PROVIDENCE, R.I. – An analysis of the 2021 Business Tax Climate Index by the Rhode Island Public Expenditure Council shows a modest increase in Rhode Island’s ranking to 37th in the nation. The 50-state ranking shows Rhode Island improving two spots over its 2020 rank. The Index also shows Rhode Island ahead of its neighbor, Connecticut (47th), and closer in-line to Massachusetts (34th). RIPEC’s analysis further found that Rhode Island has been on a positive trajectory over the last six years; in 2015, the Ocean State’s business tax climate was ranked 44th best (or seventh worst) in the country.
“Policymakers should be recognized for efforts to substantially improve Rhode Island’s business tax climate, however, our rank is hardly cause for celebration as we are still in the bottom half of states,” said RIPEC President and CEO Michael DiBiase. “As the state faces a more challenging economic environment as a result of the pandemic, policymakers need to be even more vigilant to protect the progress we have made over the years and to continue to improve the competitiveness of our broad-based taxes.”
The Business Tax Climate Index is produced each year by the Tax Foundation, a think tank based in Washington D.C., and provides a comparative analysis of each state’s business tax climate. The Index produces an overall score for states determined by comparing 124 variables across five major tax categories: individual income, sales, corporate income, property, and unemployment insurance.
Rhode Island’s ranking in the five major tax categories:
- Individual income tax: 29th
- Sales tax: 25th
- Corporate income tax: 39th
- Property tax: 42nd
- Unemployment insurance tax: 42nd
RIPEC recommends several areas of priority for policymakers to consider.
- Resist current proposals to increase individual income tax rates for high wage earners. The great majority of businesses in Rhode Island are organized as S corporations, sole proprietorships, and partnerships, and report their profits through the individual income tax. Rhode Island’s ranking of 29th for this Index category is already in the bottom half of states, and is considerably less competitive than Massachusetts (ranked 11th).
- Explore changes to make the corporate income tax more favorable to business. Despite improving its ranking for this category from 39th in 2015 to 30th in 2018, Rhode Island’s rating has slipped back to 39th in the most recent Index, largely because of decisions to forego state tax law changes consistent with the federal Tax Cuts and Jobs Act (TCJA) of 2017.
- Continue to improve its ranking in the category of property taxes. While the Ocean State has moved from a ranking of 47th in 2016 to 42nd in the most current Index and is ranked more favorably than both Massachusetts and Connecticut, this tax category continues to deserve greater focus from policymakers.
- Unemployment insurance taxes in Rhode Island remain an area for potential improvement. UI taxes have taken on greater importance given the COVID-19 pandemic and the unemployment crisis, which has significantly drained Rhode Island’s UI trust fund reserves and will necessitate future UI tax increases for employers.
An executive summary of the report is available here.