RI tax cut proposals raise questions in recession

Tax cuts are centerpiece of RI gov's budget, but skeptics question timing amid recession

PROVIDENCE, R.I. (AP) -- Tax cuts of up to $115 million annually for individuals and businesses are the centerpiece of Gov. Don Carcieri's latest budget, which attempts to trim ballooning deficits as a recession drives Rhode Island into the red.
While Carcieri argues reducing taxes will bring new jobs and investment to a state suffering from 10.3 percent unemployment, about a quarter of the 420,000 state residents who file tax returns would see a tax increase. Skeptics question whether the state can afford the resulting loss of income.
Several of Carcieri's major proposals would not take effect until days before the term-limited governor leaves office and, in one case, years afterward.
"It's a very small impact and it certainly doesn't generate enough revenue to not impact state budgets," said Michael Mazerov, a senior fellow with the Washington-based Center on Budget Policy and Priorities. He was a member of a panel that Carcieri assembled to review the state's tax code but dissented with its conclusions that Rhode Island must lower its taxes to be more competitive with neighboring states.
Businesses consider other factors beside taxes when deciding whether to move to or expand in a state, Mazerov said. He said business leaders may view Rhode Island less favorably if the tax cuts mean less public support for schools, child care or transportation.

In his proposal, Carcieri adopts many of the panel's suggestions. He wants to lower the state's top personal income tax rate from 9.9 percent to 5.5 percent starting in 2011. Estimates show about a quarter of residents will face a larger tax bill because the state would change its tax brackets, no longer offering lower capital-gains tax rates and ending some tax credits.
Residents would also be able to inherit estates worth up to $1 million, instead of the current $675,000, before owing state taxes starting next year under Carcieri's plan.
His largest proposal is reducing the state's corporate income tax from 9 percent to 7.5 percent starting next year, then annually reducing that tax until it is replaced by a much-cheaper system in 2014. Eliminating the tax would cost the state $82 million annually, or about 2 percent of the funds the state expected to raise this year.
"That would make an enormous statement to the rest of the nation, to the region, that Rhode Island is serious about growing businesses, keeping businesses that are here growing and not leaving, and attracting other businesses," Carcieri said at a news conference Tuesday.
As a recession reduces tax revenue, only a handful of governors are considering similar proposals. Minnesota Gov. Tim Pawlenty has proposed cutting the state's business income tax in half over six years, from 9.8 percent to 4.8 percent. In South Carolina, Gov. Mark Sanford supports phasing out the corporate income tax and offering an optional flat income tax for individuals.
John Simmons, executive director of the Rhode Island Public Expenditure Council, a business-backed group that monitors state spending, said the cuts will be affordable because Carcieri is phasing them in gradually.
If the state economy deteriorates further, lawmakers could always delay or scale back some of the tax changes, said Simmons, a member of Carcieri's tax panel.
The success of the Republican governor's plan remains uncertain. Democrats hold a veto-proof majority in the General Assembly, and their leaders are worried about a continued decline in state revenue.
Carcieri must leave office after finishing his second term in January 2011. As a result, he will not see through several of his proposals, even if lawmakers approve them. He would leave office just days after a drop in personal income tax rates and years before the elimination of the corporate income tax.


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