(Bloomberg) - Rhode Island Governor Dan McKee is warming to the idea of a tax on the wealthy as one way to bolster the state’s resources after a particularly turbulent year for its economy.
A proposal for a 3% surtax on incomes of more than $640,000, or the top 1% of earners, is getting a closer look from lawmakers because of the budget hole created by federal cuts to Medicaid, food-assistance and other programs. McKee in an interview said he’s open to the surtax if it’s paired with tax cuts for businesses, seniors and other groups, a contrast to comments last spring that it wasn’t time for such a step.
Rhode Island faces an estimated deficit of at least $101 million in the fiscal year that begins in July, according to the state Office of Management and Budget, with the funding gap expected to swell by as much as an additional $70 million depending on the extent of the knock-on effects from federal cutbacks.
“We are in a spot where we’re going to have to address some of those headwinds that are coming our way from DC,” McKee said.
Democrats across the US are increasingly exploring higher taxes on the wealthy as a way to bolster budgets and tackle a K-shaped economy where higher-income individuals thrive and lower-income ones are forced to dial back spending. Many are looking to Massachusetts, which shares a border with Rhode Island, as a model. In the three years since Massachusetts started charging a 4% surtax on incomes over $1 million, the effort has created a $6.2 billion windfall.
Washington, Michigan and New York are among the places where progressives are pushing for higher taxes on the rich. But economic pressures in Rhode Island are forcing even previously tax-averse politicians like McKee and Providence Mayor Brett Smiley to give measures a second look.
The tiniest state in the US by square miles, Rhode Island’s real GDP grew at a fraction of both broader New England’s and the country’s as a whole on an annualized basis from the first to second quarter last year, according to the most recent US Bureau of Economic Analysis data. The number of employed Rhode Islanders has declined for four of the past five quarters through the third quarter of 2025, according to the Rhode Island Public Expenditure Council, a nonprofit policy group.
McKee is also aggressively courting business leaders after Hasbro Inc., one of the state’s biggest employers, announced a move to Massachusetts and he’s adopting an open mind on natural gas pipelines in a bid to save the once-again-halted Revolution Wind farm. A new surtax on second homes valued at more than $1 million will take effect this summer, a measure dubbed the “Taylor Swift tax” in an ode to the state’s most famous vacation-home owner.
“We’re not putting all of our eggs in one basket,” McKee said.
McKee, who’s seeking reelection in November, is attempting to counteract this economic stress while also shepherding the state through the tragedy that shook Brown University’s campus in Providence in December when a shooter killed two students and injured nine other people. The incident marked the first deadly mass shooting in the state since 2013, according to the nonprofit Gun Violence Archive.
There’s no one explanation for Rhode Island’s economic pressures. The state, home to about 1 million people, receives more federal funding per capita than most others in the US, making it particularly vulnerable to cuts by the Trump administration. Brown, one of the state’s largest employers, is cutting $30 million of costs as it grapples with reduced federal support for scientific research and the higher tax on endowments included in President Donald Trump’s One Big Beautiful Bill.
Rhode Island also invested heavily in developing an offshore wind industry that the Trump administration is now trying to dismantle. In December, the White House suspended leases for a handful of East Coast wind farms on national security concerns, including Revolution Wind off the coast of Rhode Island, again halting construction that had only recently resumed on that development following litigation over a stop-work order in August. The developers are suing to restart work.
As of this fall, Revolution supported more than 2,000 US jobs, including shipbuilding, manufacturing, construction and operations. Expected to produce enough electricity to power 350,000 homes across Rhode Island and Connecticut, state and local officials were counting on the wind farm to ease the strain on the power grid and lower energy bills.
“What’s so frustrating is to have a federal administration that talks a good game about being business people and doing big deals and all of this stuff,” said Smiley, the Providence mayor. Constant uncertainty is “the opposite of what the business community says that they need.”
McKee said he and other New England governors spoke with US Energy Secretary Chris Wright and Interior Secretary Doug Burgum late last year in a bid to sell them on an all-of-the-above energy strategy that includes development of power sources more popular with Trump such as nuclear and natural gas but allows renewable energy projects to continue. That appeal didn’t prevent the latest suspension order in December.
Adding more salt to the economic wounds, toy giant Hasbro, long headquartered just outside Providence in the city of Pawtucket, announced in September that it’s moving to Boston. The move will send at least 700 jobs across the border but the company’s exit is also psychological: The maker of Monopoly and My Little Pony was the rare Rhode Island company with global brand recognition.
Tourism revenue is helping cushion the blow. Rhode Island has positioned itself as a summer destination that is more affordable than Nantucket or Cape Cod. Breeze Airways, the airline started by JetBlue Airways Corp. founder David Neeleman, announced in 2024 that it planned to offer 35 routes, including international destinations, at Rhode Island’s T.F. Green International Airport by 2029.
Rhode Island officials are also redoubling their efforts to lure new business — and keep what the state still has. McKee traveled to California recently to meet with defense tech executives, including Anduril Industries founder Palmer Luckey. General Dynamics Corp. already builds submarine components at Quonset Business Park, which also hosts an Anduril underwater-drone production facility.
The park, which is located on Narragansett Bay and includes a port, spans 3,200 acres and is one of the state’s biggest economic success stories, generating $5.9 billion in annual output. But Quonset too is facing new pressures. Vehicle imports into the port dropped more than 10% in 2025 because of Trump’s sweeping tariffs, said Managing Director Steven J. King.
The Rhode Island sales pitch works for some employers. Citizens Financial Group Inc., a regional lender based in Providence, considered moving jobs to Massachusetts several years ago but ultimately stayed put in a decision that coincided with legislation changing the state’s corporate tax structure in a way that benefited banks.
“It’s a manageable state where everybody knows everybody, and you have a responsive government to business needs and issues that arise,” Citizens CEO Bruce Van Saun said.
A desire to keep taxes low for businesses is forcing Rhode Island to consider other measures. In addition to the “Taylor Swift” tax on second homes, the state’s budget last year included an increase to gas and hotel levies and the extension of the sales tax to parking fees. McKee declined to sign the bill but allowed it to become law.
The proposed surtax didn’t make it into that bill but is already resurfacing for this year. The legislature will debate the measure over the next six months as part of the annual budget process. Rhode Island Senate President Valarie Lawson supported the previous proposal. House Speaker Joe Shekarchi said he’s willing to consider it this time around, although he’s not sure what the right income threshold should be.
“You can say tax the rich, but what is the rich?” he said.
Massachusetts’ millionaire’s tax means the state wouldn’t be an outlier in New England, a factor that Smiley says has led him to be more open to the proposed surtax.
“In years past, I’ve had a negative outlook on something like that,” he said. “The changing federal environment has certainly changed the state’s financial picture.”
By Greg Ryan and Georgia Hall
