Rhode Island Tax Reform

On June 9, 2010, Governor Carcieri signed a tax reform bill - H8196 Sub A & S2921. The governor described this as "legislation that overhauls the state’s personal income tax system, reduces taxes for most Rhode Islanders, simplifies the current tax system, and makes Rhode Island a more attractive state in which to live and do business."

The legislation reduced individual tax brackets from five to three and increases the standard deduction. The top rate goes from almost 10% to almost 6%. The goal seems to be simplification and making the state more attractive for business. The governor's press release includes a chart comparing the new RI system to what taxpayers would pay in nearby Massachusetts and Connecticut.

It seems that the genesis for the proposal was work of the governor's tax reform study group which issued a report in 2009 (see The Providence Journal, "R.I. tax-reform panel issues final report," 3/12/09. And various reasons for tax reform are laid out by the RI Department of Revenue in this presentation file - here.

So, reform is possible. It does not sound like a lot of simplification though because while many Rhode Islanders will claim the larger standard deduction rather than itemize, they are likely still itemizing for federal income tax purposes. Also, the number of tax brackets doesn't tie to simplification (unless is it just one bracket) because people use tax tables and tax preparation software to apply the tax brackets.

Hopefully, the state will track changes in business activity and start-ups in the state to see if the rate reduction did indeed encourage existing businesses to stay and expand and for new businesses to locate in Rhode Island.

The Tax Foundation states that it views the reform as moving Rhode Island's business climate from 7th worst state to 10th worst! (see 6/2/10 News Release).