PROVIDENCE, R.I. – An analysis of the Tax Foundation’s 2022 Business Tax Climate Index by the Rhode Island Public Expenditure Council shows Rhode Island ranks 40th in the nation, down two spots from 2021. RIPEC’s analysis further found that Rhode Island was on a generally positive trajectory between 2014 and 2019, but in the last three years, the state has lost ground.
“Rhode Island has improved its business tax climate over the years,” said RIPEC President and CEO Michael DiBiase. “However, as other states have enacted reforms to make their business tax systems more competitive in the last few years, Rhode Island has stood still.”
“As Rhode Island faces a more challenging economic environment because of the pandemic but is also flush with federal funds, policymakers need to be even more vigilant to protect the progress we have made over the years,” DiBiase added. “Policymakers should consider changes that would improve the competitiveness of our broad-based taxes, such as the property and corporate income tax, in order to lessen the burden on Rhode Island businesses.”
In the past nine years, Rhode Island never cracked the top two-thirds of states, but its improved score since 2014 has positioned it farther ahead of Connecticut and closer in line with Massachusetts.
Published each year by the Tax Foundation, a think tank based in Washington D.C., the Business Tax Climate Index provides a comparative analysis of each state’s business tax climate. The Index produces an overall score for states by comparing 125 variables across five major tax categories.
Rhode Island’s ranking in the five major tax categories:
- Individual income tax: 31st
- Sales tax: 24th
- Corporate income tax: 37th
- Property tax: 42nd
- Unemployment insurance tax: 49th
RIPEC recommends several areas of priority for policymakers to consider.
- Rhode Island should continue to improve its property tax structure. While the Ocean State has improved from a ranking of 46th in 2014 to 42nd today, this tax category continues to deserve greater focus from policymakers. Since Rhode Island permits split roll property taxation and relies on tangible property taxation, businesses pay a disproportionate share of the state’s relatively high property taxes. As assessed values for residential property have increased sharply in relation to commercial property, policymakers should resist increasing the proportional tax burden imposed on businesses.
- Rhode Island should explore changes to make its corporate income tax more favorable to business. Despite improving its ranking for this category from 39th in 2015 to 30th in 2016, Rhode Island’s rating has slipped back to 37th today, largely because of decisions to forego state tax law changes incentivized by the federal Tax Cuts and Jobs Act of 2017. At minimum, policymakers should consider improving the ability for taxpayers to deduct net operating losses.
- Calls to increase individual income tax rates for high wage earners should be resisted. The great majority of businesses in Rhode Island are organized as S corporations, sole proprietorships, and partnerships, and report their profits as individual income. Rhode Island’s ranking of 31st for this category is already in the bottom half of states and is considerably less competitive than that of Massachusetts (ranked 11th).
- The state should use federal pandemic relief funding to provide UI tax relief to employers. Rhode Island’s UI benefit levels were reformed in 2011 to be more in line with neighboring states but remain relatively high compared to other states. Because the UI trust fund, entirely paid for by employers, was severely impacted by government-mandated shutdowns caused by the pandemic and by unprecedented UI fraud, the state should consider using some of its discretionary federal relief money to build up its UI trust fund balance and shield employers from future rate increases.
An executive summary is available here.