Rhode Island Weighs Tax Reform

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Posted by Paul Blair on Tuesday, May 6th, 2014, 4:23 PM PERMALINK


The Rhode Island legislature has toyed with the idea of reducing the state sales tax for the past year. The small size of Rhode Island opens it up to lost business as taxpayers can easily purchase less expensive goods without real effort in neighboring states. That's precisely why reducing the sales tax from 7% to 3% is a good idea.

Cross border purchases will have the predictive effect of new revenue for the state. A reduction in the sales tax would also lessen the overall tax burden on Rhode Island low-income families while creating jobs that will provide opportunities for upward income mobility. The 4 point reduction in the sales tax will create more than 13,000 jobs according to the Rhode Island Center Freedom and Prosperity. 

A dynamic analysis of the tax reform proposal projects that although the state would lose $433 million in sales tax revenue, income tax receipts will increase by more than $200 million as well as revenue collected on cigarettes and alcohol. With greater economic activity and population growth over time, the state would also likely experience higher revenue from a wide range of things including gasoline. According to the report, the net state budget impact would be less than $50 million, a figure easily addressed with small spending cuts.

The bill is being sponsored by Democrat Representative Jan Malik, who says, "We have to find a way to lower taxes to make us more competitive with other states." 

Rhode Island has one of the highest statewide sales tax rates in the nation, though the application of the tax is extremely narrow, applying to only about a quarter of goods and services. The best designed tax system has a broad base and low rates. Dropping the rate to 3% addresses the second and is certainly a huge step in the right direction. Genuine tax reform should address the issue of Rhode Island's narrow sales tax base as well, in a revenue neutral way. 

"This important legislation would take a step in the right direction towards reversing course on decades of uncompetitive and anti-growth tax policies that cripple the Ocean State economy. Whether this bill’s full impact is phased in over several years or adopted immediately, it is a bold move in the right direction. The full legislature should have the opportunity to debate this bill’s merits which include more jobs, more investment, and a reduced burden on Rhode Island taxpayers," said Grover Norquist, president of Americans for Tax Reform. 

Rhode Island's sales tax isn't the only tax that is among the highest in the nation. The corporate income tax stands at 9%, which is the 6th highest among states levying a corporate income tax. The Ocean State has a long way to go to boost business and tax competitiveness and bills that address both of these issues should be debated by the full legislature in the coming weeks. 

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