RIPEC Analyzes Rhode Island’s Business Tax Climate

PROVIDENCE, R.I. – The Rhode Island Public Expenditure Council released today its analysis of Rhode Island’s business tax climate, finding that the state has improved its standing in the Tax Foundation’s Business Tax Climate Index from 42nd to 41st but still ranks in the bottom ten states. RIPEC’s brief also assesses potential tax law changes currently under consideration by the General Assembly and provides recommendations to improve the Ocean State’s business tax climate.

“RIPEC applauds Rhode Island policymakers for taking serious action last year to improve the state’s business tax climate by enacting tangible property tax relief,” said Michael DiBiase, President and CEO of RIPEC. “However, Rhode Island’s tax climate remains in the bottom ten states and there is significant room for improvement.”

DiBiase further cautioned that, “some proposals before the General Assembly would significantly worsen our position, with potential negative consequences for the state’s economy. For example, Massachusetts’s Index ranking fell 12 spots (from 34th to 46th) because of its new ‘millionaires’ tax’; RIPEC urges the General Assembly to resist legislative proposals that would impose the same income tax hike in Rhode Island.”

“Policymakers should instead support Governor McKee’s proposed corporate tax change to extend the time for which businesses can carry forward net operating losses from five years to 20 years. Proposals of this type would provide needed improvement to Rhode Island’s business tax climate,” he said.

RIPEC’s policy brief analyzes Rhode Island’s ranking on the Index overall and in the five tax categories that determine its overall score. Rhode Island’s rank on the 2024 Index marks the first time Rhode Island improved in the rankings since 2017. While Rhode Island has never cracked the top two-thirds of states, its most recent, one-spot improvement to 41st has positioned it farther ahead of Connecticut (47th highest) and Massachusetts (now 46th).

Rhode Island’s ranking in the Index’s five major tax categories, and analysis of pending legislation:

  • Sales tax:
    • Rhode Island ranks 22ndin the Index, which places it in the top half of states but below every New England state but Connecticut (23rd). Of the tax categories in the Index, the New England region is the most competitive in sales tax and Rhode Island likewise ranks higher in this tax category than in any other.
    • Policymakers are considering a reduction in Rhode Island’s sales tax rate. Rhode Island Senate President Dominick Ruggerio has voiced support for legislation to decrease the rate from 7.0 percent to 6.5 percent, which would improve Rhode Island’s combined state and average local sales tax rate from 24th highest to 30th highest. Legislation sponsored by Senate Minority Leader Jessica de la Cruz (S2049) would reduce the rate to 5.0 percent and move Rhode Island’s combined rate to third lowest. Governor McKee’s FY 2025 budget proposal does not include a sales tax reduction, but he has cited sales tax relief as a priority if additional revenues are projected at the May Revenue and Caseload Estimating Conferences.
  • Corporate income tax:
    • Rhode Island scores poorly on the corporate income tax with a rank of 40th highest and ranks below every other New England state but New Hampshire, which does well on the Index overall (overall rank of sixth highest).
    • Governor McKee’s proposed corporate tax change to extend the time for which businesses can carry forward net operating losses from five years to 20 years would significantly improve Rhode Island’s ranking in this category. While Rhode Island’s current carryforward provision is the most limited in the nation, this proposal would bring Rhode Island more in line with other states and on par with neighboring Connecticut and Massachusetts, which both have 2o-year provisions.
    • Recommendation: Policymakers should support the governor’s proposal to extend the period for which businesses are allowed to carry forward net operating losses from five years to 20 years.
  • Property tax:
    • Rhode Island ranks in the bottom third of states (35th) but performs significantly better than other New England states, which all rank in the bottom ten. Rhode Island improved by six spots from 2023 because of its new tangible personal property tax exemption.
    • Legislation currently under consideration (H7381) would require that the assessed value of real property not be increased by more than 20 percent above the previous (three-year) revaluation cycle. This would negatively affect Rhode Island’s ranking in this category and distort the real value of property by shifting the tax burden away from real estate experiencing large increases in market value.
    • While not affecting Rhode Island’s Index ranking, legislation which would enable greater distortion between market values and property tax bills through homestead exemptions is also before the General Assembly this session (H7378).
    • There are currently three legislative proposals before the Assembly to raise the estate tax threshold (S2064/H7487, S2065, H7680), but none of these proposals would affect Rhode Island’s ranking—the Index only considers whether the tax is levied because only 12 states levy an estate tax.
    • Recommendation: Rhode Island should continue to improve its property tax structure and resist efforts to shift a greater proportion of the property tax burden to businesses and renters.
  • Unemployment insurance tax:
    • Rhode Island ranks in the bottom third of states (35th) but performs significantly better than other New England states, which all rank in the bottom ten. Rhode Island improved by six spots from 2023 because of its new tangible personal property tax exemption.
    • Legislation currently under consideration (H7381) would require that the assessed value of real property not be increased by more than 20 percent above the previous (three-year) revaluation cycle. This would negatively affect Rhode Island’s ranking in this category and distort the real value of property by shifting the tax burden away from real estate experiencing large increases in market value.
    • Recommendation: Rhode Island should continue to improve its property tax structure and resist efforts to shift a greater proportion of the property tax burden to businesses and renters.
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