01:00 AM EDT on Friday, May 27, 2005

BY ANDREA L. STAPE
Journal Staff Writer

The Rhode Island Public Expenditure Council yesterday proposed a personal income-tax cut that would benefit all Rhode Islanders, no matter how much money they make.

With the state forecast to have an extra $107.5 million to spend during this fiscal year and next, RIPEC has offered the first broad tax cut proposal this year. The business-backed policy group recommended to Governor Carcieri and General Assembly leaders that the state cut its income-tax rate over the next two fiscal years for both rich and poor taxpayers.

The result would be a 12-percent drop in every Rhode Islander's personal income-tax rate by 2007.

"This tax cut is aimed at giving relief to everyone," said Gary Sasse, executive director of RIPEC.

The tax cut would cost the state $31.5 million in the first year, and $135.3 million when it is fully implemented, according to RIPEC.

The policy group is recommending that the tax cut be included in the budget for fiscal year 2006, which starts July 1 of this year. The tax reduction would go into effect on January 2006.

Tax cuts are a priority at the State House. Earlier this week, Carcieri and Senate President Joseph A. Montalbano struck a deal to use revenue from new slot machines at Lincoln Park to eliminate the state's car tax. And the Senate approved last night a bill aimed at reducing the income tax that employees at large growing companies -- such as Fidelity Investments -- would pay on job-performance bonuses and stock-option gains.

Carcieri supports RIPEC's call for broad tax relief, said Jeff Neal, a spokesman for the governor. However, Carcieri is still studying "which of the broad-based taxes we should address first, the sales tax or the income tax, and how soon we can address them," Neal said.

Earlier this month, Neal had said the governor was ready to consider lowering the state's 7-percent sales-tax rate. He spoke after a group of state budget officials found an extra $58 million to spend during the current fiscal year, and $49.4 million extra to spend during the fiscal year that begins July 1. At the time, House Finance Chairman Steven M. Costantino also suggested the possibility of decreasing the state's corporate tax.

Since last year, Carcieri and economic-development officials have been calling for a broad income tax cut. They say the state's overall tax burden, on businesses and residents, needs to be reduced to make Rhode Island competitive with surrounding New England states.

Michael McMahon, executive director of the Rhode Island Economic Development Corporation, testified at a Senate committee hearing earlier this week that the state was having trouble attracting highly paid employees because of its tax structure.

Highly paid employees, such as corporate executives, decide where companies will locate jobs, and if they think the tax structure here is too high, they won't come to Rhode Island, McMahon said.

Rhode Island's tax rate on high-income individuals is 9.9 percent, compared with 5.3 percent in Massachusetts and about 5 percent in Connecticut, according to a study released last week by RIPEC and the Rhode Island Society of Certified Public Accountants.

For RIPEC, though, now is the time for personal income-tax relief.

The group proposes lowering the state's personal income tax from 25 percent of the federal income-tax liability to 22 percent. Currently, Rhode Islanders pay an income-tax rate that is derived from the 2001 federal income-tax rates. Before President Bush's tax cut in 2001, people making between $48,500 and $117,250 paid the federal government 28 percent of their income. Rhode Islanders in that tax bracket pay the state of Rhode Island an income tax that is 25 percent of that older 28-percent federal tax rate -- or 7 percent of income. RIPEC is proposing to lower the Rhode Island income-tax rate on people in that income bracket to 6.16 percent, by January 2007.

RIPEC's reduction would apply to people in every tax bracket, and would result in reducing the state's personal income-tax rate by 12 percent.

(The last time the state reduced its income-tax rate was from 1997 to 2002. Over five years, the personal income-tax was pared from 27.5 percent to 25 percent of federal taxes.)

The policy group suggested this rate of tax reduction, since it would be enough to make a noticeable impact on people's personal finances.

"The relief shouldn't be pigeonholed in certain places; everyone would feel the benefit from it," Sasse said.

The tax cut would cost Rhode Island $31.5 million in fiscal 2006. It would cost the state $64.1 million in fiscal 2007, and $135.3 million in fiscal 2009, when the full effect would be felt, according to RIPEC.

With a surplus expected, the state's budget wouldn't be as sensitive to the revenue impact. If the state ended up with a budget deficit, however, it would feel the pinch of that lost tax revenue.

The tax cut would "build greater fiscal discipline into the system," Sasse said. "We think the state will be able to provide the level of services it's currently providing with this tax cut."

Ellen Frank disagrees.

When taxes are cut, spending must also be cut, said Frank, senior economic analyst with the Poverty Institute at Rhode Island College's School of Social Work. The institute works to protect the economic security of low- to moderate-income Rhode Islanders.

She said the state's tax rate is uncompetitive compared with those of nearby states only for those people who are very highly paid.

When it comes to broad tax changes, Frank said, she would prefer the state focus on property-tax reform.

"I think it's a terrible idea," she said of the RIPEC proposal. "Why do that, when we have a relatively progressive personal income tax that isn't an onerous tax?"

Sasse concedes that the state's income-tax rate is more competitive for lower-income workers, and says that RIPEC's tax-cut proposal is just the first step in tax reform.

A tax-policy office should be set up to analyze the state's tax system, and property taxes should be lowered, he said. And even after the proposed cut, the highest personal income-tax rate in Rhode Island would still be greater than Massachusetts' highest tax rate, Sasse said.

"We think this is good down payment, a good way to start," he said. "It's not the end of the game, by any means."