An economist who oversaw a recent report that ranked Rhode Island among the worst states in the nation for business competitiveness urged state policymakers last week to examine income tax rates and keep the minimum wage down.
David G. Tuerck, executive director of the Beacon Hill Institute for Public Policy Research at Suffolk University, told the state Legislature’s Permanent Joint Committee on Economic Development that Rhode Island’s fiscal policy has hurt its ability to compete.
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The institute, which monitors all 50 states in categories that include technology and business incubation, ranked Rhode Island 41st in a report released in December. However, Tuerck testified that Rhode Island actually should have ranked 37th, but there was a data entry error. Massachusetts retained its No. 1 ranking when the correction was made.
A major factor in the state’s ranking was its tax policy, Tuerck said, and in that area Rhode Island still has work to do.
While he credited the Legislature for examining the issue of income taxes, Tuerck said that the “Taxpayer Relief Act of 2006” unveiled this month by the House of Representatives’ Democratic leadership would likely make little impact.
The legislation, which Gov. Donald L. Carcieri has said may not be feasible because of the state’s projected $300 million deficit, would reduce the top personal income tax rate from the current 9.9 percent to 7.5 percent in 2007 and 5.5 percent in five years.
But while it would eventually bring Rhode Island closer to Massachusetts’ flat 5.3-percent income tax rate, Tuerck noted, it would tax residents based on their adjusted gross income without adjustments, deductions or credits, while Massachusetts and Connecticut do allow for some deductions and credits.
“At the end of the day, what you really want is to reduce the penalty on making money in Rhode Island,” Tuerck said. “If the tax reform you are looking at doesn’t reduce the marginal tax rates on income… then it doesn’t do much good.”
The Beacon Hill study also said Rhode Island was at a disadvantage for its high minimum wage – now set to rise to $7.10 on March 1 and $7.40 next Jan. 1 – and the influence of labor.
Tuerck said a high minimum wage “destroys jobs,” and noted that Rhode Island’s current minimum, $6.75, is 31 percent higher than the federal rate. That may dissuade small businesses from opening in Rhode Island, he said, because they may not be able to hire as many workers as they need.
Additionally, the high percentage of the state’s work force belonging to a labor union – at 17 percent, one of the highest in the nation – may also give companies a reason to pause before opening in Rhode Island, Tuerck said.
Committee members countered that unions’ influence should not be weighted equally with other indicators in the report, as they were. But Tuerck argued that the labor agreements tend to drive up costs.
Tuerck did commend the state for success in several indicators of business incubation. Rhode Island ranked 15th among all states when it came to venture capital investments and company starts per capita.
Additionally, Rhode Island scored well when it came to the amount of broadband Internet connections per 1,000 residents, safety, and percentage of students attending a degree-granting institution.
The committee asked Tuerck to testify as part of its ongoing examination of the state’s economic competitiveness. While the Beacon Hill report’s merits have been debated, the committee wanted to learn more about areas the state can improve in, said Rep. Elizabeth Dennigan, an East Providence Democrat who co-chairs the committee.
“Whether we agree or disagree with some of the conclusions, I think everyone here would agree that we want to do what we can to promote economic development,” she said.
