Tax Justice Digest stories about Rhode Island

Rhode Island: Breaking Away from Capital Gains Tax Breaks

June 19, 2009 5:27 PM | Permalink

Taxes have been at the forefront of the public debate in Rhode Island for some time now, due both to the depth of the state's fiscal crisis and to the work of Governor Don Carcieri's hand-picked tax commission.

With the release of the House of Representative's budget proposal for fiscal year 2010 earlier this week, it appears not only that the end of that debate may be in sight, but that it will close on a positive note. The House's budget plan contains a number of changes in tax policy, changes that are at once a repudiation and an affirmation of the commission's recommendations. Those recommendations, as embodied in the budget that Governor Carcieri put forward in March, would have eliminated Rhode Island's corporate income tax and dramatically flattened out the income tax's graduated rate structure. Fortunately, the House did not include either of these changes in its budget plan.

The commission recommendation that the House budget plan does include is a major step forward for tax fairness - the elimination of preferential rates for income from capital gains.

In addition, the budget plan appears to include changes in law, similar to those adopted in New York last year, designed to increase the extent to which Internet retailers such as Amazon are responsible for collecting sales taxes on purchases made by Rhode Island residents. It would also provide for an increase in the state's estate tax exemption and index that exemption to inflation.

While the prospect of ending favorable treatment for capital gains taxation should cheer all those concerned about sound tax policy, the House budget plan fails to remove Rhode Island's existing alternative flat tax, which means that both the revenue and equity gains resulting from the capital gains change will be somewhat muted. Policymakers should seriously consider addressing that flaw in the tax code before completing action on the state budget.

To learn more about the shortcomings of the commission's recommendations and the Governor's budget proposal, see this helpful fact sheet from the Rhode Island Poverty Institute -- and this one as well. (In fact, check out the Institute's budget webinar too.) For more on the other states still offering capital gains tax breaks, see this March report from ITEP.

New ITEP Report: States Can Raise Needed Revenue and Improve Tax Fairness by Repealing Capital Gains Tax Breaks

March 20, 2009 4:11 PM | Permalink

As state policymakers craft their budgets for the upcoming fiscal year, they must confront a pair of daunting challenges, one fiscal, the other economic. The budget outlook for the states is, at present, the most dire in several decades. In this context, then, states must find ways to generate additional revenue that create neither additional responsibilities for individuals and families struggling to make ends meet nor additional distortions in the economy as a whole.

For nine states -- Arkansas, Hawaii, Montana, New Mexico, North Dakota, Rhode Island, South Carolina, Vermont, and Wisconsin -- one straightforward approach would be to repeal the substantial tax breaks that they now provide for income from capital gains. In tax year 2008 alone, these nine states are expected to lose a total of $663 million due to such misguided policies, with individual losses ranging from $10 million to $285 million per state. A new ITEP report explains that repealing these tax preferences would help states reduce their large and growing budgetary gaps, enhance the equity of their current tax systems, and remove the economic inefficiencies arising from such favorable treatment.

This report explains what capital gains are, how they are treated for tax purposes, and who typically receives them. It also details the consequences of providing preferential tax treatment for capital gains income for states' budgets, taxpayers, and economies in nine key states. Lastly, it responds to claims about both the relationship between capital gains preferences and economic growth and the role capital gains taxation plays in state revenue volatility. (Appendices to the report provide detailed state-by-state estimates of the impact of repealing capital gains tax preferences.)

Read the report.

Rhode Island: What Not to Do with Federal Stimulus Funds

February 9, 2009 2:15 PM | Permalink

Back in January, Rhode Island Governor Don Carcieri, in introducing legislation to cut spending by $240 million in the five months remaining of fiscal year 2009, remarked that, should Rhode Island "receive Federal stimulus funds, we must … plan on using most of these funds to lower taxes for individuals and businesses, create jobs and stimulate growth." He further maintained that "to do otherwise would be irresponsible." That's an odd definition of irresponsible. Most people living in a state with an expected budget gap of nearly 14 percent in the coming year might say a plan that including permanent tax cuts and only temporary revenue-raising provisions to pay for them is pretty irresponsible. Apparently the Governor isn't most people.

Definitions of irresponsibility aside, the Governor may be about to put his plan into action. The Strategic Tax Policy Workgroup that the Governor initially convened in May of last year met for the final time last week and will soon present the Governor with a report on its work. For several months it seems that the Workgroup would make revenue-neutral recommendations, but now it appears that they will put forth options that would cut taxes by as much as $140 million. Keep in mind that total tax revenue in Rhode Island is projected to be only slightly more than $2.4 billion for the current year. Among the major cuts to be proposed by the Workgroup are the outright repeal of Rhode Island's estate tax, which would cost $28 million annually, and the replacement of the state's corporate income tax with a graduated franchise tax. The latter would reduce taxes on businesses by $82 million per year and would cap the maximum tax paid by any one business, no matter how profitable, at $10,000.

The Governor has requested -- and will likely receive -- a postponement of the deadline by which he must submit his budget for the coming fiscal year. It seems likely that his "otherwise irresponsible" plan will feature prominently in that document.

