Rhode Island surpasses neighbors in business tax rankings as Massachusetts plummets following ‘millionaires tax’ – The Boston Globe

And that should be a cautionary tale for the Rhode Island General Assembly as it weighs similar proposals to tax the state’s highest earners, DiBiase said. “We feel strongly about not going down that road here,” he said.

For years, Massachusetts ranked higher than Rhode Island on business tax climate rankings, in part because of its flat 5 percent income tax rate, RIPEC said. But now that has changed because Massachusetts voters approved amending that state’s constitution to add a 4 percent surtax on annual income exceeding $1 million.

“We should not lose that advantage,” DiBiase said. “And the other point is: We already have a fully progressive income tax.”

Rhode Island now has three personal income tax brackets: 3.75 percent on income below $73,450; 4.75 percent on income from $73,450 to $166,950; and 5.99 percent on income above $166,950.

But Senator Melissa A. Murray, a Woonsocket Democrat, has introduced legislation that would add a 3 percent surtax on taxable income of more than $1 million in Rhode Island. Under her bill, the tax revenue would be used for child care and early learning programs, public education, affordable public colleges, roads and bridges, and public transportation.

And Senator Jonathon Acosta — a Central Falls Democrat who co-chairs the Rhode Island Black, Latino, Indigenous, Asian American, and Pacific Islander Caucus — has said it is “beyond time” for Rhode Island to pass legislation like Massachusetts’ “millionaires tax.”

Senate President Dominick J. Ruggerio, a North Providence Democrat, has warned that rich Rhode Islanders would move elsewhere if the state hiked income taxes.

DiBiase said that wealthy people are mobile and, while they might have reason to remain in large metro areas such as Boston and New York City, the rich might not remain in a small state such as Rhode Island if it raised income tax rates. “We have a wonderful scenic state, but as a small place, why do people need to make their money here?” he said.

Also, DiBiase said the personal income tax is applied not just to individuals but to many businesses, such as partnerships and other pass-through entities. So a higher top income tax rate would reduce profits, and leave less money for investment in those companies, he said.

“It is a business tax,” DiBiase said. “Most people think of it as cutting into an affluent lifestyle, but there is a question of cutting into business investments.”

The annual business tax climate ranking is conducted by the Tax Foundation, a pro-business think tank based in Washington, D.C.

“Taxes do affect business decisions on where to locate and invest,” DiBiase said. “Regardless of whether you agree with the Tax Foundation methodology, their rankings have an impact.”

Between 2014 and 2019, Rhode Island followed “a generally positive trajectory” in the Tax Foundation rankings, rising from 44th to 38th, before beginning to backslide, and Rhode Rhode Island has never cracked the top two-thirds of states, the RIPEC policy brief notes.

But this year, Rhode Island rose from 42nd to 41st in part because of the “precipitous decline” by Massachusetts, and in part because Rhode Island now exempts the first $50,000 of assessed tangible personal property from taxes.

Ruggerio championed that exemption, which was signed into law in June 2023, and it is expected to remove the tangible tax liability for 75 percent of Rhode Island businesses. The tangible personal property tax is paid by businesses on property other than real estate that has value by itself, such as computer equipment, furnishings, and fixtures.

“RIPEC applauds Rhode Island policymakers for taking serious action last year to improve the state’s business tax climate by enacting tangible property tax relief,” DiBiase said. “However, Rhode Island’s tax climate remains in the bottom 10 states, and there is significant room for improvement.”

For example, he called for legislators to approve Governor Daniel J. McKee’s proposal to extend the time for which businesses can carry forward net operating losses from five years to 20 years. “Proposals of this type would provide needed improvement to Rhode Island’s business tax climate,” he said.

Rhode Island’s current “carryforward” provision is the most limited in the nation, RIPEC said, and the proposal would bring Rhode Island in line with with Connecticut and Massachusetts, which both have 20-year provisions.

When it comes to property taxes, Rhode Island ranks 35th overall, but that’s better than the other New England states, RIPEC noted, and it marks a six-spot improvement from 2023 because of the new tangible personal property tax exemption.

RIPEC objected to additional “homestead exemptions,” saying local officials should “resist efforts to shift a greater proportion of the property tax burden to businesses and renters.”

When it comes to sales tax rate, Rhode Island ranks 22nd with its 7 percent sales tax, placing it in the top half of states but below every New England state except Connecticut. With no sales tax at all, New Hampshire ranks first.

In 2023, McKee proposed trimming the state’s 7 percent sales tax rate to 6.85 percent to save people about $35 million a year, but the Assembly rejected that idea. McKee did not propose a sales tax cut this year, but said he added it to a wish list if the May revenue estimating conference reveals a rosier financial outlook.

Edward Fitzpatrick can be reached at edward.fitzpatrick@globe.com. Follow him @FitzProv.