Michael McMahon, the state’s economic development director, calls it our “one big negative.” A Fidelity Investments official recently said “it’s no secret” that Rhode Island’s high taxes put it “at a competitive disadvantage.” And the Rhode Island Public Expenditure Council has called for a more “transparent,” simple, equitable, and competitive tax structure.
In business and economic development circles, there’s a consensus: Rhode Island needs to do something about taxation. Even state legislative leaders, who have traditionally resisted tax-cut talk, are now moving in that direction.
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But what precisely is the problem, and how do you fix it? As part of its yearlong Economic Agenda initiative, the Providence Business News hosted a discussion May 19 at the Federal Reserve Restaurant seeking to answer those questions.
At the table were Gary Sasse, executive director of RIPEC; state Rep. Raymond C. Church (D-North Smithfield), executive director of the Rhode Island Society of CPAs; state Rep. Paul W. Crowley (D-Newport), owner of La Forge Casino Restaurant; and James J. Skeffington, a partner in the law firm Edwards & Angell with many corporate and institutional clients.
All four agreed that, as Skeffington put it, taxes are “an issue of vital importance” for Rhode Island – and that they need to be lowered to compete with Massachusetts and Connecticut. But they also agreed that not all taxes are a problem: The 7 percent sales tax and 9 percent corporate income tax, for example, are both “reasonable” by national standards, Crowley said.
The two taxes that need attention, the four men said, are the property tax and the personal income tax, specifically the top rate, 9.9 percent, applicable to incomes above $319,000; Massachusetts and Connecticut taxpayers in that bracket pay 5.3 and 5.0 percent, respectively.
Skeffington said the high tax is “a real drag” on Rhode Island’s economy, because the executives who run large company divisions – the ones that could bring 400 or 500 jobs to the state – don’t want to move here because of the “large disparity in the income tax rate.”
Entrepreneurs whose companies are growing also choose to leave, Skeffington said, because they want to keep more of their money and invest it back in their businesses. All that means “a flight of capital, a flight of jobs,” and it limits Rhode Island’s ability to retain the young people who graduate from its colleges, because there are few opportunities for them here.
Income tax reform is urgently needed, Skeffington said, because “every year we don’t do it, the pain gets greater, and the challenge becomes more significant.”
Sasse and Church, whose organizations issued a report together last month urgently calling for income tax reform – both to reduce the top rate and to simplify the tax structure – didn’t argue with Skeffington; in fact, Sasse suggested that the state should take advantage of a $104-million revenue windfall to make a “down payment” on tax reform, while also making a “broader effort to reform the entire tax structure.”
Sasse also pointed out, however, that Rhode Island’s property taxes are just as uncompetitive, noting, for example, that taxes in Providence are 17 percent higher than in Boston. And not only do property taxes affect people inequitably, Sasse said – because the rates vary by town – but they also encourage sprawl by driving companies out of high-tax urban areas.
With both income and property taxes, Sasse said, the key is to cut government spending. In the last 10 years alone, state spending has grown by $1.8 billion, or 46 percent after adjusting for inflation, he said. Entitlements are growing dramatically, he said, to the point that by 2010, Medicaid will take up 37 percent of the state budget.
“Unless we look closely at the benefit levels, unless we look closely at what entitlements are absolutely necessary, we’re not going to get control of the budget,” Sasse said.
Crowley spoke in similar terms, saying that legislators “really don’t have the discretion that we used to have with the budget, (because) a lot of it is being driven by entitlements.” Rhode Island may soon get one other major expense under control, however, he said: Legislators are “close” to an agreement with Gov. Donald L. Carcieri on pension reform.
Yet another major budget item, however, education, continues to be a challenge, Crowley said, and it’s driving up what he sees as the biggest tax problem, property taxes. The General Assembly has always been “very generous” with school funding, he said, but that hasn’t kept property taxes in check, or improved the quality of education.
Asked for specific suggestions to improve Rhode Island’s tax outlook, the speakers came up with four major ideas:
*Establish a tax policy office to provide “objective, factual information” to guide legislators, as Church put it, with a long-term view and consideration of “best practices” in other states.
n Start reducing the top income tax rate, even if it’s phased in over five years – to send “a signal to the business community that we’re on the right track,” as Skeffington put it.
Revamp the entire tax system to make it simpler and easier to interpret.
Provide “direct” property tax relief, perhaps in a same way as the car tax was partly phased out years ago.
PBN’s Economic Agenda series will continue this Thursday (June 9) when a panel of experts convenes for a breakfast meeting at the Radisson Hotel in Warwick to discuss energy and the environment.
