Last Friday, the Rhode Island House Committee on Finance released the $15.2 billion FY2027 state budget. Included in the budget bill is an amended version of Governor McKee’s 3% tax surcharge on income over $1 million.

The House iteration of the tax plan will roll the tax hike over a 3-year period, adding 1% in 2027, an additional 1% in 2028, and reaching the full 3% in 2029. The Governor’s version rolled out the 3% tax surcharge in 2027.

What many small business owners may not realize, is that this tax could negatively impact pass-through businesses like S-corps, LLCs, partnerships, and sole proprietors who may be subjected to the higher 8.99% rate. As you are aware, a pass-through entity’s income is money used to reinvest in the business for land, equipment, facility upgrades, and job creation.

Rhode Island lawmakers have cited a similar tax on higher income earners in Massachusetts has yielded billions of dollars in tax revenue. But what they fail to mention is that Massachusetts lost a record number of residents following the implementation of their 4% surtax taking $4.2 billion in adjusted growth income with them.

NFIB Rhode Island State Director Christopher Carlozzi responded to media outlets following the budget’s Friday release saying:

“In the race to the bottom in national tax rankings, Rhode Island lawmakers chose a marathon approach over the Governor’s sprint. Gradually rolling a 3% income tax surcharge over a three-year period does nothing to help Rhode Island’s image as a high cost, high tax state. Instead, the proposal makes Rhode Island less competitive and progressively exposes pass-through entity small businesses to higher tax rates.”