The state government is almost certainly in for a struggle over the budget that Governor Donald Carcieri '65 recently submitted to the General Assembly. To help close a deficit of $427 million for the coming fiscal year, the governor proposes new and increased fees alongside drastic cuts in local services and state worker pensions. And to address a statewide unemployment rate of nearly 13 percent, he recommends tax credits for new hires and a reduction in the minimum tax rate for corporations.
Ultimately, Rhode Island's situation is miserable enough that everyone involved in the negotiations over the budget will have many bitter pills to swallow. The government-friendly Democratic supermajority in the Assembly should recognize that Carcieri's proposed tax breaks are crucial for revitalizing the state's economy. And the governor himself should acknowledge that some tax increases, carefully targeted to minimize economic disruption, may be necessary to avoid excessively scaling back Rhode Island's public services.
Without a kick to its economy, Rhode Island will face similar public crises in years to come. If enacted, Carcieri's well-tailored plan to grant small businesses $2,000 in tax relief for each new hire would almost certainly provide a significant long-term boost to both the private and the public sector. The state Office of Revenue Analysis estimates that the proposal would allow for nearly 1,000 jobs that otherwise would not have existed and accelerate the creation of 5,000 more, at a cost of roughly $15 million over the next two fiscal years. It now falls to the Assembly to verify that the calculations used to produce these figures were sound. If so, the credits merit inclusion in the final budget legislation. If not, the Assembly should work with the governor to salvage the proposal rather than hastily scrapping it.
Carcieri also hopes to halve the minimum tax rate imposed on corporations and franchises; currently, even enterprises that don't turn a profit must pay $500 to the state each year. Lightening this load would be especially helpful for entrepreneurial newcomers, who will be an important part of any real recovery. This modest approach to reducing the state's heavy corporate taxes is also a welcome shift on Carcieri's part: Last year, he proposed phasing out the entire corporate tax, which would have cut into state revenue without commensurately stimulating Rhode Island's economy. The Assembly rightly shot down that proposal, but they should accept the halving of the minimum rate now and consider scaling back corporate taxes at all brackets once the budget crisis has receded.
Carcieri should also give ground. After years of excessive spending and in the midst of a severe fiduciary crunch, steep budget cuts are in order. But the government can reduce the pain of this adjustment without mortgaging Rhode Island's future economic well-being. For example, by freezing the rate of the flat tax — an alternative assessment attractive to some high earners — at its 2009 level, the state could bring in nearly $18 million in additional revenue. Most of the affected taxpayers would feel only a marginal pinch, not enough to prompt them to reduce their participation in the state economy. Two of the contenders to succeed Carcieri — Independent Lincoln Chafee '75 and Democrat Frank Caprio — have already endorsed this measure, but the governor remains opposed. For the sake of the thousands of state residents and employees his cuts may unnecessarily hurt, he should reevaluate this stance. With almost 74,000 Rhode Islanders out of a job, their elected representatives shouldn't consider bent principles much of a burden.
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