In a little-noticed move, the General Assembly has doubled the state’s corporate
minimum/franchise tax to $500, giving Rhode Island the highest tax of that kind
for small businesses in New England and the second-highest in the nation (tied
with New Jersey).
More than 35,000 companies paid the minimum tax in 2002, yielding $8,803,750 at the old $250 rate, according to Paul Dion, senior budget analyst and economist for the state budget office.
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The new rate for 2004 is expected to produce another $9 million.
California has the nation’s highest corporate minimum tax, $800, and Massachusetts
ranks fourth, at $456. The vast majority of the country, however, is kinder
to small businesses: Connecticut and Vermont charge $250; Utah, $100; Arizona
and West Virginia, $50. Several states have no minimum at all.
Little fanfare
How the tax came to double with so little fanfare is unclear. As part of his fiscal 2005 budget proposal, Gov. Don Carcieri had proposed a hike to $450, and at some point, legislators raised it by another $50.
House Finance Chairman Steven M. Costantino, a Providence Democrat, did not return a call seeking comment. James G. Hagan, president of the Greater Providence Chamber of Commerce, said he hadn’t been aware of the change, which the Division of Taxation posted on its Web site last week.
For companies paying tens of thousands of dollars in wages, rents, utilities and supplies, an extra $250 a year is unlikely to be the last straw. But Ed Flanagan, chief of corporate taxes for the state Division of Taxation, said he is concerned about suddenly having the highest tax in New England.
“Where do we go from there?” he said.
Hagan put it more bluntly. As it is, the minimum tax is “a regressive tax, because it disproportionately affects small businesses and startups,” he said. “A small business at first tends to lose money, so now you’re charging them $500 for the right to lose money.”
The minimum/franchise tax affects two main kinds of taxpayers: limited liability companies (LLCs), partnerships and S corporations, all of which pass their profits on to their shareholders; and companies whose profits apportionable to Rhode Island are so low that, under the regular tax rate, they’d pay less than the minimum (at $250, that’s anyone under $2,777; under the new rate, it’ll be about $5,777).
Rhode Island’s regular corporate tax rate is 9 percent, relatively high in the national picture, but lower than Massachusetts’ 9.5 percent rate. (Maine, New Hampshire and Vermont have different tax brackets; the top rates are 8.93, 9.25 and 9.75 percent, respectively, but as low as 3.5 percent in Maine for the smallest businesses).
In 2002, only about 8,000 taxpayers paid Rhode Island’s regular corporate income tax, producing about $50 million, Flanagan said. If that seems low, compared to the 35,000-plus franchise taxpayers, it’s at least in part because 13,600 of the roughly 46,500 corporations active in Rhode Island are LLCs.
There are approximately 16,000 S corporations.
Nevertheless, economist Ellen Frank, of the Poverty Institute at Rhode Island College, has data to suggest there’s more to the story. Last year, the institute asked the Division of Taxation for figures on the taxes paid by Rhode Island’s top 100 employers. It got a list with the names removed but enough information to eliminate 36 nonprofit and governmental employers.
Of the remaining 64, the institute found, 15 had paid only the minimum tax;
29 paid $1,000 or less; 38 paid $5,000 or less; and only 15 paid more than $100,000.
In testimony to the General Assembly this year, Frank noted that the figures
weren’t surprising, because in the 1990s, “a period of record growth in U.S.
corporate earnings,” the share of tax revenues from corporate taxes had dropped
from 4.4 percent to 2.9 percent.
Documenting tax breaks
The Poverty Institute has advocated reforms to better document state tax breaks and also to close “loopholes” such as apportionment rules that allow a good chunk of income to be taxable nowhere. “The state corporate income tax has become increasingly difficult to enforce, because of all these games companies play,” she said.
So how do you keep Rhode Island’s hardest-struggling businesses from bearing the brunt of the corporate tax? One thing is clear: Nobody wants to raise the tax rate, especially given the state’s competitiveness problems due to high property taxes.
Asked how he’d solve the problem, state economic development director Michael McMahon wouldn’t advocate any specific measures, but he stressed that any plan that helps one sector at the expense of the other isn’t a real solution.
“We have a business-unfriendly image in this state, and it’s not about big business vs. small business,” McMahon said. “We do not create an environment that encourages successful entrepreneurs to build successful businesses in this state, and that’s the most important thing we need to change.”
Both McMahon and Gary Sasse, executive director of the Rhode Island Public Expenditure Council, a business-backed research group, said the state needs a comprehensive tax overhaul to make itself more competitive. The first step, they said, is to create a tax policy office with the expertise to analyze different policies and tax breaks and recommend smarter alternatives.
“There’s no question that Rhode Island’s tax policy today has a number of very negative unintended consequences,” McMahon said. “First of all, we drive successful people away from this state. Secondly, we have allowed a patchwork of tax incentives to grow without the necessary review and performance monitoring of are we getting what we’re paying for. If this is not addressed in a rational, cohesive way, the unintended consequence is that we are going to harm the people who need help the most.”
