Rhode Island Proposes Flat Income Tax

by Leroy Baker, Tax-News.com, New York

14 February 2006

Right-wing US commentators were shocked last week when Rhode Island Democratic legislators proposed a flat income tax in response to competition from other States which is leaching away their tax base.

Currently, Rhode Island taxes its highest earners at 9.9 percent of their income, the highest of all the 41 states with broad-based income taxes. Massachusetts taxes its highest earners (and all its workers, since it has a flat tax rate) only 5.3 percent and Connecticut, 5 percent.

The legislation proposes an alternative tax rate that top earners could choose to pay beginning in 2007. Instead of the current rate of 9.9 percent of their federal taxable income, which is then subject to adjustments, deductions and tax credits, those taxpayers could elect to pay 7.5 percent of their Adjusted Gross Income (AGI), but without any of the reductions. Over the course of five years, the flat rate would be gradually reduced to 5.5 percent to make it closer to the rate that those taxpayers would pay if they lived in Massachusetts.

Dan Mitchell of the Centre for Freedom and Prosperity said: 'Any list of the five most left-wing states almost surely would include Rhode Island, so it is especially noteworthy that Democrats - yes, Democrats - in the state legislature are proposing a flat tax. These politicians have not become supply-siders who understand the importance of low marginal tax rates. Instead, their flirtation with good economic policy is driven by tax competition. They realize that high tax rates are driving economic activity to other states, and they feel compelled to lower tax rates to keep the geese that lay the golden eggs from flying away.'

Said the Wall Street Journal: 'The answer is . . . the discovery that Rhode Island's high tax burden is damaging its economy. Just as the countries of the former Soviet bloc have passed flat taxes to make themselves more competitive, Rhode Island politicians are hoping the idea can help them stop their most talented workers and growth industries from going elsewhere.'

“This legislation is a comprehensive approach to providing relief to all taxpayers throughout the state,” said House Speaker William J. Murphy at a news conference where he and other members of the leadership team presented the legislation. “Rather than taking a piecemeal approach to the issues that affect our tax system, we’re going to look at how to make the entire system work for the state and for all its taxpayers. The ultimate goal is to put more money directly into people’s pockets both by giving relief to those who need it and by making Rhode Island a more attractive place for businesses that will provide high-paying jobs for more Rhode Islanders.”

House Majority Leader Gordon D. Fox said he is proud that the Taxpayer Relief Act includes a number of proposals that are meant to help Rhode Islanders of every income level.

“We know that all Rhode Islanders are feeling the pinch in this economy, facing meteoric housing costs and heating bills. That’s why we’ve designed this package to respond to the needs of people at every income level. It will provide much-needed relief to those with low incomes and to middle-class working families, as well as putting Rhode Island in a more competitive position to attract high earners and companies that will bring more jobs to the state,” said Leader Fox (D-Dist. 4) of Providence.

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