WASHINGTON – Rhode Island ranked 42nd overall on the Tax Foundation’s 2011 State Business Tax Climate Index, moving up two places from a year earlier based on a partial phase-on of the alternative minimum tax, at 6 percent at the beginning of the fiscal year.
“Instead of continuing the phase-in, the state has enacted a massive revision of its individual tax code and at the beginning of 2012, we anticipate a significantly higher ranking for Rhode Island,” the Tax Foundation said.
The index emphasizes “economic neutrality” highlighting “good tax fundamentals” as: enacting low tax rates, and granting few deductions, exemptions and credits.
“The temptation is for state lawmakers to lure high-profile companies with packages of tax bonuses,” said Kail Padgitt, author of the 2011 index. “But that strategy often backfires if the company does not prosper.”
This year’s Top 10 states, in order, were South Dakota, Alaska, Wyoming, Nevada, Florida, Montana, New Hampshire, Delaware, Utah and Indiana; all of these, except for Utah and Indiana, raised sufficient revenue without imposing one or two of the three major state taxes (sales taxes, personal income taxes or corporate income taxes), according to Scott Hodge, president of the Tax Foundation.
The worst state tax codes tended to have: complex, multi-rate corporate and individual income taxes with above-average tax rates; above-average sales tax rates that don’t exempt business-to-business purchases; complex, high-rate unemployment tax systems; high property tax collections as a percentage of personal income.
Rhode Island, at No. 42, was highlighted as one of the “least hospitable”; New York took last place, with California at No. 49, followed by New Jersey, Connecticut, Ohio, Iowa, Maryland and Minnesota. North Carolina beat the Ocean State, taking 41st place.
Massachusetts’ business tax climate was ranked 32nd, moving up from No. 35 a year earlier.
The overall index ranking was composed of five factors, including the state’s major business tax, individual income tax, general and selective sales tax, unemployment insurance tax and the asset-based taxes, including property tax. Each of these five factors was composed of several subindexes.
The states’ tax collections were assessed on July 1, 2010, and newer tax changes were subject to commentary but not tallied in the scores, said the Tax Foundation, which describes itself as a nonpartisan organization that has been monitoring fiscal policy at the federal, state and local levels since 1937.
The Ocean State’s performance varied from No. 50 on its unemployment insurance tax to 14th-best for its sales tax. In between the two extremes stood individual income tax (No. 35), corporate tax (No. 37), and property tax (No. 47).
Rhode Island’s unemployment insurance tax, which accounts for 12.25 percent of the total score, has been rated as the worst in the nation since 2006, which is as far back as the Tax Foundation’s 2011 report includes. The states that have the work UI tax tend to have complicated experience formulas and charging methods, and added benefits and surtaxes to their systems.
Also, these states have rate structures with high minimum and maximum rates and wage bases above the federal level, the Foundation said.
Rhode Island also had one of the highest tobacco taxes per pack of 20 cigarettes at $3.46, trailing New York ($4.35).