For more on Rhode Island's budget situation and on the recommendations of the Governor's Tax Policy Workgroup, visit the Rhode Island Poverty Institute's web site.

Competing Visions for Rhode Island

December 12, 2008 3:48 PM | Permalink

Rhode Island, like many states, is facing some tough fiscal and economic times. Its current budget deficit of $357 million is among the largest in the nation (relative to total spending) and its unemployment rate of 9.3 percent is nearly the highest in the country.

So, what does Governor Don Carcieri think the state ought to do in response? Why, repeal the estate tax, of course. After all, repealing it would drain away another $35 million that the state can ill afford to lose and would benefit fewer than 5 out of every 100 people who die in Rhode Island each year.

Others have offered more sensible approaches to addressing Rhode Island’s fiscal woes. As Kate Brewster, the Executive Director of the Rhode Island Poverty Institute points out, “revenue problems require revenue solutions.” To that end, she suggests modernizing the state’s corporate income and sales taxes, by adopting such reforms as combined reporting or by ensuring that services are subject to taxation.

To learn more about the need to preserve federal and state estate taxes, see CTJ’s latest report.

New ITEP Policy Brief Explains Why States Need Progressive Personal Income Taxes

November 17, 2008 1:53 PM | Permalink

Enacting an income tax would obviously be a step in the right direction for states like Nevada, New Hampshire, and Florida, but it would only be the first step. As ITEP's latest policy brief explains, states' income taxes must also be progressive, in order to balance out the regressive impact of the other types of taxes that states levy, like sales taxes and property taxes. States that do not have a progressive personal income tax will find it nearly impossible, over the long run, to fund public services in a way that is sustainable and fair.

At the very least, this means states' income taxes should provide meaningful exemptions to poor taxpayers and use a graduated rate structure to ensure that the very wealthy are paying their share. Unfortunately, though, as a new report from the Center on Budget and Policy Priorities documents, some states with personal income taxes are actually taxing the poor deeper into poverty. In fact, the Center's report finds that, in 18 of the 42 states that levy income taxes, two-parent families of four with incomes under the federal poverty level actually paid state income taxes in 2007. It also finds that 15 states make single parents with two children living below the poverty line pay state income taxes.

There are some straightforward solutions to this. For example, 23 states and the District of Columbia offer earned income tax credits (EITCs) which reduce income taxes for poor families and sometimes provide a refundable credit that further offsets the regressive impact of other state taxes. Plenty of states with personal income taxes could also make their rate structures more progressive, which would ensure that high-income families pay a bit more, as a share of their income, than low- and middle-income families.

Also troubling is that some states that do the right thing and use fairly progressive income taxes -- such as Rhode Island and California -- are considering fundamental changes to those taxes. As ITEP's Jeff McLynch observes in yesterday's Providence Journal, policymakers in Rhode Island should be strengthening the progressive character of their state's income tax, rather than seeking to diminish it.

Finally, a State Where Taxpayers Know Who They Are Subsidizing

September 22, 2008 3:30 PM | Permalink

Rhode Island's Remarkable Tax Credit Disclosure Report

Last week, Rhode Island's Department of Revenue Division of Taxation released a study detailing the tax credits and incentives that nearly 120 companies operating in Rhode Island received over the past year. The report is a result of recent disclosure legislation intended to reveal to the public and policymakers just how much money Rhode Island corporations receive. The Poverty Institute has their own summary of the report here. The release of the report is quite timely as lawmakers are coming to terms with a projected shortfall and may dip into the state's rainy day fund.

The disclosure legislation required the state "to annually report the names, address and amount of tax credits received during the previous fiscal year." Some states have disclosure reports, but including the names of recipients of government largesse is a very unusual -- and positive -- step. Now Rhode Islanders know which businesses received part of the $54.1 million in tax subsidies doled out during the last fiscal year. CVS (the pharmacy chain) saved about $17.2 million through various credits and watchers of Wall Street may be interested to know that Bank of America benefited to the tune of $1.72 million from Rhode Island's attempts to spur development.

The state's tax administrator said, "This report is not intended to provide an analysis as to the effectiveness of the tax credit programs. It is simply aimed at disclosing the amount of tax credits received by taxpayers.” But it's almost a certainty that this type of disclosure will affect the politics surrounding these tax credits, since voters actually know who and what they're subsidizing. We'll remain on the edge of our seats until next month when the Department releases a report detailing the, "the full-time and part-time jobs created or retained by each recipient, and the employee benefits provided; the degree to which each recipient has met tax-credit requirements and goals for job creation or retention and employee benefits; and the full cost to the state of each tax-credit awarded." Thanks to this report, policymakers, taxpayers and advocates can now have honest discussions about tax incentives with an understanding about who actually benefits.

