A proposed bill that could change the way the state taxes its manufacturers may be seen by those in the industry as a much needed shot in the arm. But according to some local experts its passage is going to be an uphill battle.
If passed, the bill, proposed by Sen. Stephen D. Alves (D-West Warwick), would change the method the state uses in apportioning income for tax purposes. It’s a change proponents of the bill believe would not only offer relief to manufacturers already in the state, but would also make Rhode Island more competitive in attracting new companies.
“If it’s changed it would definitely be more beneficial,” said John Ricottilli, president of Taco, Inc in Cranston, which manufactures parts for residential and commercial heating and ventilation units. “It would be a boost for the local economy and it would make the state more attractive to out-of-state business. Equally important in recruiting new business is retaining current business, and this is one way to do that.”
But despite these industry accolades, many agree the likelihood of a tax-cutting initiative passing in slow economic times is slim.
“It’s definitely going to be tough,” said Gary Sasse, executive director of the Rhode Island Public Expenditure Council. “It’s always much tougher to pass a bill that includes a tax decrease. On the other hand, during tough economic times the state needs to make investments to protect jobs in the state and in slow economic times, manufacturing is especially vulnerable.”
Rhode Island’s current tax structure dates back to the late 1950s when the National Commission on Uniform State Tax laws developed the Uniform Distribution of Income Tax Purposes Act. The apportionment formula developed by the commission used three equally weighted factors to apportion corporate income – sales, property and payroll. The three percentages are added together and then divided by three to determine the percentage of taxable corporate income subject to tax by the state.
And while a majority of states across the country continued to use that system, when a 1979 Supreme Court ruling allowed states to alter their formula, many states saw it as an opportunity to encourage businesses to expand in payroll and property by giving greater weight to sales.
“Income was originally based on people, assets and sales,” said Christopher “Kip” Bergstrom, executive director of the Rhode Island Policy Council. “A number of states have put the weight now on sales. It shifts more of that tax on companies that simply sell in your state.”
Currently, Rhode Island is one of the only New England states that has not changed its tax system.
“Rhode Island’s apportionment formula is not competitive with other states,” Sasse said. “That’s clear.”
For example, if a multi-state firm has 70 percent of its property, 60 percent of its payroll and 10 percent of its sales in Rhode Island, and a taxable income of $10 million – under Rhode Island’s current system it would pay approximately $420,000. Using a double-weighted sales formula the tax would be $337,000 – or 20 percent less.
Bergstrom said a change in Rhode Island’s system could promote the development of high-end manufacturing companies in the state.
“If you aren’t profitable, taxes aren’t an issue,” he said. “This type of legislation keeps the profitable companies we have here. A lot of manufacturers today have locations in multiple states and the difference in tax structures has resulted in movements of activity.”
According to John Grady, executive director of the Rhode Island Manufacturers Association, the current structure is a serious drawback for companies wanting to locate here.
“Both of our neighbors, Massachusetts and Connecticut, have already passed this legislation,” he said. “So someone wanting to move to the area would look and see a different atmosphere in those two places.”
But that’s not the only thing they will look at, said University of Rhode Island Economics Professor Leonard Lardaro.
“Maybe the percent change in the tax would be a good thing,” he said. “But that’s not what is going to reform manufacturing. It might make some difference, but where we really goof up is in the costs associated with manufacturing here like energy and health care.”
Sasse agreed that the new tax system may not be a total solution to the problem, but he pointed out it is a part of it.
“There isn’t any one answer,” he said. “It’s a combination of policies. We as a state need to do a series of things to improve our competitiveness.”
According to Lardaro, measuring the success of this bill, if it were to pass, would be a challenge for the state, especially in slow economic times.
“I am totally in favor of this, but I am not naïve enough to think that if you pass this, manufacturing will jump,” he said. “Corporate taxes aren’t that big a part of our total picture. We have deluded ourselves to think that if we fiddle with the little stuff the industry will change. I welcome change but lets not delude ourselves.”
And while the bill has received some backing at the State House, there is a consensus that after the passage of the Capital Gains, the legislature will be somewhat reluctant to pass another tax cutting measure.
“I think there is definitely interest in it,” Bergstrom said. “This is a strong issue. But whether the General Assembly has the ability to address that issue remains to be seen. It wouldn’t have the impact of capital gains, but it does have value for the state’s manufacturers.”
