The General Assembly is currently negotiating the annual state budget, which this year includes a provision to adopt “combined reporting.” This is great news for Rhode Island.
For many years, Rhode Island’s political leaders have passed laws and regulations that created a climate that was hostile to economic growth and job creation. But, in a refreshing change of pace, our state legislators are considering a tax change that would actually support the creation of new jobs.
The General Assembly is currently negotiating the annual state budget, which this year includes a provision to adopt “combined reporting.” This is great news for Rhode Island. It will stop large corporations from avoiding Rhode Island tax and ensure that they pay their fair share for the privilege of doing business in Rhode Island.
Many multi-state corporations consist of an overarching parent corporation as well as various subsidiaries, which are owned by the parent corporation. Such arrangements make it easy for corporations to shift money around to minimize their state taxes.
Combined reporting considers the subsidiaries to be one business entity, a unitary enterprise, for state income tax purposes. The profits of this unitary enterprise are aggregated at the national level, and the state then taxes a share of that combined income. The amount of taxes owed is determined by the amount of business activity in that particular state compared to its activity in the rest of the nation.
The General Assembly in 2011 passed legislation that called for a two-year study to assess the potential implications of combined reporting in Rhode Island.
In that study, the RI Division of Taxation found that combined reporting would have yielded between $23 and $55 million in additional tax revenues in 2011 and between $22 and $44 million in 2012 (the estimate ranges reflect the different kinds of combined reporting the state could choose to enact).
For the fiscal year that ends June 30th, Rhode Island’s corporate income tax is projected to generate $136 million in revenue - about 4% of the state’s total general revenues. Imagine what an extra $22-55 million could do.
The additional revenue would allow Rhode Island to reduce its corporate income tax rate from 9% to 7%, without reducing funds for current services. A reduction in the corporate income tax rate would make Rhode Island a more attractive option for businesses. Those businesses then would have more money to invest in people, training, and equipment. When new businesses set up shop in Rhode Island it leads to more tax revenues for the state to invest in schools and infrastructure.
By most national reviews, Rhode Island is not perceived as a desirable place to start or grow a business. Rhode Island comes in among the bottom 10 states in current business climate rankings. By some estimates, combined reporting could vault Rhode Island into the middle of the rankings. This would be a sea change in how our state is perceived by national business leaders.
The Rhode Island Public Expenditures Council (RIPEC) says, “tax policy is one of the few factors affecting business location decisions that are within a state’s ability to control.”
There are currently 46 states that tax some form of corporate income, and of those, 23 require combined reporting.
As a CPA with 35 years of business experience, I believe this is an easy choice for Rhode Island. I’ve spent my career as a trusted adviser to individuals, businesses, governments and non-profits: this move is good for business and it’s good for Rhode Island.
Combined reporting will generate additional revenue without raising rates or imposing additional taxes. It will level the playing field between in-state and multi-state corporations. It will provide additional revenue allowing the state to lower the overall corporate tax rate and improve our state’s appeal and standing in national rankings.
I call on the General Assembly to approve, and the Governor to sign, the combined reporting language in the proposed budget.
The sooner we adopt combined reporting, the sooner we can get Rhode Island back on track.