The reduction would affect Rhode Islanders earning $250,000 or more a year.

01:00 AM EDT on Wednesday, April 26, 2006

BY SCOTT MAYEROWITZ
Journal State House Bureau

PROVIDENCE -- Legislation that would lower income taxes for Rhode Island's richest residents sailed through the House Finance Committee yesterday on a 15-to-0 vote.

The bill, aimed at attracting new businesses -- and keeping those already in the state here -- is a major piece of the House leadership's legislative agenda for the year. It now heads to the full House for a floor vote.

The measure would give taxpayers a choice of paying their taxes under the current system or paying a flat tax -- essentially a straight percentage of the adjusted gross income.

Generally speaking, Rhode Islanders pay less in income taxes than residents in Massachusetts or Connecticut. But Rhode Islanders that have incomes of $250,000 or greater generally pay more in taxes than residents in neighboring states.

The tax burden of those top earners is one of the things businesses look at when deciding in which state to set up shop, said committee Chairman Steven M. Costantino, D-Providence, who sponsored the bill.

"We need to make this state competitive with our neighbors," he said.

The vast majority of Rhode Island taxpayers currently pay graduated rates that range from 3.75 percent on their first $49,650 in adjusted gross earnings up to 9.9 percent on every dollar over $326,450.

The legislation passed yesterday would give taxpayers the option of paying one tax rate instead. For the current year, the rate would be 8 percent and would decrease to 5.5 percent by 2011.

The state would lose an estimated $7.2 million for this tax year and $14.4 million the next year, according to Michael O'Keefe, fiscal advisor for the House. In subsequent years it would cost the state $24.5 million, $37.3 million, $53.5 million and $73.1 million for tax year 2011.

The bill's supporters say that new businesses would make the state's tax base grow and would eventually make up for the loss in revenue.

"We think this is an extremely important move by the House of Representatives to improve the business climate in this state," said R. Kelly Sheridan, lobbyist for the Greater Providence Chamber of Commerce. "There is no question that our high marginal income tax rate is deterring entrepreneurs from coming to Rhode Island and creating and growing jobs."

Senate leaders have their own set of proposed tax changes this year, but are not including a flat tax in their package.

smayerow@projo.com / (401) 277-7513