In fact, had Carcieri’s proposed plan been in effect for 2009, Rhode Island would have been ranked the 16th most business-friendly state in the nation, according to a new analysis by Josh Barro, staff economist for the Tax Foundation and author of the State Business Tax Climate Index. The foundation issued the 2009 index this past October.
“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’,” Barro said. “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.”
Carcieri’s plan would phase out the state’s 9% corporate income tax over four years, making Rhode Island one of four states without a major business tax, according to the Tax Foundation.
The plan also would simplify the individual income tax by cutting marginal rates, reducing the number of brackets and eliminating many deductions, according to the foundation. 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.
Carcieri’s plan would increase the estate tax exemption from $675,000 to $1 million. Additionally, the cigarette tax would be raised by $1 to $3.46 per pack, which would be the country’s highest state cigarette tax, according to the Tax Foundation.
Plan Would Boost State’s Ranking in Other Areas
Barro analyzed the tax proposal’s effects on Rhode Island’s business tax climate ranking. Based on current law, the Ocean State ranks 46th-best out of 50 states. Neighboring Connecticut is 37th; Massachusetts is 32nd.
With Carcieri’s plan in effect, instead of scoring 40th on the corporate income tax component of the index, Rhode Island would tie for first. The state would jump nine spots on the income tax portion (from 42nd to 33rd) and three on the property tax portion (from 43rd to 40th) because the Rhode Island corporate tax includes an assessment on corporate net worth. The state would drop one position on the sales tax measure (30th to 31st), according to Barro’s analysis.
“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 said. “Now, Gov. Carcieri has identified an opportunity for Rhode Island to step out from its neighbors’ shadows.”
The State Business Tax Climate Index measures how well a state’s tax system encourages investment by maintaining a broad tax base and low rates. To download the 2009 index, click here.
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