Island. The economic literature demonstrates that higher marginal income tax rates reduce gross state product, investment, and in-state employment mobility, while encouraging outmigration.[2] Notably, research finds a negative relationship between changes in income tax rates and the wages of both higher-income and lower-income workers.[3]

Much of this negative effect on economic growth would come as a result of the proposal’s harmful impact on businesses. As pointed out by the Rhode Island Public Expenditure Council (RIPEC), in 2022, over half of Rhode Island tax filers 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.” (AGI) exceeding $500,000 declared business income or losses,[4] so this tax increase would fall heavily on pass-through businesses in the state, making it harder for them to stay in business and leading to higher prices for consumers, lower wages, and fewer new job opportunities.

The proposed tax increase would also make Rhode Island’s tax climate substantially less competitive both regionally and nationally. Despite its relatively high top marginal rate nationally, Rhode Island has the third-lowest individual income tax rate in the northeast after only New Hampshire, which forgoes an individual income tax altogether, and Pennsylvania, which has a low, flat statewide rate of 3.07 percent but imposes relatively high local income tax rates.

Currently, Rhode Island is a more competitive alternative to high-income-tax New York, New Jersey, and Massachusetts. However, if this proposal were adopted, the Ocean State would become less attractive to high earners than even Massachusetts, since Massachusetts’ 9 percent rate kicks in at a much higher income level of over $1 million, with income below that threshold taxed at a much more competitive rate of 5 percent. If Rhode Island were to adopt a tax rate of 8.99 percent on income in excess of approximately $625,000, Rhode Island’s marginal rate on $625,000 in taxable income would be higher than the marginal rates on that level of income in New Jersey (8.97 percent), Vermont (8.75 percent), Maine (7.15 percent), New York (6.85 percent), and Massachusetts (5 percent).[5]

In a recent report that references efforts to increase the top marginal income tax rate in Rhode Island, the Institute for Policy Studies (IPS) claims Massachusetts has “seen tremendous growth in the number of people with more than $1 million in total wealth since raising taxes on higher earners,”[6] but the report’s analysis is deeply flawed. As my colleague Jared Walczak has written, the study “touts an increase in the number of filers with $1 million or more in nominal AGI between 2018 and 2022—a period when incomes grew rapidly across the country (up almost 12 percent in nominal terms), and when inflation ran hot. But it never mentions that Massachusetts’ performance is actually quite poor compared to the national average, letting the figure stand alone.”[7] In fact, while Massachusetts saw a 36 percent increase in filers with AGI of $1 million or more, every state saw an increase, and Massachusetts’ 36 percent increase was the fifth-lowest—tied with Oregon—after only New York (22 percent), Illinois (31 percent), and Connecticut and Maryland (34 percent). The national average was 49 percent, and some states saw the number of $1 million AGI filers more than double.

Since 2021, 28 states have reduced their individual income tax rates, with many doing so on more than one occasion. In that same time, only Massachusetts, New York, and the District of Columbia have increased individual income tax rates. Joining the ranks of Massachusetts and other high-income-tax states would harm the state’s competitiveness. The negative outcomes—including outmigration of entrepreneurs and job creators and reduced job growth, wage growth, and in-state investment—would likely be even more pronounced in Rhode Island given the state’s small geographic footprint and the ease with which Rhode Islanders could easily move elsewhere while staying relatively close by. Policymakers should take full stock of all these likely negative outcomes before adopting income tax increase proposals such as the one contained in H 5473.

I appreciate your consideration of this statement and respectfully request the inclusion of this letter as part of the public hearing record.

[1] Andrey Yushkov, Jared Walczak, and Katherine Loughead, 2025 State Tax Competitiveness Index, Tax Foundation, Oct. 31, 2024, https://taxfoundation.org/statetaxindex/.

[2] For a summary of the literature, see Timothy Vermeer, “The Impact of Individual Income Tax Changes on Economic Growth,” Tax Foundation, Jun. 14, 2022, https://taxfoundation.org/research/all/state/income-taxes-affect-economy/. See also Ann D.M. Nguyen et al., “The Macroeconomic Effects of Income and Consumption TaxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. Changes,” American Economic Journal: Economic Policy 13:2 (2021); Karel Mertens and Morten O. Ravn, “The Dynamic Effects of Personal and Corporate Income TaxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. Changes in the United States: Reply,” American Economic Review 109:7 (2019); William M. Gentry and R. Glenn Hubbard, “The Effects Of Progressive Income Taxation On Job Turnover,” Journal of Public Economics 88:9 (2002); and John K. Mullen and Martin Williams, “Marginal Tax Rates and State Economic Growth,” Regional Science and Urban Economics 24:6 (December 1994).

[3] Karel Mertens and Jose L. Montiel Olea, “Marginal Tax Rates and Income: New Time Series Evidence,” Quarterly Journal of Economics 133:4 (2018): 1803-1884.

[4] RIPEC, “Taxing Top Earners: The Potential Effects of a Proposed Tax Hike in Rhode Island,” Apr. 28, 2025, https://ripec.org/2025-taxing-top-earners/.

[5] Andrey Yushkov and Katherine Loughead, “State Individual Income Tax Rates and Brackets, 2025,” Tax Foundation, Feb. 18, 2025, https://taxfoundation.org/data/all/state/ststa-income-tax-rates/.

[6] Omar Ocampo, “Wealth Expands After Higher State Taxes on High-Income Earners,” Institute for Policy Studies, Apr. 28, 2025, https://ips-dc.org/report-wealth-expands-after-higher-state-taxes-on-high-income-earners/.

[7] Jared Walczak, “Taxes Still Affect Economic Growth, Contrary to Findings of Flawed IPS Study,” Tax Foundation, Apr. 29, 2025, https://taxfoundation.org/blog/institute-for-policy-studies-state-taxes-high-income-earners/.