Turns out in between the normal gossip, my friends and family had somehow neglected to spread a juicy bit of exciting Ocean State news with me -- I'm talking of course about the flat tax proposal that came out of the Rhode Island House of Representatives in early February.
I did a double take this week when I saw my very liberal home state name-checked in the very conservative editorial pages of The Wall Street Journal. The paper's lead opinion piece on Feb. 10 carried the headline "Rhode Island Revelation," and praised the centerpiece of the House's Democratic leaders tax reform plan, a proposal to create an optional flat rate income tax of 5.5 percent.
The rate would be an alternative to the state's mind-numbingly complex "progressive" tax schedule, which the independent Rhode Island Public Expenditure Council says sets rates anywhere from 3.75 percent ( a taxpayer's first $49,650 in income) to 9.9 percent for the highest bracket (every taxable dollar above $326,450 in income).
According to a release announcing the plan, 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, and a significant difference from its neighbors in Massachusetts (all workers taxed at a flat 5.3 percent) and Connecticut (at 5 percent), never mind New Hampshire, which still doesn't have a state income tax.
The release also noted a May 2005 survey from the Rhode Island Society of CPAs, which found that the high marginal tax rate might be having an effect on the retention of wealth in the state by causing retirees and companies to move to states with lower taxes, and causing large companies with multiple locations to put their highest earners somewhere other than Rhode Island.
The Taxpayer Relief Act of 2006 consists of nine initiatives, and proposes an alternative tax rate that top earners could choose to pay beginning in 2007. Instead of the current top rate taxpayers could elect to pay 7.5 percent of their adjusted gross income, but without taking any deductions or credits. Over the next of five years, the flat rate would be gradually reduced to 5.5 percent. First year costs would run around $17 million.
In a May 2005 report urging tax reform, RISCPA and RIPEC, repeatedly brought up Rhode Island's high marginal tax rate as a disadvantage that might be causing the state to lose valuable high-earners and successful corporations. And that's just one of a number of studies noting that Rhode Island's economic competitiveness measures have dropped off significantly in recent years, even as more and more people are priced out of the cost of buying a home, or find themselves unable to advance up the career ladder.
At any rate, there's seems little reason changes to the current system shouldn't at least be explored, instead of immediately dismissed. With more and more Rhode Islanders making their chief residence elsewhere for six months and a day out of the year, o f the nearly 500,000 state income-tax returns filed in 2003, less than 10,000 came from filers with adjusted gross incomes of $200,000 or more. It's less about political semantics than simply finding a way for the state to remain economically competitive by attracting high earners and companies that will bring more jobs into the state.
As House Speaker William Murphy put it in a statement, "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."
Rhode Island has a history of independent thinking, being the first of the British colonies to declare its independence, on May 4, 1776. Years later, it became the last of the original 13 states to ratify the Constitution -- and only after being threatened with having its exports taxed as a foreign nation. There's no guarantees making changes to the highest tax bracket will truly change anything for the state's economy, but it can't hurt to have a serious, bipartisan discussion over meaningful, long-term changes.
As the Internal Revenue Services openly discusses its collection problems with an annual tax gap estimated in the billions, and while the work of the President's Advisory Panel on Tax Reform collects dust, there's no reason why more serious tax reform talk shouldn't be happening on a national level. Democrats and Republicans can't always be running to the same excuses for failing to address problems with the country's tax system. Hopefully, Rhode Island can serve as a proving ground that there is a middleground.
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