Another singular component of Rhode Island’s tax system is unusually high unemployment insurance taxes. Unemployment insurance taxes don’t get very much attention (they are excluded from the graph of the distributional effect of taxes in the previous column, for instance), but they can have a very real effect on the economy, particularly in a time of high unemployment. The unemployment insurance tax system is hideously complex, with four different components and rates that go up when the company conducts layoffs. The result is a payroll tax that hits the working class far harder than anyone else, as this graph shows.
High unemployment insurance taxes can help exacerbate an economic collapse because once a business is forced to make layoffs, its tax rate can skyrocket. This tends to help push struggling businesses over the line, and Rhode Island’s high unemployment insurance tax rate pushed us over the line. In the Tax Foundation’s 2013 Business Tax Climate Index, the gold standard for biased conservative tax climate rankings, the unemployment insurance tax is the only tax category where Rhode Island ranks last. There is relatively little evidence that a better tax climate ranking helps a state become more competitive, but there are real competitiveness issues that do matter, and they are the subject of tomorrow’s column.