State Tax Wars Heat Up - Gary Sasse

State Tax Wars Heat Up - Gary Sasse

In his 2009 State of the State message Governor Donald Carcieri said that he was “tired of people writing stories that Rhode Island was a tax hell.” To address this, the Governor asked me to chair his Tax Policy Strategy Workgroup. He charged the Workgroup with developing a tax strategy to make Rhode Island’s tax structure a competitive advantage.

Over the next several years, the General Assembly enacted the most sweeping changes to the state’s tax structure in decades.  The individual income tax was restructured, and the top marginal rate was reduced from 10.9% to 5.99%, while itemization was eliminated and the standard deduction increased. The estate tax exemption was increased. The corporate tax rate was dropped to the lowest in New England, combined reporting was instituted, a single sales factor apportionment implemented, and the franchise tax was repealed.

These and other strategic tax policies materially improved Rhode Island’s business tax competitiveness. Unfortunately, over the past few years while other states have taken aggressive steps to improve their business tax climate Rhode Island has backslid. As the Wall Street Journal editorialized, “Statehouses across the country are continuing to cut taxes in a movement that shows no sign of slowing down.” A report published by the Tax Policy Center found that 29 states had passed major tax cuts in 2021 and 35 in 2022, even as most states increased spending and enhanced their rainy-day funds.

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Evidence of Rhode Island’s declining business tax climate can be found in the Tax Foundation’s annual Business Tax Climate Index. This comprehensive Index includes 125 tax factors for five major taxes for all fifty states—personal income, sales, corporate income, property, and unemployment insurance.

In 2009, the year the Tax Policy Strategy Workgroup issued its report, Rhode Island’s business tax climate ranked 46th (fifth worst) among the fifty states. As a result of choices made by the General Assembly, by 2018 the Ocean State’s business tax climate ranked 38th.

Since then, other states continued to improve their business tax competitiveness while Rhode Island did not. As result Rhode Island’s business tax climate is again in the bottom ten in the nation, ranking 42nd.

Tax competitiveness has taken on added importance as a result of the pandemic. Steven Malanga, senior editor of City Journal opined, “Remote work gives businesses far more flexibility in where they put jobs, which will almost certainly make executives more inclined to consider low tax, low regulation places.”

Governor McKee’s Fiscal Year 2024 budget plan contains tax cuts. The Governor proposed reducing the state’s sales tax from 7 percent to 6.85 percent, and decreasing the corporate minimum tax by 25 dollars. He also wants to deposit $4.4 million in the Workers Compensation Fund in order to minimize employer rate increases.

To help consumers with increasing energy costs, the Governor’s budget would forgo a 3-cent increase in the gasoline tax. However, future Rhode Island gasoline tax rates will be automatically increased because they are statutorily indexed to inflation. The Governor’s budget would also refund the gross receipts tax on electricity and natural gas from December 2022 through March 2023.

It is hard to understand how these tax changes can make Rhode Island’s tax structure more competitive and fairer.

The Rhode Island Public Expenditure Council (RIPEC) was “spot on” by suggesting more strategic and proactive tax policy choices to improve the Ocean State’s economic competitiveness.

They advocated reducing business property taxes by phasing out the tangible personal property tax. RIPEC also drew attention to the need to reform the corporate tax by making it easier for businesses to deduct net operating losses, liberalize the state’s carryback provisions, and eliminate its throwback rule. One might also add reducing the sales tax rate to 6 percent.

There are reputational risks to states that are viewed as having a poor business tax climate. As opposed to tepid and temporary tax reforms, Rhode Island’s  lawmakers should take the long strategic view in enacting tax policies that will help create jobs and stimulate investments.

 

Gary Sasse served as the Rhode Island Director of Administration, Director of Revenue, and Executive Director of the Rhode Island Public Expenditure Council.