Rhode Island House lawmakers advanced a plan to phase in a 3% surtax on personal annual income over $1 million, making the state the latest to target high earners to generate additional revenue.
State lawmakers unveiled the tax proposal late last week as part of a $15.2 billion budget bill (H 7127) for the upcoming fiscal year starting July 1. The plan would also sever the state from a federal tax provision allowing businesses to immediately deduct research and experimental expenses the year they’re incurred.
The tiny state is looking to follow the lead of Massachusetts, Maine, Hawaii, Washington, and other Democratic-led states across the country that have looked to tax millionaires to close budget gaps and make the tax code, as they see it, fairer.
The budget bill passed the House Finance Committee 11-2 late Friday. It is scheduled for debate in the full House this Friday, and then must be negotiated with the Senate. Rhode Island’s legislative session is scheduled to adjourn by June 30.
The proposal to phase in the additional tax—starting with 1% in tax year 2027 and rising to 3% by 2029—would bring the state’s top tax bracket to 8.99%. It’s projected to generate $142 million annually when fully implemented.
It’s a softer approach than the initial plan from Gov. Dan McKee (D) to impose the surtax immediately next year. And it’s less aggressive than other legislative proposals (H 7313, S 2238) to impose the tax on people making more than $640,000 annually—what supporters dubbed the “top 1%" of earners.
Rhode Island Rep. Karen Alzate (D), the House sponsor of the “top 1%" plan, said the state could collect about $204 million annually from roughly 6,000 taxpayers.
“We knew coming in that we wanted to do the top 1%—and negotiate, if we had to, and land on a million,” Alzate told Bloomberg Tax last month. Alzate didn’t immediately respond to a request for comment Monday.
The high-earners tax gained momentum this year after McKee, who is running for re-election, endorsed a millionaires tax for the first time in his budget proposal. McKee’s primary challenger—Helena Foulkes, who currently leads in the polls ahead of a primary election on Sept. 9—has floated the same tax plan.
McKee didn’t respond to requests for comment.
Advocacy groups and businesses supportive of the surtax counter that families are struggling with rising housing costs, food insecurity, and healthcare affordability at a time federal cuts are threatening Medicaid, SNAP, and other essential programs.
But the plan faces stiff resistance from the state’s business groups.
The Greater Providence Chamber of Commerce and the Rhode Island Public Expenditure Council have argued the tax would make the state less competitive as many other states have moved to lower income taxes.
In an op-ed this year, leaders of the two groups said 1% of Rhode Island state filers—those earning $500,000 or more—paid 35% of the state’s total income tax liability.
“That is not evidence of an undertaxed wealthy population; it is evidence of a tax base that is highly concentrated and, therefore, fragile,” they wrote.
The expenditure council released a report on May 12 finding that states with higher income tax rates see more people leaving for states with lower rates.
Massachusetts’ 4% millionaires surtax passed in 2022—which has generated greater-than-expected revenue collections—"gave another argument to the advocates,” Michael DiBiase, the council’s president and CEO, told Bloomberg Tax. But he questioned whether the state needed more money, particularly after a revised revenue estimate last month netted the state more than $200 million.