Tax competition. What is it? An Olympic event or a powerful economic engine?
It is, of course, the latter (though if we had our preferences, it would be an Olympic event also — and all countries would have to compete).
Lawmakers in Rhode Island, who are mostly Democrats and not particularly disposed to lower taxes, have entered the event. In response to lower taxes in nearby states, they’re pushing hard to overhaul their state’s tax system. And it’s no small reform. The “Taxpayer Relief Act of 2006” would essentially flatten the state’s progressive tax rates.
We quote below from the state’s press release, just so you know we aren’t making this up.
- Currently, 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. Massachusetts taxes its highest earners (and all its workers, since it has a flat tax rate) only 5.3 percent and Connecticut, 5 percent. [And New Hampshire has no income tax.]
The legislation proposes an alternative tax rate that top earners could choose to pay beginning in 2007. Instead of the current rate of 9.9 percent of their federal taxable income, which is then subject to adjustments, deductions and tax credits, those taxpayers could elect to pay 7.5 percent of their Adjusted Gross Income (AGI), but without any of the reductions. Over the course of five years, the flat rate would be gradually reduced to 5.5 percent to make it closer to the rate that those taxpayers would pay if they lived in Massachusetts.
A recent survey by the Rhode Island Society of Certified Public Accountants (RISCPA) found that Rhode Island’s high marginal tax rate might be having an effect on the retention of wealth in Rhode Island by causing retirees and companies to move to states with lower taxes [ya think?!], and causing large companies with multiple locations to put their highest earners somewhere other than Rhode Island. In a May 2005 report urging tax reform, RISCPA and Rhode Island Public Expenditure Council (RIPEC), an independent public policy research and education organization, 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.
We couldn’t have said it better ourselves — which is why we let them say it.
But three questions remain:
- If Rhode Island lawmakers know these basic economic principles of taxation, they why did they push the rate to 9.9 percent in the first place?
- Is Rhode Island Senator Lincoln Chafee, a Republican, reading the local newspapers, and if so, why hasn’t he taken this wisdom with him to Washington?
- Is there any possibility we can get the good lawmakers from Rhode Island writing the tax section of the next Democratic presidential platform?
Nothing we’d like more than to ignite a little lower-tax competition at the federal level. Right now, only one party is competing.