Rhode Island’s tax climate for business would improve significantly if the state were to adopt tax changes proposed by Governor Carcieri in March, according to an analysis by the Tax Foundation, which monitors fiscal policy at the federal, state and local levels.

The group ranks state business climates based on the extent to which their tax systems encourage investment by maintaining a broad tax base and low tax rates. In general, states that rank closest to 1 have the most favorable tax climates for business and states that rank close to 50 have the worst.

Rhode Island currently ranks 46th among the states. It ranked 49th last year, 50th the year before. But if the changes that Carcieri proposed in March were enacted and all made effective for 2009, Rhode Island’s ranking would be 16th nationwide, according to the analysis issued Friday by the Tax Foundation.

Carcieri’s proposals include the following:

•Phase out the state’s 9-percent corporate income tax over four years.

•Reduce the individual income tax’s highest marginal rate, to 5.5 percent from the current 9.9 percent, starting in 2011.

•Increase the estate tax exemption amount from $675,000 to $1 million starting Jan. 1, 2010, thus making fewer estates subject to the tax.

•Raise the cigarette tax by $1 a pack, to $3.46.

Tax Foundation staff economist Josh Barro said in his analysis that “Rhode Island faces a tough tax situation because it has significantly lower per-capita income than its two neighbors, and therefore must impose higher taxes to raise revenues in line with its neighbors. Unfortunately, those high tax rates add further incentive for wealthy people and businesses to leave Rhode Island for its lower-tax neighbors, or for other parts of the country.”

Barro said that, with Carcieri’s plan in effect, Rhode Island’s ranking would have moved up by 30 places. Also, instead of scoring 40th on the corporate income-tax component of the ranking, Rhode Island would tie for first. The state would jump nine spots on the income-tax portion of the analysis (42nd to 33rd) and three places on the property-tax portion (43rd to 40th) because the Rhode Island corporate tax includes an assessment on corporate net worth, he said. Rhode Island would drop one position on the sales-tax measure (30th to 31st).

“While small states can face competitive disadvantages with their larger neighbors [especially if those neighbors are wealthier], they also have an opportunity to specialize in attracting a certain kind of capital or business activity,” Barro said.

“Now, Governor Carcieri has identified an opportunity for Rhode Island to step out from its neighbors’ shadow,” he said.

John C. Simmons, executive director of the Rhode Island Public Expenditure Council (RIPEC), a business-backed group that monitors the state’s finances, said Monday that Carcieri’s proposals are “the types of changes that we need to do to make Rhode Island more competitive on a corporate tax basis.”

Businesses and others use the Tax Foundation’s rankings as a measure of a state’s business climate, Simmons said. It is one factor businesses look at in determining whether to relocate or expand, he said.

Kate Brewster, executive director of the Poverty Institute at the Rhode Island College School of Social Work, which analyzes tax and budget policies on behalf of low-income people, said Monday that the Tax Foundation relies mainly on tax rates for its analysis of state business climates.

Thus, if tax rates were to go down, “It’s no surprise” that Rhode Island’s ranking would rise, she said.

But Brewster said the Tax Foundation does not measure its rankings against economic activity. In other words, the group does not test its highest-ranking states to see if the tax structures in those states are generating comparably higher economic activity, she said.

For this and other reasons, Brewster said, “We don’t pay much attention to their rankings.” Her group opposes Carcieri’s tax proposals, particularly the phase-out of the corporate income tax, which Brewster called “unaffordable, unfair and unsound,” particularly with respect to small- and mid-sized businesses in Rhode Island.

ndowning@projo.com