Michael DiBiase is President and CEO of the Rhode Island Public Expenditure Council.
Several bills were introduced at the Rhode Island General Assembly to add a new tax bracket for personal income, threatening a higher tax burden for businesses, and especially small businesses, at a time when many businesses are struggling to survive and are recovering from the economic fallout the pandemic. These proposals are being pushed forward at the wrong time and affect the ability of the state to attract and retain businesses and investments.
The increase in income tax for higher-income taxpayers introduced at the meeting would replace the current maximum rate of 5.99% with tax rates between 6.99% and 10.99%. The vast majority of businesses and almost all small businesses in Rhode Island are run-through businesses and report their profits through income tax rather than corporation tax. Corporate profits are often reinvested in the local economy through new ventures or the expansion of existing businesses.
The proposed legislation would undermine important work done over the past decade to improve Rhode Island’s income tax structure. In 2011, the General Assembly implemented a major income tax reform, cutting Rhode Island’s maximum rate from 9.9% – then one of the highest in the country – to 5.99%. The tax cut was revenue-neutral, as the reform also eliminated almost all deductions and credits available at the time.
At the time, the general business tax climate in Rhode Island was 47th in the country, according to the Tax Foundation. As a result of the 2011 income tax reform and other tax reforms affecting businesses and individuals, the ranking of the corporate tax climate in Rhode Island has improved significantly – the state now ranks 37th. However, the ocean state still remains in the bottom third of the states. Lawmakers should focus on measures that improve our corporate tax climate ranking, not on measures that bring us backwards.
Businesses and those who invest in businesses have a choice. Higher tax rates will hinder investment in Rhode Island and encourage companies to invest in states with more favorable tax climates. Rhode Island is a very small state. Our highest personal income tax rate of 5.99% is already 20% higher than near Massachusetts (5% highest tax rate). While Connecticut has a top tax rate of 6.99%, its economy has underperformed the nation and New England dramatically over the past decade, at least in part due to a tax climate that is unfriendly to businesses and high earners.
There is compelling evidence of migration from higher-taxing states to lower-taxing states. A recent study found that in 2016, nearly 600,000 net people migrated from the 25 states with the highest taxes (Rhode Island falls into this category) to the 25 states with the lowest taxes. In another study, almost all 10 states with the highest churn in 2020 were in the bottom third of the tax foundation’s corporate tax climate ranking. Conversely, seven of the ten largest immigration states ranked in the top half of the states in terms of their trade tax climate.
With the advent of remote working, individuals are likely more mobile than ever and can choose where to live regardless of where their employer is located. We are already seeing an exodus from high-cost, high-tax states like California and New York.
Legislative proposals to increase income tax are the wrong policy at the wrong time and should be rejected.