In an era of shrinking tax revenues, most states are rushing to raise funds by increasing rates and simply taxing more stuff. Rhode Island, however, has a different idea. The tiny New England state may be geographically the smallest in the country but it has big plans to make the state more attractive to business. This week, Gov. Don Carcieri (R) signed into law a bill passed by a Democratic-led General Assembly to lower taxes. That’s right, I said lower taxes.
Okay, they’re not cutting taxes for everybody – but mostly everybody. The new law will reduce the state income tax rate for top earners from 9.9% to 5.99%. The number of tax brackets is also tweaked from five down to three. The result, according to a budget analysis, is that 302,500 taxpayers would see a tax decrease; 103,434 taxpayers would see no change and an unfortunate 91,404 taxpayers would see a tax increase. The changes are effective as of January 1.
Proponents of the measure hope that lower taxes will kick start Rhode Island’s economy, which has suffered along with most of the country. Its unemployment rate sits at 12.5%, higher than the national average.
Rhode Island’s tax structure has previously been attacked as too high and too complicated. The state has long been considered tax heavy, ranked a miserable 44th by the Tax Foundation (downloads as a pdf) in terms of desirable state business tax climate. Only California, Iowa, Maryland, New Jersey, New York and Ohio are ranked lower.
With holes already in the state’s budget, it’s a gutsy move. Expect other states to keep an eye on Rhode Island to see if altering the tax structure actually makes a difference in the economy. It’s a question that tax policy analysts have been debating for years: are tax cuts incentives for taxpayers to make more money – or just plain ol’ tax cuts?
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