Threat of Rhode Island Rolling Back its Beneficial 2010 Reforms

The unique puzzle Rhode Island faces—high public spending, low per-capita income relative to its neighbors—means the state has become notorious for high tax rates on nearly everything. In 2010, the state took a positive first step by reducing the top individual income tax bracket from 9.9 percent to 5.99 percent, reducing the number of tax brackets and credits, increasing standard deductions for most except wealthier taxpayers, and eliminating the state’s alternative minimum tax and optional flat tax. Legislators are currently considering an effort to undo a good chunk of those valuable reforms.

Claiming this reform has depressed tax revenue while hurting local communities, Rep. Scott Guthrie (D) has introduced 2014-H 7245, which would raise the rate on income over $250,000 to 7.99 percent. The revenue raised would go to municipalities in the state via revenue sharing.

The narrative is that property taxes are going up in Rhode Island because local aid has slowed. While local aid has slowed to some degree, there are two reasons that state income tax hikes are not the answer here. First, 2014-H 7245 does not address whether local property taxes would decrease as a result of the additional state aid. This means localities would get an influx of new state funds and then taxpayers presumably just hope for consequential property tax rate cuts.

Further, it’s important to note that the recent decrease in state aid is actually a return to the norm for Rhode Island. As Figure 1 shows, state aid was much more modest in the 90s, but exploded in the 2000s.

Figure 1: Rhode Island State Aid to Local Governments (FY 1990-2012)

Source: Rhode Island House Fiscal Advisory Staff

Raising top individual income tax rates at the state level might take the sting out of local spending issues in Rhode Island temporarily, but it fails to offer a sustainable solution because it asks one small portion of the population to pay for services everyone uses. Ultimately, if people want additional local government services, they are going to have to pay for them with the primary tool in the local tax toolkit: property taxes.

On the better note, check out the recent Rhode Island corporate tax reform proposal.

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