The 11th-hour budget amendment submitted by Gov. Daniel J. McKee asking to overhaul how Rhode Island-based banks are taxed had some questioning whether the proposal was prudent tax reform or a pressure tactic by a company that employs thousands of workers locally.
If included in the state’s fiscal 2025 budget, the change – put forth at the behest of Providence-based Citizens Financial Group Inc. – would allow the use of a “single sales factor apportionment methodology” in determining tax liability, allowing banks to apportion their net income based solely on in-state receipts rather than a weighted three-factor formula applying payroll, property and a percentage of sales.
Twenty-six states have passed similar legislation, with Massachusetts scheduled to join that list on Jan. 1.
State projections show $42.2 million in bank tax revenue in fiscal 2024. But McKee administration officials say the amendment would result in $7.7 million in lost revenue this fiscal year, growing to $15.6 million over the full fiscal 2025.
Michael Ice, associate teaching professor at the University of Rhode Island’s College of Business, says the state must do what it can to entice businesses currently headquartered in Rhode Island to remain, while also making it more attractive for others to relocate here.
“Whether you are competing with Massachusetts, New York or Connecticut, you have to be very conscious of that [option to leave] and be aggressive in attracting business,” Ice said. “Companies have shown they can come and go.”
Citizens is by far the largest bank in Rhode Island by deposits and has more than 4,300 employees in the state, according to Providence Business News’ 2024 Book of Lists.
No other financial institution offered testimony for or against the proposal and none reached by PBN appear to be eager to speak about it.
“The team is reviewing the proposal to determine the impact, but we have no position on it at this time,” said Elizabeth Boyle Eckel, spokesperson for Westerly-based The Washington Trust Co., Rhode Island’s third largest bank by deposits.
Representatives for Bank Rhode Island and Bank Newport, the fifth and sixth largest banks in the state, declined to comment or did not respond to messages seeking comment.
In written testimony to the House Finance Committee in favor of the change, the Rhode Island Bankers Association warned of job losses that could have “a significant impact on state revenues” and argued the change “would create the necessary tax parity with our neighboring state to stave off such a scenario.”
The association president is Keith Kelly, Citizens Bank president for the Rhode Island market.
Michael DiBiase, CEO and president of the Rhode Island Public Expenditure Council, says the proposed change became urgent given the development in Massachusetts.
Conversely, some research has shown the single-factor methodology may not be all as advertised.
According to the Center on Budget and Policy Priorities, a state’s business tax structure has “at most a small impact on a state’s rate of economic and employment growth,” citing its literature review summarizing 33 economic studies of the relationship between state business tax codes and private sector employment or investment, nine of which showed “no statistically significant impact.”
But according to Ice, given the importance of Citizens to the state’s economy, the impact would be felt without the change.
“The state is often short-sighted with these issues. It may lose $15 million, but it may lose $115 million if Citizens leaves,” he said.
