Rhode Island is still struggling with unemployment, a sluggish economic recovery, and increasing worker anxiety. It’s worthwhile to understand how tax policies generated on Smith Hill are hurting a state the recession has hit particularly hard.
At 12.7 percent unemployment, Rhode Island has the country’s third-highest rate. Equally disturbing is the severity of unemployment in the Ocean State.
A staggering 36.5 percent of those unemployed in 2009 were without work for more than 27 weeks, a commonly accepted measure of severe unemployment. This was the fifth-highest rate of severe unemployment in the country. Worse, nearly one in five (19 percent) unemployed workers in 2009 experienced joblessness for more than a year.
Part of the economic malaise in the state is a function of the larger national recession. Tax policies emanating from the State House in Providence, however, haven’t made things better.
There are two aspects to understanding taxes: burden and design. Both the size of the tax burden and how it is imposed on citizens have economic effects. The larger the burden, the larger the role the government plays in the economy compared with individuals and businesses when it comes to deciding priorities and allocating scarce resources. This is important, since experience and history inform us that individuals and businesses make far better decisions about how best to allocate resources.
To measure the total burden of government, both state and local taxes, including current and deferred (borrowed), must be included. Such a measure focuses on the real variable determining the burden of government: spending.
State and local spending represented 16.9 percent of the state’s economy in 2007, the most recent year for which information is available. Rhode Islanders can decide whether they’re receiving commensurate value-for-money in terms of education, public safety, infrastructure, etc., given the burden of government they face.
How those resources are extracted also matters. Some taxes impose much higher economic costs than others by altering incentives to work, save, invest, and be entrepreneurial, the foundations of a prosperous society. Rhode Island’s tax problems exist across all major categories of taxation.
Rhode Island levies the seventh-highest corporate income tax rate in the country and is one of a handful of states to impose additional capital-based taxes on businesses. Specifically, Rhode Island imposes a franchise tax of $2.50 for every $10,000 in “authorized capital” in the state. This capital-based tax along with a high corporate income tax rate are particularly damaging to the Rhode Island economy because they discourage investment and business development, the heart of job creation.
Rhode Island’s personal income taxes are also troubling. Its top marginal personal income tax rate (9.9 percent) is the fifth-highest in the country and it has the eighth most progressive personal income tax rates. The rates, that is, become higher and more punitive the harder one works and the more one earns. When these and other attributes of the personal income tax system are combined and compared with those in the other states, Rhode Island ranks a lowly 43rd.
Rhode Island also possesses the country’s sixth-highest sales tax rate, and its property taxes as share of the state economy rank fifth highest in the country.
Put simply, a significant portion of Rhode Island’s economic problems are rooted in a heavy and poorly structured tax system. When the state tax burden is combined with its tax structure, it ranks a dismal 43rd out of 50 states. Fortunately, the solution to these problems is straightforward.
First, Rhode Island must reform the way in which it spends in order to spend less while providing better results. There are lessons across the country, as well as abroad, regarding how to achieve this goal.
Second, the state needs to reduce taxes and, in particular, it must reduce personal and corporate income taxes and eliminate the use of other capital-based taxes.
Such changes would allow for permanently lower taxes that improve incentives for work, savings, investment, and entrepreneurship, coupled with better services. Such a combination is the recipe for a lasting return to economic prosperity in Rhode Island.
Jason Clemens is the director of research at the Pacific Research Institute, a free market think tank, and a co-author, along with Robert Murphy, PhD of the recently released Taxifornia study ( https://www.pacificresearch.org/publications/taxifornia).