Trying to Nip It in the Bud: Rhode Island Democrats Attack the New Alternative Flat Tax

January 22, 2010

Rhode Island’s 3-year-old alternative flat personal income tax with no deductions or credits is becoming a political football in the 2010 race for governor. A Democrat-controlled General Assembly passed the optional flat tax in 2006, and it was signed into law by Gov. Don Carcieri (R) who is not running for re-election because of the state’s term limit.

The optional tax was intended to help attract and retain businesses, but it has hardly even been test-driven. Because the regular income tax (with rates ranging from 3.75 to 9.9 percent) has so many large deductions, exemptions and credits, it continued to yield lower tax payments for almost every tax filer during 2006 and 2007. [table of state income tax rates]

As the Providence Journal reports, only 838 residents used the flat tax in 2007, the most recent year’s data. That’s seems like a remarkably low number, considering that 2007 was a boom year for many high earners, but the flat tax rate that year was 7.5 percent, not exactly a bargain considering that the tax filer has to give up every deduction. The rate has since dropped by 0.5% annually. The 2010 rate will be 6 percent, and when it reaches 5.5 percent in 2011, that’s the floor; it will be permanent at that level.

A few Democratic legislators have conducted a steady campaign to repeal the flat tax or at least prevent the rate from falling as scheduled, and the argument got more heated during 2009 because of the bad economy.

Among gubernatorial candidates, one Democrat, Attorney General Patrick Lynch favors repeal, another Democrat, Treasurer Frank Caprio supports freezing the flat tax. Republican John Robitaille said the tax was too new and that a repeal or freeze would send taxpayers the wrong message, “Tax predictability is very important for both business and individuals. A sudden change will not instill confidence in government or in the economy.”

The alternative flat tax counts as a plus in the Tax Foundation’s annual comparison of state tax systems, the State Business Tax Climate Index, although Rhode Island’s other high taxes added up to a poor finish, 44th best out of 50.

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