Taxes have been at the forefront of the public debate in Rhode Island for some time now, due both to the depth of the state's fiscal crisis and to the work of Governor Don Carcieri's hand-picked tax commission.
With the release of the House of Representative's budget proposal for fiscal year 2010 earlier this week, it appears not only that the end of that debate may be in sight, but that it will close on a positive note. The House's budget plan contains a number of changes in tax policy, changes that are at once a repudiation and an affirmation of the commission's recommendations. Those recommendations, as embodied in the budget that Governor Carcieri put forward in March, would have eliminated Rhode Island's corporate income tax and dramatically flattened out the income tax's graduated rate structure. Fortunately, the House did not include either of these changes in its budget plan.
The commission recommendation that the House budget plan does include is a major step forward for tax fairness - the elimination of preferential rates for income from capital gains.
In addition, the budget plan appears to include changes in law, similar to those adopted in New York last year, designed to increase the extent to which Internet retailers such as Amazon are responsible for collecting sales taxes on purchases made by Rhode Island residents. It would also provide for an increase in the state's estate tax exemption and index that exemption to inflation.
While the prospect of ending favorable treatment for capital gains taxation should cheer all those concerned about sound tax policy, the House budget plan fails to remove Rhode Island's existing alternative flat tax, which means that both the revenue and equity gains resulting from the capital gains change will be somewhat muted. Policymakers should seriously consider addressing that flaw in the tax code before completing action on the state budget.
To learn more about the shortcomings of the commission's recommendations and the Governor's budget proposal, see this helpful fact sheet from the Rhode Island Poverty Institute -- and this one as well. (In fact, check out the Institute's budget webinar too.) For more on the other states still offering capital gains tax breaks, see this March report from ITEP.