Several bills have been introduced in the Rhode Island General Assembly to add a new top state personal income tax bracket, thereby threatening to impose a higher tax burden on business, and …
Several bills have been introduced in the Rhode Island General Assembly to add a new top state personal income tax bracket, thereby threatening to impose a higher tax burden on business, and particularly on small business, at a time when many businesses are struggling to survive and recover from the pandemic’s economic fallout. These proposals are being pushed at the wrong time and will hurt the state’s ability to attract and retain business and investment.
The income tax increase introduced in the Assembly for higher-income taxpayers would replace the current top rate of 5.99 percent with rates ranging from 6.99 percent to as high as 10.99 percent. The great majority of businesses, and nearly all small businesses, in Rhode Island are organized as pass-through entities and report their profits through the personal income tax rather than the corporate tax. Business profits are often reinvested in the local economy through new ventures or the expansion of existing businesses.
The proposed legislation would undercut important work done in the last decade to improve Rhode Island’s income tax structure. In 2011, the General Assembly undertook a major reform of the personal income tax, reducing Rhode Island’s top rate of 9.9 percent— then among the highest in the country — to 5.99 percent. The tax rate reduction was revenue neutral since the reform also eliminated nearly all deductions and credits then available.
At the time, Rhode Island’s overall business tax climate was ranked 47th in the nation, according to the Tax Foundation. As a result of the 2011 income tax reform, and other tax reforms affecting businesses and individuals, Rhode Island’s business tax climate ranking has significantly improved — the state is now ranked 37th. However, the Ocean State still remains in the bottom third of states. Lawmakers should focus on policies that improve our business tax climate ranking, not ones that bring us backward.
Businesses, and those who invest in businesses, have choices. Higher tax rates will discourage investments in Rhode Island and cause businesses to invest in states with more favorable tax climates. Rhode Island is a very small state. Our top personal income tax rate of 5.99 percent is already 20 percent higher than nearby Massachusetts (5 percent top rate). While Connecticut has a top income tax rate of 6.99 percent, its economy has dramatically underperformed the nation and New England over the past decade due, at least in part, to a tax climate that is unfriendly to businesses and high earners.
There is compelling evidence of migration from higher tax states to lower tax states. A recent study reported that, in 2016, nearly 600,000 people, on net, migrated from the 25 highest-tax states (Rhode Island is in this category) to the 25 lowest-tax states. In another study, nearly all of ten states with the most outbound migration in 2020 were in the bottom third of the Tax Foundation’s business tax climate rankings. Conversely, seven of the top ten inbound migration states ranked in the top half of states in their business tax climate.
With the rise of remote work, individuals are likely to be more mobile than ever, with the ability to decide where to live independent of where their employer is located. Already, we are seeing an exodus from high cost and high tax states like California and New York.
Legislative proposals to increase the income tax represent the wrong policy at the wrong time and should be rejected.
President and CEO of the Rhode Island Public Expenditure Council