April 2014

Rhode Island: Experimenting with Tax Reform

by Amy K. Frantz 

Just a few years ago, Rhode Island had one of the highest top personal income-tax rates in the country, at 9.9 percent. In 2006 the Democrat-controlled Rhode Island General Assembly adopted and then-Governor Don Carcieri (R) signed into law an optional flat tax with no deductions.  Rhode Island taxpayers could choose between the ongoing tax system with rates and brackets and deductions or could choose the flat tax and forgo the exemptions and deductions, whichever system would give them the lowest tax bill.[1]  The optional flat tax was set at 8 percent for the 2006 tax year and was scheduled to drop by 0.5 percent each year until reaching a floor of 5.5 percent in 2011.[2]

While many state tax reformers have discussed implementing a dual-tax system in which taxpayers decide which tax to pay, Rhode Island has been the only state to adopt such a reform. However, very few Rhode Island taxpayers took advantage of the optional flat tax:

As the Providence Journal reports, only 838 residents used the flat tax in 2007…. That seems like a remarkably low number, considering 2007 was a boom year for many high earners, but the flat-tax rate that year was 7.5 percent, not exactly a bargain considering that the tax filer has to give up every deduction.[3]

In April 2010, House Finance Committee Chairman Steven Costantino (D) proposed eliminating the optional flat income tax. However, Representative Costantino also indicated that simply continuing with a tax system with a high top rate was not acceptable and also proposed tax reform that would “make Rhode Island ‘more competitive with neighboring states,’ and ‘get that 9.9 percent monkey off our backs.’”[4]

Two months later, in June 2010, Governor Carcieri signed legislation to overhaul Rhode Island’s personal-income-tax system, with the following elements:

  • Eliminates the optional flat-tax system and the alternative-minimum tax.
  • Reduces the number of tax credits.
  • Increases the standard deduction for most taxpayers.
  • Eliminates the option to itemize deductions.
  • Reduces the number of brackets from 5 to 3 and reduces the top tax rate from 9.9 percent to 5.99 percent.[5]

“Under the legislation, the vast majority of Rhode Island taxpayers – those with adjusted gross income below $500,000 – would see a tax decrease…. The new standard deductions would be $7,500 for individuals and $15,000 for those filing jointly.”[6]  The tax reform also “eliminates most of the state’s roughly 40 tax-credit programs.”[7]

As described by Joseph Henchman of Tax Foundation:

Overall, the reform was designed to be revenue-neutral and actually increase progressivity, while dramatically reducing compliance costs and barriers to economic growth. While Rhode Island still has problematic property and corporate income taxes…their tax reform will greatly boost the state’s competitive position. That an overwhelmingly Democrat Legislature and the Republican Governor came together to enact it shows that tax reform is a possibility in any state.[8]

While the dual-tax system was not a success in Rhode Island due to the high rate of the flat tax, elected officials in that state did recognize the need to reform their system and reduce the high tax rates and complexity of their state’s income tax. The income-tax reforms adopted in Rhode Island demonstrate that progress can be made even with divided government.

Amy K. Frantz is Vice President of Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry.

[1] William Ahern, “Trying to Nip It in the Bud: Rhode Island Democrats Attack the New Alternative Flat Tax,” Tax Foundation, The Tax Policy Blog, January 22, 2010, <http://taxfoundation.org/blog/trying-nip-it-bud-rhode-island-democrats-attack-new-alternative-flat-tax> accessed July 17, 2013.

[2] “State Individual Income Tax Rates, 2008,” Tax Foundation <http://taxfoundation.org/article_ns/state-individual-income-tax-rates-2000-2013> accessed November 6, 2013.

[3] William Ahern, “Trying to Nip It in the Bud…”

[4] William Ahern, “Rhode Island Tax Writer Threatens to Repeal the Best Feature of the State’s Tax System,” Tax Foundation, The Tax Policy Blog, April 24, 2010, <http://taxfoundation.org/blog/rhode-island-tax-writer-threatens-repeal-best-feature-states-tax-system> accessed July 17, 2013.

[5] Joseph Henchman, “Trend #2: Income Tax Reform,” Tax Foundation, Fiscal Fact, No. 312, June 14, 2012, <http://taxfoundation.org/article/trend-2-income-tax-reform#_edn2> accessed July 17, 2013.

[6] William Hamilton, “Carcieri to sign R.I. income tax overhaul,” Providence Business News, June 7, 2010, <http://www.pbn.com/Carcieri-to-sign-RI-income-tax-overhaul,50384> accessed July 17, 2013.

[7] Ibid.

[8] Joseph Henchman, “Trend #2.”