Concerns Raised on High-Earner Surtax Impact on Rhode Island Small Businesses

Rhode Island's proposed House Bill 7313 could fundamentally reshape the state's tax landscape, raising significant concerns among business leaders and economists alike. Slated to commence on January 1, 2027, this legislation would introduce a three-percentage-point surtax on taxable income exceeding $640,000, pushing the top marginal rate to 8.99%. This increase would elevate Rhode Island from 15th to 10th in terms of the highest state income tax rates in the United States, worsening its competitive positioning for both residents and businesses.[1]

The Unintended Consequences of the Surtax

The implications of House Bill 7313 stretch far beyond higher tax bills for affluent individuals. The bill has been framed as a means to tax the “top one percent” of income earners, but this perspective overlooks a critical detail: a significant portion of those affected are owners of pass-through businesses such as S corporations and limited liability companies—business structures that are vital to Rhode Island's economic fabric. Approximately 55.6% of state taxpayers earning over $500,000 report pass-through income.[5]

This direct taxation of small business owners could inflate operational costs, thereby exacerbating economic strains and stunting growth. A tax increase of this magnitude doesn't only affect those within the income brackets; it cascades through the economy, reducing overall investment and limiting job creation. The economic literature supports this notion, highlighting that higher marginal income tax rates deter economic productivity, exacerbate job turnover, and potentially lead to outmigration among both employers and skilled workers.[2]

Rhode Island's Competitive Positioning

Rhode Island's potential move toward a higher tax burden comes at a precarious time. Over the past few years, a tide of states has lowered their top marginal individual income tax rates, shifting the national median from 5.4% in 2020 to 4.7% in 2026. This rising trend of tax rate cuts contrasts sharply with Rhode Island's trajectory, which has seen no adjustments to its income tax rates, causing it to lag in regional competitiveness.[6]

Comparatively, New York and Massachusetts already impose formidable income tax structures. Yet, at least Massachusetts's marginal tax applies only on income levels starting at nearly $1.1 million. By instituting an 8.99% surtax for a threshold of $640,000, Rhode Island risks making itself a less appealing option for high-income earners, particularly those looking to relocate. The fear is that higher earners—often the very people contributing significantly to the local economy through investment and job creation—will choose to settle in states with more favorable tax climates.[3]

The Risks of Outmigration

Economists often point to the phenomenon of "tax flight," where individuals and businesses relocate to jurisdictions with more favorable tax situations. Given Rhode Island's geographic proximity to other states such as Massachusetts and New Jersey, the practicality of such a move is very real. The economic impact of an exodus could be dire, as states fight to retain human capital and small businesses that act as critical job creators.

With 116,149 small businesses employing over half of Rhode Island's workforce, the ramifications of the proposed tax increase extend beyond individual financial burdens. The rising costs might lead to layoffs, stagnate wage growth, and ultimately result in higher prices for consumers. Should businesses struggle under the new tax structure, a wave of closures could lead to even higher unemployment, especially in a small state where the economy is deeply interconnected.[4]

A Call for Caution

Policymakers should carefully consider the broader economic landscape before implementing House Bill 7313. The push for additional revenue must be balanced with the potential risks of stifling economic growth and innovation. If the goal is to enhance state revenue while fostering a healthy economic environment, strategies that do not encumber businesses and deter high-income earners should be prioritized.

As the discussion moves forward, industry leaders and economists alike will be watching closely. Will the Rhode Island legislature adjust its approach to avoid the pitfalls common to states that have prioritized tax increases over competitiveness? The answer to this question will have lasting implications on the state’s economic vitality in the coming years.

References

[1] Janelle Fritts, Jared Walczak, Abir Mandal, and Katherine Loughead, 2026 State Tax Competitiveness Index, Tax Foundation, Oct. 30, 2025, https://taxfoundation.org/statetaxindex/.

[2] For a summary of the literature, see Timothy Vermeer, “The Impact of Individual Income Tax Changes on Economic Growth,” Tax Foundation, Jun. 14, 2022, https://taxfoundation.org/research/all/state/income-taxes-affect-economy/.

[4] US Small Business Administration Office of Advocacy, “2025 Small Business Profile: Rhode Island,” Jun. 30, 2025, https://advocacy.sba.gov/2025/06/30/2025-small-business-profiles-for-the-states-territories-and-nation/.

[5] Internal Revenue Service, “SOI Tax Stats – Historic Table 2,” https://www.irs.gov/statistics/soi-tax-stats-historic-table-2.

[6] Janelle Fritts and Katherine Loughead, “State Individual Income Tax Rates and Brackets, 2026,” Tax Foundation, Feb. 17, 2026, https://taxfoundation.org/data/all/state/state-income-tax-rates-2026/.