PROVIDENCE – A multimillion-dollar shortfall in projected corporate tax revenue is largely contributing to the state’s near $100 million shortfall in revenue estimates.
And it’s not entirely clear why.
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The state’s budget office on Wednesday estimated revenue for fiscal 2017 would total about $3.7 billion, representing a $60.1 million decline from the last time revenue was estimated in November. At the same time, revenue estimates for fiscal 2018 – totaling $3.6 billion – is expected to be $39.5 million less than previously estimated.
A large part of the cumulative $99.6 million shortfall is attributable to corporate tax revenue, which combined for the two fiscal years is expected to be $56.8 million less than November estimates. What makes the shortfall so notable, however, is that while corporate tax revenue typically makes up about 3.4 percent of total revenue, it accounts for 57 percent of the projected shortfall.
“It’s an interesting question and we’ve been looking at it for the last month or so,” said Executive Director John C. Simmons of the Rhode Island Public Expenditure Council.
While reasons for the shortfall are not entirely clear right now, the independent nonprofit that examines public spending is looking into some running theories, including low profit margins, deferred tax payments, state subsidies used to offset gains and poor estimating.
The shortfall runs counterintuitive to the fact that the state’s economy has largely grown in the past year. But as Simmons points out, robust growth doesn’t always translate into income.
Indeed, if low-profit generating companies, such as restaurants, hotels and retail outlets, contribute to the overall GDP growth in a significant way, the state wouldn’t likely benefit as much on the corporate tax side because there would not be a lot of profit to tax.
“There might be growth of sales at the hotels and restaurants, but that doesn’t necessarily revert back to corporate tax,” Simmons said.
The state budget office is now estimating corporate tax revenue for fiscal 2017 to total $125 million compared with the $167 million estimated in November. For fiscal 2018, the new estimate totaled $158 million compared with $172 million estimated six months ago.
The Boston Globe and other publications have suggested some companies and individuals could be deferring income in the hope that President Donald Trump successfully lowers the federal corporate tax. Such deferrals could impact corporate tax revenue at the state level, but it’s unclear whether that’s happening in Rhode Island in any significant way, as data from the R.I. Division of Taxation wasn’t immediately available.
State officials, now facing the challenge of dealing with revenue over the two fiscal years nearly $100 million less than previously anticipated, are pointing to the Trump administration, and the uncertainty it has caused surrounding various federal policies, as contributing to revenue shortfalls.
“Across the nation, President [Donald] Trump’s policies have created a lot of uncertainty for businesses and state fiscal officers. At least two-thirds of states, including our neighbors in Massachusetts and Connecticut, have seen revenues fall short of projections as individuals and businesses look to Washington for a signal of what’s to come,” said Mike Raia, spokesman for Gov. Gina M. Raimondo.
Simmons says corporate tax revenue could also be depressed by companies cashing in on state subsidies received in exchange for such efforts as job creation, a hallmark of Raimondo’s economic-development strategy. The subsidies could be used to offset corporate tax payments.
At the end of the day, however, it’s also entirely possible November revenue estimates were just off, Simmons added.
RIPEC expects to release a report in the coming weeks examining some of these issues.
Eli Sherman is a PBN staff writer.
