A bill allowing high-income Rhode Islanders to cut their state income taxes by shifting the cost to their employers has cleared the state House of Representatives, but only after a heated debate over broader-based tax breaks that may shape what remains of the legislative session.
The House vote on Tuesday, 49 to 17, was far more contentious than the Senate’s unanimous passage of the Jobs Growth Act on May 26, and it revealed widespread concerns over the bill.
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Inspired by talks with Fidelity Investments executives, the measure is designed to create a cheaper alternative to “gross-up” payments that many top-paid workers demand before they’ll move to Rhode Island, where the 9.9-percent tax rate on incomes above $319,000 is almost twice the rates in Massachusetts and Connecticut.
To offset a $10,000 difference in net income due to the higher taxes, an employer would have to offer a “gross-up” of nearly twice that much. The Jobs Growth Act allows the company to instead assume responsibility for half the worker’s tax liability on some income.
Advocates say offering firms that option would cost the state nothing. But because the whole idea is to attract high-paying jobs, the bill’s sponsors limited the benefit to companies that create at least 100 jobs that, combined, pay at least $10 million.
“This is a jobs growth bill,” stressed state Rep. Raymond C. Church (D-North Smithfield). “I think this bill is going to be a benefit not only to our economy, not only to the business community, but especially to … youngsters who can’t find opportunities in this state.”
But fellow legislators quickly offered a different take.
State Rep. Alfred A. Gemma (D-Warwick) called the bill “gimmicky,” and argued that if the state really wanted to create jobs, it would invest in Quonset Point, not cater to Fidelity. Plus it’s unfair to just give a tax break to the richest people, he said.
“What about the rest of the working stiffs in Rhode Island?” Gemma asked, noting that many people’s bonuses – the bill applies only to “performance-based pay” such as bonuses and stock options – are much lower, $50,000 or even $200.
“We have to cut taxes across the board, not just for the high end,” Gemma added later.
State Rep. Rene R. Menard (D-Lincoln) said the fact that the House was debating such a proposal showed “that our income tax structure is broken,” and he complained that if the bill passed, two people earning the same at different companies could pay different tax rates.
The bill also discriminates against smaller companies that may want to come to Rhode Island or expand here, but “can’t possibly create 100 jobs,” Menard argued, and against companies struggling to preserve jobs in Rhode Island.
“If we can sit here and say this bill is revenue-neutral,” he asked, “what is so wrong with giving every company the same benefit?”
Menard offered an amendment to that effect, eliminating the 100 jobs/$10 million requirement, and many Republicans and populist-minded Democrats jumped to support it.
“This is a very unfair tax policy,” argued Rep. Bruce J. Long (R-Middletown), citing a constituent with 12 employees who had complained to him about the bill.
Rep. Jim Davey (R-Cranston) said he’s been walking in his district, and while many people don’t know about the “Fidelity bill,” those who do consider it “just another tax break… for special interests.” Rather than making another “special deal,” Davey argued, legislators should implement broad-based tax cuts, such as those proposed recently by the Rhode Island Public Expenditure Council.
Visibly irritated, House Finance Chairman Steven M. Costantino (D-Providence) countered that Rhode Island’s tax structure “actually is very competitive” for people with incomes up to about $200,000, as noted in a recent RIPEC report. The General Assembly years ago set up the tax structure to more heavily affect the rich, he said, “so it’s a little disingenuous to say that this isn’t a bill for the poor person.”
“This is a Jobs Growth Act, and it is designed for those high incomes,” Costantino said. “That is why those conditions were put in the bill.” That doesn’t mean that Rhode Island shouldn’t pursue broader-based tax reforms, he said, “but you’re not going to do it on a whim.” Earlier, in fact, he had called the bill a “catalyst” for deeper discussions of the tax system, and urged colleagues to support it “not for what it is in itself, but for what it would force us to do, to have a fair and balanced tax policy.”
Menard’s amendment ultimately failed, 28 to 35. House Minority Whip Nicholas Gorham (R-Coventry) promptly introduced another proposed “amendment” that actually replaced the entire text of the Jobs Growth Act with a new bill to implement the RIPEC tax proposal, but House Speaker William J. Murphy rebuffed him, sparking a short but nasty argument.
Such were the tempers in the room that more substantive criticism of the bill got lost in the debate. Some “technical” issues with the measure, such as an apparent loophole involving stock options, have been resolved, and Costantino also added a public reporting requirement that will ensure Rhode Islanders will know who benefits from the tax break.
But Rep. Laurence W. Ehrhardt (R-North Kingstown) offered a more basic criticism: The bill, as written, appears to require companies to pay a tax equal to 5 percent of all the compensation it pays to “eligible” employees – meaning all new hires under the program, even those well below the 9.9-percent tax bracket.
The House and Senate still have to reconcile their two versions of the bill before it can go to Governor Donald L. Carcieri for his signature.
