The measure is geared toward high-wage earners and aims to boost job growth in R.I.
A new bill backed by state legislative leaders would allow large companies that increase their high-wage employment in Rhode Island to sharply reduce their workers’ personal income tax liability by covering the cost themselves.
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The measure, which resulted from talks with Fidelity Investments, would apply only to performance-based pay, and could only be used by firms that added at least 100 jobs paying at least 125 percent of the state’s average wage each, and $10 million overall, in a single year.
Dubbed the “Jobs Growth Act,” the bill “will bring jobs to Rhode Island that carry a higher salary and a higher level of disposable income,” House Speaker William J. Murphy said.
“I believe this legislation will be an important cog in the wheel of economic progress in Rhode Island,” said Senate President Joseph A. Montalbano, a co-sponsor of the bill. And though it will benefit Fidelity, which “has made a significant investment” in the state, he said, “it’s not the Fidelity Act,” because a range of companies will be able to take advantage of it.
The bill was only introduced May 19, but last week it cleared the Senate committee to which it had been referred, and it was also heard by House Finance.
Under the bill, a worker who earned, say, $300,000 in salary and $200,000 in bonuses would pay the state’s regular income tax on the salary, but only half the 9.9-percent tax applicable to the bonuses, for a total state tax bill of about $25,000, roughly the same as in Connecticut or Massachusetts.
His employer would then pay the rest – in this case, about $10,000 – directly to the state. Because many companies’ top-paid employees object to working in Rhode Island due to the high tax rate, they’d consider the tax offset “an acceptable business expense” just to gain “flexibility” in whom they can bring here, Fidelity spokesman Vincent G. Loporchio said.
State Economic Development Director Michael McMahon noted that some companies pay top-level workers a “gross-up” to get them to move here, meaning their gross pay is hiked to offset the loss in net income; in that tax bracket, to net $10,000 after federal and state taxes, for example, you’d have to boost gross pay by more than $18,000.
Loporchio said he didn’t know whether Fidelity offered “gross-ups” to any of its local workers, but he did say that the company “strongly” supports the proposed legislation. Fidelity already employs more than 1,600 people on its Smithfield campus, but it has space to more than double its presence, Loporchio said. If approved, the tax offset would help Fidelity bring “better-paid, more highly skilled employees” to its Rhode Island offices.
Asked what other companies in Rhode Island might benefit, McMahon cited Textron, Bank of America and Citizens Bank as potential candidates. It could also help Investors Bank and Trust, he said, which last year considered moving its headquarters from Boston to Rhode Island, but was discouraged by the high personal income taxes. The firm still has a tax deal with the state to open an office here, but not with top-paid workers.
The truth is Rhode Island currently has few employers whom the tax offsets could help, McMahon said. “Think of all the companies that aren’t here that could do it. Therein lies our problem: These companies stay away.” The tax offset, he said, might change that.
But the legislation does set a pretty high bar for eligibility. To qualify, companies would have to get certified by the Rhode Island Economic Development Corporation. For “provisional” certification, they would have to have met the 100 new full-time jobs/$10 million in new payroll requirement in the previous year. To be permanently certified, they would need to maintain those jobs for three years.
Asked why the bar had been set so high, state Sen. William A. Walaska (D-Warwick), a co-sponsor and author of the bill, said the payroll figure was “kind of an arbitrary number, but it’s a nice number” – a desirable target for job creation.
House Finance Chairman Steven M. Costantino (D-Providence) said it was an attempt to “have a little balance here, to test the waters to see if this really is revenue-neutral” to the state. “It’s in a sense to be conservative from the get-go.”
Gov. Donald L. Carcieri was not involved in the Fidelity talks or in the drafting of the bill, and his spokesman Jeff Neal said he had not yet reviewed it. But Neal added that Carcieri is “generally supportive of any reasonable economic development initiative.”
McMahon, the governor’s point man on economic development, wasn’t directly involved in drafting the legislation, but did participate in discussions about the underlying issues. He said the bill is “a work in progress,” with some flaws that should be corrected.
For example, McMahon noted, the bill now requires companies to pay 5 percent of their total performance-based compensation to eligible employees to offset the taxes, but depending on their tax bracket, some workers’ bonuses might not be taxed at 9.9 percent, but at a lower rate, meaning the employers would be overpaying.
Moreover, McMahon said, the legislation wouldn’t cut to the heart of the problem: That Rhode Island taxes upper-income people so much more heavily than its neighbors (though lower- and middle-income people, up to about $200,000 a year, actually pay less here, he said).
Ultimately, McMahon said, the state will need to cut its top tax rates to be competitive. But that’s not going to happen fast enough, he said, to miss out on economic growth opportunities now. The tax offsets would provide a way to deal with the issue in the meantime, he said.
“It allows us to engage in a different type of dialogue with both companies that are here, and companies that we’d like to come here,” he said. “Because any time we’ve had this discussion in the past, the high marginal tax rate got in the way.”
And just having this kind of bill on the table, McMahon said, is a big step forward. “The fact that the leadership of the General Assembly is acknowledging (the problem) and then participating in coming up with a solution … that’s huge.
