To best fix our economy, Rhode Island needs tax and fiscal stability. In far too many cases, Rhode Island shoots itself in the economic foot due to poorly considered lawmaking and posturing regarding tax policy within our General Assembly.
It was only two years ago that our General Assembly lowered the top income tax to a rate of 5.99 percent (down from 9 percent), making Rhode Island competitive in terms of our income tax with our adjacent neighbors Connecticut and Massachusetts, whose top rates are 6.5 percent and 5.3 percent. In the recently concluded legislative session, there were no fewer than five bills proposed to the House Finance Committee to raise Rhode Island’s top income tax rate from the current rate of 5.99 percent to as high as 10.09 percent.
To a large degree, these five different attempts to raise Rhode Island’s income tax cause harm to our economy by sending an unmistakable “keep out” message to any businesses considering locating to the Ocean State.
For me, the worst aspect of these bills is the thinking behind one of the bills’ prime sponsors, freshman Rep. Larry Valencia, D-Richmond, who is a member of the House Finance Committee. During my testimony against the worst of the bills – an attempt to raise the highest rate to 10.09 percent – Valencia interjected that he proposed the state income tax increase to “fix the Bush tax cuts.” A bit later he stated that he was “for creating more jobs” in Rhode Island.
Starting from what should be the most obvious point, national tax policy cannot be “fixed” by anything Rhode Island does with its tax policy. If Valencia were successful at driving home an effective 68 percent increase in our top marginal tax rate, those hit the hardest by that tax increase could readily jump across the border to Massachusetts, leaving the Bush tax cuts largely unmolested.
I find it extremely worrisome that a legislator who sits on the House Finance Committee could misunderstand basic consumer economic behavior so badly and have so little appreciation for the importance of being competitive with our neighbors.
Valencia’s lip service to creating jobs ends with the tax increases he has proposed. Tax increases of this magnitude would likely cause small-business owners to leave the state in a hurry. The profits of most small businesses show up on the owner’s personal income tax statement, meaning that Valencia’s tax would be a tax largely on the net profitability of Rhode Island’s small businesses. A business with a 25 percent profit margin would need to increase gross sales nearly 5 percent to come out even after Rep. Valencia’s tax increase – a massive disadvantage relative to a similar business located in Massachusetts.
What Rhode Island desperately needs is a General Assembly committed to improving our economic condition. What we get is 30 state representatives signing on to these bills to re-raise the income tax. These 30 legislators hurt Rhode Island’s competitive posture, and they work against the best interest of anyone who needs a job.
If your legislator was one of the 30 who signed on to these small-business-busting bills, you should contact them and let them know of your displeasure. Invite that legislator to visit your business and explain to them how difficult it is to increase gross sales by 5 percent. Most importantly, if that legislator demonstrates a lack of understanding for how tax policy influences our state’s economy, work to get that legislator defeated in the coming election.
The bills our legislators propose can have a substantial impact on our state – regardless of whether those bills pass or not. It is important for our legislators to realize this, and crucial for the business community to do something about it when the lawmaking process gets out of hand. •
Ken Block is president of Simpatico Software Systems and a former candidate for governor of Rhode Island.