Grafton “Cap” Willey is a busy guy. The CPA is the shareholder-in-charge of Tofias PC’s Newport office and a member in the accounting and consulting firm’s tax group. He’s also the chairman of the Rhode Island chapter of the Smaller Business Association of New England (SBANE).
This year, Willey was appointed to participate on two critical state study panels: the Tax Policy Workgroup, which will examine Rhode Island’s tax system and recommend reforms; and the Special House Commission to Study All Aspects of the State Pension or Retirement System.
PBN: What ramifications will the upcoming presidential elections have on tax planning for businesses?
WILLEY: This is an important question that we are looking at as we do tax planning for our client. We will have a new president and a new Congress come January 2009. The likelihood is that the Democrats will retain the House. There is a possibility that they could reach 60 in the Senate, which would allow them to override vetoes and actually pass legislation.
A President Obama has said that he will let the Bush tax cuts expire, which will be a tax increase. He has also said that he wants to increase the taxes on the higher-income taxpayers, which will hit a lot of successful small businesses that operate as pass-through entities, which means they pay the entity taxes on their individual tax returns. He has also said that he wants to increase the capital gains taxes from the present 15 percent rate to a rate of 25 to 28 percent.
A President McCain has said that he would retain the Bush tax cuts and possibly cut the corporate tax rates. We are looking at how we would plan for those eventualities. It might mean selling appreciated assets early to take advantage of the current reduced tax rates or advancing the collection of income into the current year or holding off deductions until next year. It is a wait-and-see approach. We will know much more after the election and even more as we move into 2009.
PBN: What kind of effect does the slumping economy have on businesses, from an accounting perspective?
WILLEY: A lot of Rhode Island businesses are suffering in this economy for a variety of reasons. Commodity inflation and increased transportation and energy costs have squeezed margins of manufacturers and distributors. The hospitality and tourism businesses have been squeezed by the diversion of consumer disposable incomes to pay for necessities such as gas and utilities. Job layoffs or the concerns about continued employment have registered with the consumers and impacted their spending. Big-ticket items, which had been supported by the increasing equity in real estate, have been curtailed by the subprime lending crisis, which has dropped the real-estate values about 20 percent. From an accounting standpoint we are probably looking at lower business profits, reduced business expenditures and dealing with difficult personnel decisions. The other big concern is the tightening of credit, which has limited business access to capital.
PBN: How does the slumping economy affect the accounting industry itself?
WILLEY: The accounting business is still strong for Tofias. When companies are faced with financial problems they often need our help. Also, as credit terms tighten there is an increased need for audited financial statements and on the tax side the government still requires tax returns to be filed. We are also seeing a slight improvement in our ability hire qualified employees, which in the boom years was a real problem for us. Fees can be an issue because the accounting rules are becoming more complex. And certainly Congress has never found a way to simplify the tax codes. We do see some firms looking for competitive fees, but that works both ways for us. We see a lot of movement from the larger national firms to firms like us that can provide quality service at reasonable rates.
PBN: You’re on a commission studying the state’s tax structure and ways to change it, and you’re also on a commission examining the state’s pension system. How are things proceeding with those boards?
WILLEY: These commissions are a work in process. The pension study commission has taken a break as the actuaries are doing some calculations for us. The tax study committee is working diligently through the summer and I am very hopeful that it will come out with some significant recommendations to make the Rhode Island tax system more competitive and pro-economic growth.
PBN: State leaders were able to hold the line on broad-based taxes in the enacted $6.89 billion state budget, but that assumed $60 million in savings through labor negotiations. Now with a court battle looming between the Carcieri administration and Council 94, is there growing concern from Rhode Island-based SBANE members and other businesspeople that the state won’t be able to maintain that stand?
WILLEY: The legislature and the governor did hold the line on tax increases last year and we certainly hope that they will continue in the future. The State has to implement the budget changes needed to keep the budget in balance going forward. The economic downturn is bound to have some adverse consequences in state revenues. The state, like the businesses that I represent, has to respond to the ups and downs in the economy, and [they both] need to find ways to be more efficient and provide services with less. We need to be able to live within our means.
To learn more about the Smaller Business Association of New England and its programs, or to nominate a company for SBANE’s 2008 New England Innovation Awards, visit www.sbane.org.
