Rhode Island should not follow Massachusetts' tax mistakes

Yahoo

4 days ago

Eight ducklings follow their mother in Nancy Schön's 'Make Way for Ducklings' statues in Boston Common. Rhode Island would be wise not to follow Massachusetts when it comes to taxing high earner, according to the Tax Foundation. (Photo by Kyle Klein/Meet Boston)
Rhode Island lawmakers are debating raising the state's top income tax rate. Though billed as a tax hike on high earners, the consequences would manifest across the state's entire economy — creating a risk that Rhode Island will tax its way into uncompetitiveness.
The two identical bills — H5473, sponsored by Rep. Karen Alzate, a Pawtucket Democrat, in the House and S329, sponsored by Sen. Melissa Murray, a Woonsocket Democrat, in the Senate — would raise the state's top marginal individual income tax rate from 5.99% to 8.99% on income above approximately $625,000 (in 2025 dollars), adjusted for inflation.
Though structured as a surtax, this proposal effectively creates a fourth income tax bracket, and one that doubles down on the marriage penalty that already puts married couples at a disadvantage compared to single filers. It erodes whatever tax advantage Rhode Island currently has against higher-tax peers elsewhere in New England. If enacted, Rhode Island would have the eighth highest top marginal state individual income tax rate in the country (excluding the District of Columbia), up from the 14th highest currently.
Millionaire's tax proposal is getting a warm reception from new R.I. Senate leadership
Had these changes been in effect last year, Rhode Island would have clocked in on Tax Foundation's 2025 State Tax Competitiveness Index at 43rd overall, down from its current rank of 39th.
But a poor ranking shouldn't be the only deterrent to lawmakers who are on the fence about this proposal.
Small businesses would be among the biggest losers under this tax increase. In 2022, over half of Rhode Island individual income tax filers with adjusted gross income exceeding $500,000 had income or losses from a pass-through business. Such businesses are often small stores or family operations that fuel their communities' Main Streets. This tax hike would make it more difficult for businesses to stay afloat, forcing many to raise prices, lay off employees, or move out of state to escape an increasingly punitive tax climate.
New investment, likewise, would be more difficult to attract since Rhode Island would no longer be a relatively tax-friendly beacon in the Northeast. Currently, Rhode Island outcompetes Connecticut, Massachusetts, New York, New Jersey, and Vermont in tax structure, and Massachusetts' recent tax increase gives Rhode Island another opportunity to position itself as a superior competitor. Instead, proponents of this tax increase seem eager to imitate their neighbor's mistake.
Massachusetts, in 2023, abandoned the state's previously enviable flat income tax by imposing a similar surtax. The impacts didn't take long to manifest. According to recent Census data, Massachusetts saw among the highest rates of net outbound migration in the country in fiscal years 2023 and 2024. And at a time when uncertainty stemming from White House orders is putting additional strain on businesses, millionaire's taxes are a strong deterrent to entrepreneurs and businesses with slim profit margins.
Still, some try to say tax hikes don't matter or that this data is overblown. Some believe Massachusetts has been impervious to the adverse economic consequences states like California, New York, and Washington experienced when they raised taxes on high earners, pointing to higher-than-expected revenues from the state's new tax on high earners. But Massachusetts is not defying gravity. Years of stock market gains have boosted income for high earners across the country, and those income increases are more than enough to obscure the outmigration and reduced investment caused by the higher tax. When, inevitably, those gains subside, Massachusetts will face the realities created by its high taxes.
Similarly, a report from the Institute for Policy Studies (IPS), for example, claims Massachusetts has 'seen tremendous growth in the number of people with more than $1 million in total wealth since raising taxes on higher earners.'
The IPS study, unfortunately, is deeply flawed.
To begin, it only looks at 2018-2022 — a period when inflation surged and incomes grew rapidly across the country (up almost 12% in nominal terms). Not to mention, a time when Massachusetts didn't have a millionaire's tax.
But even conceding that overall wealth grew during that period, IPS gives no context to Massachusetts' performance, which is quite poor compared to the national average. Every state saw an increase in total millionaires after the pandemic, but Massachusetts' 36% increase from 2018-2022 was the fifth lowest in the country. Some states saw triple-digit increases.
This raises the question: Why are Rhode Island lawmakers using this legislative session to try and emulate Massachusetts instead of trying to outcompete them?
Rhode Island should take this opportunity to distinguish itself from the rest of New England by resisting harmful tax increases and instead reinforcing its current position as a more attractive alternative to its ultra-high-tax neighbors.
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