Rhode Island’s Tax Plan

Posted June 17, 2010, at 8:46 p.m.

Mainers did not like the plan to reduce the state’s income tax rate while expanding the sales tax to make-up for the loss of revenue. That much is clear, given the 60-40 rate by which voters repealed the plan in the June 8 vote. Is there another way to reduce Maine’s income tax rate — which both Republicans and Democrats say is hurting the state’s economy — which voters will accept? They might want to consider Rhode Island’s plan.

Earlier this month, the Ocean State’s Democratic-controlled General Assembly passed and Republican Gov. Don Carcieri signed into law a tax code that cuts the highest marginal income tax rate from 9.9 percent to 5.99 percent, and reduces the number of tax brackets from five to three. Legislative leaders believe, according to a story in the Providence Journal, that lowering the rate will make Rhode Island “more appealing to companies looking to come to the state,” and help change “the negative stigma that Rhode Island has of being a high-tax state.”

Sound familiar?

To balance the loss of revenue from the lower income tax rates, the value of the standard deduction and exemption for those with adjusted gross income between $175,000 and $200,000 was reduced, and those deductions and exemptions for those earning more than $200,000 were cut altogether. So instead of off-setting the revenue loss with an expanded sales tax, a portion of which might have been picked up by tourists, as Maine’s plan was conceived, Rhode Island’s plan puts more of a burden on its wealthy residents. Is this approach more palatable to Maine voters? Would Republicans support this version? Does it run counter to their notion that people with money invest it and create jobs?

The Rhode Island plan follows President Barack Obama’s approach to apportioning the tax burden, which he stressed repeatedly on the campaign trail in 2008, shifting it back onto those who earn $250,000 or more. That shift countered the breaks given to wealthier Americans under the Bush ad-ministration.

An analysis of the new Rhode Island plan by the state found that 60 percent of resident taxpayers will see a tax decrease, averaging about $226. About 21 percent would see no change, and about 19 percent will see an increase, on average about $654 each.

At the signing ceremony in Providence, the state senator who sponsored the bill, Finance Committee Chairman Daniel DaPonte, said: “We are living in a mobile global economy. There are those people who will embark upon entrepreneurship … and they will shop around. This is a plan that makes us more competitive with other states.” That is an opportunity Maine missed with last week’s repeal of a tax reform plan that would have dropped the income tax rate from 8.5 percent to 6.5 percent for most people.

When the new Maine Legislature convenes, reducing the state’s income tax must be a priority. Rhode Island’s new law offers one way to get there.

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