Introduction

RIPEC believes that Rhode Island's long-term interests will be best served by the development of a stable, balanced, equitable, accountable and competitive tax system that enables State and local governments to deliver vital public services effectively and efficiently, at a price the citizens of the State can afford.

To reflect the economy of tomorrow and improve Rhode Island's fiscal position, State and local leaders should develop a multi-year strategic tax plan with the objective of:

• Lessening the overall tax burden;
• Ensuring a proper balance between State and local taxes;
• Reducing tax inequities among localities within the State;
• Equitably and efficiently funding public education; and
• Improving Rhode Island's competitive position.

A proactive and thoughtful tax restructuring effort, distinct from a piecemeal approach will enable the establishment of a tax system that reflects the Rhode Island of tomorrow instead of the Rhode Island of yesterday. The impact that proposed tax policy changes may have on State and local spending obligations must also be considered and understood.

Tax policy changes must be carefully considered to ensure that the resulting State-local tax structure is equitable, fair, balanced and serves to strengthen the State’s economy – in both the short term as well as the long term. As Rhode Islanders know, the economy, like the weather, can change quickly. A tax reduction program that appears feasible when the economy is strong can turn into a budgetary shortfall when the economy cools and revenues slow.

To further this effort, RIPEC assembled a group of professional, academic and business leaders to review Rhode Island's existing tax system and develop a tax strategy for the 21st Century. Over the past six months, this group has examined Rhode Island's State and local tax system, paying particular attention to the issues of fairness, equity, balance, accountability and economic competitiveness. During the course of this review, the RIPEC Tax Strategy Task Force focused primarily on the "Big Three" State and local taxes - property, personal income and sales.

This report contains seven sections and an appendix, in addition to the Executive Summary and this Introduction.

Section III, Characteristics of a High-Quality Revenue System, discusses the general principles associated with state and local government revenue systems and the benchmarks that are often used to assess the performance of these systems.

Section IV, Rhode Island's State and Local Revenue System, Expenditure Trends and Economic Performance, provides an overview of the Ocean State's total revenue system, including general information regarding taxes, Federal revenues, and fees, charges and miscellaneous revenues, a brief synopsis of expenditure trends and basic information concerning the State' recent economic performance.

Section V, Rhode Island State and Local Taxes, examines the overall tax system and provides information that compares Rhode Island's tax system to the U.S. average and to neighboring states.

Beginning with Section VI, Personal Income Tax, the rest of the report focuses on individual taxes, how Rhode Island compares, issues to consider, and a number of recommendations related to the individual tax covered in the section.

Section VII, Property Taxes, Section VIII, Consumption Taxes, and Section IX, Emerging Business Tax Issues, follow the same form as the Personal Income Tax Section.

The Appendix includes an explanation of the Representative Tax System, a brief discussion of the assumptions and methodology used to calculate personal income tax liability for upper-income families in the 41 states with a personal income tax, property tax details, recent pro-business changes enacted in Rhode Island during the 1990s, a description of the seven business-specific taxes assessed in Rhode Island, additional information on the National Governors' Association's streamlined sales tax proposal, a glossary of terms and a list of sources.

Throughout this report, the reader will likely notice the use of a number of different fiscal years. Due to data limitations, the latest year for which relatively reliable state and local government financial information is available from the U.S. Census Bureau is FY 1996. Therefore, when comparing Rhode Island's State and local government revenues to other states, FY 1996 is used. State level information, excluding local government revenues, is available for FY 1998. Where appropriate, FY 1998 state revenue figures are used to compare Rhode Island to other states. Data that is specific to Rhode Island is available through FY 2000 (estimated) and is used whenever appropriate.

The report that follows is intended to be educational as well as proscriptive. RIPEC does not suggest that all of the recommendations contained in this report can or should be implemented immediately. It is our hope, however, that this document will focus attention on the need to establish a tax system that is fair, balanced, equitable, accountable and competitive, and that addresses some of the long-standing problems that have hindered both the people and the economy of the Ocean State.