Governor goes before House Finance to plea for more ‘competitive’ tax structure

By JIM BARON

PROVIDENCE — The budget decisions that will be made this year, particularly on his proposals to reform the corporate, income and estate taxes “are probably going to be the most important and consequential of the last four decades, maybe, in truth, in our state’s history,” Gov. Donald Carcieri told the House Finance Committee Thursday.

“I am not overstating that,” Carcieri said during rare in-person testimony to make his case before the budget panel, “We are at a very critical point.”
The governor was touting a three-pronged plan to completely rejigger the state’s tax structure, which he says will make Rhode Island more competitive with neighboring states in attracting business, provide much needed jobs to help boost the state out of the recession and position it for growth when the national economy revives.
As if to underline the importance of the task, Carcieri told the lawmakers that the state’s unemployment rate will crack 11 percent when it is officially announced today.
“We have become an uncompetitive, high cost state, struggling to create jobs for our citizens,” Carcieri said. “The state, and I include municipalities when I say this, has unfortunately perpetuated an unsustainable spending and tax structure. We need to dramatically change our business climate.”
To do that, Carcieri has proposed phasing out the corporate income tax, streamlining the personal
deductions and credits, and to increase the amount of a person’s wealth that is exempt from taxation upon his or her death.
The plan includes phasing out the corporate income tax over a five-year period, from the current 9 percent to total elimination in 2014. In the budget year beginning July 1, the rate would drop to 7.5 percent, costing the state $14.5 million in revenue. Corporations would be taxed at a rate of 6 percent in 201, 4 percent in 2012 and 2 percent in 2013. When it is fully phased in 2014, it will reduce revenue that year by $114 million.
The estate tax, which Carcieri made a point of calling “the death tax” during his testimony, would be modified starting January 1, 2010 to exempt the first million dollars of an estate’s value, currently the first $675,000 is exempt, one of the lowest exemptions in the nation. Massachusetts exempts the first $1 million, Connecticut exempts the first $2 million and the federal government exempts their first $3.5 million. The change would cost the state $1.5 million in revenue the first year, because that encompasses only half a fiscal year. In later years it would reduce state revenues by about $3 million a year. The estate tax affected 392 taxpayers in 2008, including 326 residents and 66 non-residents.
The personal income tax would be radically restructured. The number of brackets would be reduced from five to four, with a top rate of 5.5 percent that covers everyone with an income of $175,000 or more. Incomes up to $55,000 would be taxed at 3.5 percent; between $55,000 and $110,000 the rate would be 4 percent and incomes between $110,000 and $175,000 would be taxed at 4.5 percent.
Taxpayers would no longer itemize deductions, but would receive higher standard deductions — $15,000 for married couples filing jointly, as well as widows and widowers; $7,500 for single taxpayers or married filing separately, and $11,250 for a single head of household. 
The new model would do away with most of the 45 or more tax credits people now use to lower their tax liability. The only tax credits that would remain are the refundable earned income tax credit, the lead paint abatement credit, the property tax “circuit breaker,” the credit for income taxes paid in other states and the credit for contributions to scholarship organizations.
Also eliminated would be the alternative flat tax, currently used by the state’s highest income earners to avoid today’s top marginal rate of 9.9 percent.
“I won’t be here, truthfully, to see the benefits of this,” Carcieri said. “This will happen after I’m gone. But the important thing is, like all of you, I have family here. I have children here. I have grandchildren here.”
Director of Administration Gary Sasse, who doubles as director of the state’s Department of Revenue, said, “Rhode Island is an outlier as far as tax policy is concerned. Taxes at the margins are extremely high.” Sasse chaired the tax policy work group that came up with the recommendations Carcieri proposed in his 2010 budget.
At least one lawmaker was skeptical.
Pawtucket Rep. William San Bento told Sasse, “I’m not sure how much more I can vote for. I know that I am not going to vote to hurt working people.
“We were told that if we went to the flat tax, businesspeople would start hiring more people, we would keep people here,” he said. “I sit back now and say to myself, the only thing that’s happened that we are losing people. People are out of work. My concern is about the average Rhode Islander and that includes our working class people, our labor people, our firemen, our police, our teachers, our state workers. It seems to me we go after them.
“If we’re going to do something, I want this to be what it has to be to put Rhode Islanders back to work,” San Bento said. “I don’t want to see Rhode Islanders get a job for six months and be back on the unemployment lines.”
Carcieri’s plan won applause from outside observers.
Joseph Henchman, of the Washington D.C.-based Tax Foundation, which has been harshly critical of Rhode Island’s business climate, told the finance committee that “even in the northeast,” which has a reputation for oppressive taxes, “Rhode Island stands out as a high tax state.” But eliminating gthe corporate income tax, he said, would establish the Ocean State as “a corporate tax haven.”
While his group currently ranks Rhode Island as 46th in the nation in terms of business climate, Henchman said adopting Carcieri’s three tax proposals would move the state up to 16th.
But there were detractors.
Karen Malcolm, executive director of Ocean State Action said, “if we are really going to take economic development seriously, then we would say no to the governor’s policies, or certain pieces of the governor’s policies.
“The biggest single problem for the state of Rhode Island is the high cost of doing business, but that high cost of doing business when we look at our tax structure is related not to the corporate income tax, but the property taxes that businesses pay.”
Quoting the accounting firm Ernst & Young, Malcolm said “business property taxes account for 51 percent of business taxes as compared to the national average of 35 percent. The corporate income tax, she said, accounts for only 6.2 percent of business taxes.
“We are looking in the wrong place,” Malcolm asserted. “We have made significant tax policy changes and adjustment over the past 10 to 15 years. They haven’t worked. We still have a significant problem.
Malcolm said, “We do need to dramatically change our climate. We have to make sure our bridges aren’t closed down to the trucking industry so our businesses can get their goods to and from. We need to make sure we raise the literacy level of our workforce by investing in education, including higher education.
“The policies we have adopted have not brought promised jobs,” Malcolm concluded.