As the General Assembly considers the FY 2011 budget, RIPEC notes in its most recent report that caution should be exercised when considering tax changes. At this critical juncture in the state’s fiscal and economic future, RIPEC believes it would not be advisable to create uncertainty or increased burden.  If changes are made there should be a fiscal and administrative analysis including information on the revenue raised, the tax incidence, the impact on state competitiveness, and the anticipated administrative burden. 

The state must be mindful of taking a balanced approach to changes to the tax code.  Any changes ought to ensure that the system produces revenue in a reliable and efficient manner with limited effects on taxpayer decisions.  Further, taxpayers, including businesses, must be assured of some measure of stability and predictability in their tax system.  In some cases, the state has made a commitment to reduce taxpayer burdens that should be fulfilled unless there is compelling evidence that changes should be made.

Recently, the state has seen the first positive signs of change in the overall tax burden.  Since FY 2005, the state’s personal income tax burden as a share of personal income has dropped from 21st to 26th highest, and the overall burden continues to decline.  These changes have also improved Rhode Island’s relative business climate ranking by the Tax Foundation from 50th to 44th.  Rhode Island’s decreases in rankings are in part reflective of the movement in the rankings of other states who have seen their tax burdens increase, but also are indicative that changes to the state’s tax code, such as the alternative flat tax and S 3050, are achieving their intended goals.  

At the same time, however, Rhode Island’s state and local tax collections remain higher than the national average and both Connecticut and Massachusetts.  In FY 2007, Rhode Island’s state and local tax burden as a share of personal income was the 15th highest in the country while Connecticut ranked 21st and Massachusetts ranked 37th.  A recently-released study by the National Conference of State Legislatures indicates that tax changes in FY 2010 were equal to 2.1 percent of total FY 2008 state tax collections, the 19th largest increase in the country.  Moreover, the total property tax levy, the largest share of taxes in the state, increased by 7.8 percent between FY 2008 and FY 2010.

Further, national studies indicate that Rhode Island is not perceived as a good place to start or grow a business.  Ernst and Young note that Rhode Island businesses had the 11th highest tax burden in the nation in FY 2008 and that, between FY 2002 and FY 2008, the business tax burden in the Ocean State increased faster than in either Connecticut or Massachusetts.  A separate analysis by Forbes rated the state as the worst state in the country for doing business.  While taxes are not the only factor in the studies, they do figure heavily into the state’s ranking and are one of the few variables that are within the state’s power to affect.

Any changes to the state’s tax system should be undertaken with both a short- and long-term outlook.  A thoughtful tax restructuring effort, distinct from a piecemeal approach, will enable the establishment of a tax system that reflects the Rhode Island of tomorrow instead of the Rhode Island of yesterday.  RIPEC’s most recent tax policy analysis is designed to put the state’s tax policy choices in context by providing an overview of the current tax system and national rankings.  

Specifically, the report finds that:

  • Thirteen percent of personal income tax filers paid 63.3 percent of total income taxes remitted to the state in tax year 2008.
  • Taxes paid by businesses in tax year 2008 amounted to 5.7 percent of the gross state product in that year.
  • The Department of Revenue estimates that sales tax exemptions account for approximately $625 million in lost revenue.
  • In FY 2010, 27 of the state’s 39 communities enacted a levy that was below the cap; the average levy increase in those communities was 1.98 percent.
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