FY 2009 State Budget Carnage: Rhode Island

June 20, 2008 4:04 PM | Permalink

The House of Representatives in Rhode Island unanimously passed a $6.89 billion budget this week that is expected to receive approval from both the Senate and Governor Carcieri. Unwilling to make responsible choices during an election year, lawmakers settled on a budget that includes across the board spending cuts with virtually no tax increases. Ocean State legislators breezed through statutes that would reduce funding of organizations such as Meals on Wheels, the Rhode Island Community Food Bank and the state’s largest homeless shelter, Crossroads Rhode Island. A $17.8 million cut from the state’s public universities also received little attention, as did a $12.5 million cut in non-school aid funding for cities and towns. Further blows to Rhode Island’s impoverished include the elimination of state-subsidized health care benefits for approximately 1,000 low-income parents, the eradication of a program that subsidizes heating costs for the poor, a cap on welfare benefits at 4 years rather than 5 years, and the removal of 300 poor children from the Head Start program.

Requests to reverse tax breaks for high-income Rhode Islanders, such as the capital gains tax or flat tax alternative were ignored. The one tax increase is on health insurance premiums which would be borne by the major insurers—Blue Cross, United and Delta Dental. These companies will likely pass on those costs to consumers, as they did last year when the tax was expanded. With no other tax revenue increase, the remaining sources of savings or revenue all come with high degrees of uncertainty. Lawmakers are looking to unspecified state personnel cuts to save about $91 million. But this money is only guaranteed if planned labor negotiations go smoothly. In addition, the state anticipates savings of $67 million on Medicare programs; this money hinges on federal approval. Rhode Island will rely on gambling revenues, in an uncertain economy, to allocate $12.8 million in education funding to cities and towns.

Sen. Paul E. Moura, D-East Providence, happily declares, “I think we are coming out of it looking good. Any time in an election year you knock on someone’s door and you haven’t raised their taxes, it certainly makes the walk a lot easier.” As Senator Moura proudly indicates, the motives behind Rhode Island’s budget debates this year were almost completely political. And among the victims were the poor, homeless and children who have little to no say in government.

Working on Tax Reform in Rhode Island

May 30, 2008 3:49 PM | Permalink

Rhode Island Governor Don Carcieri last week announced the formation of a Tax Policy Workgroup to consider fundamental changes to the Ocean State’s tax system. While the group has been charged with devising changes that promote “equity, efficiency, predictability, competitiveness, and transparency” – laudable goals all – the Governor’s comments regarding the group’s aims suggest he may favor one particular outcome over others. In the Governor’s view, “Rhode Island cannot prosper if its tax policies hinder the creation of jobs and are a disincentive to investment. Unfortunately, [Rhode Island is] now at a competitive disadvantage with many of the other states in New England, including Massachusetts and Connecticut. That needs to change.” In light of the fiscal woes now confronting Rhode Island and the regressive legacy of past tax cuts, changes are clearly needed, but will they be the "business-friendly" sort that the Governor seems to have in mind or will they help to produce the revenue state government needs in a fair and sustainable fashion?

Turning the Tide in the Ocean State

March 14, 2008 5:10 PM | Permalink

In recent years, more and more states have come to realize that they often receive little in return for the hundreds of millions of dollars in business tax incentives that they dole out. Rhode Island can now be counted among them. Earlier this month, the Democratic and Republican leaders of the state Senate jointly introduced legislation requiring the agencies administering upwards of $80 million in state tax incentives to compile annual reports detailing the number and quality of jobs attributable to those incentives.

While that legislation – and even more far-reaching companion legislation in the House of Representatives – holds promise, the state Division of Taxation is ready to deliver some measure of reform now. On Monday of this week, the Division proposed new rules that would clamp down on the state’s film production tax credit – and with good reason. According to the Providence Journal, a production company that spent less than a month in Rhode Island filming the straight-to-DVD Hard Luck received a tax credit for $2.65 million, even though it spent less than $2 million on Rhode Island businesses and workers. In other words, Rhode Island probably could have saved money simply by employing those businesses and individuals directly. Given that the movie starred Wesley Snipes, this outcome probably isn’t all that surprising.

For more on state tax giveaways and what can be done to combat them, see Good Jobs First's new blog, Clawback.

Tax Cuts for Sale

November 13, 2007 8:23 AM | Permalink

If the facts aren't on your side, why not just buy yourself a favorable change in tax policy? Well, federal authorities are now investigating whether that sort of approach helped to get legislation to cut capital gains taxes passed in Rhode Island a few years ago. As the Providence Journal reports, former House Majority Leader Gerard Martineau recently plead guilty to two federal corruption charges for the business relationships he maintained with CVS and Blue Cross & Blue Shield while a member of the Assembly and "could still face charges for influencing capital-gains tax-cut legislation" at the request of the former company, the nation's largest retail pharmacy chain.

In 2002, despite scant evidence that tax breaks on capital gains promote economic growth, Rhode Island enacted legislation to gradually eliminate the taxation of capital gains held for five years or more. As the Rhode Island Poverty Institute notes, the Assembly froze the scheduled reduction this year, but in light of the state's continued fiscal problems and the sordid manner in which the initial legislation may have been adopted, restoring the tax should be at the top of the Assembly's agenda in 2008.

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