What’s Not in the Numbers

A few important considerations are missing from Tom Sgouros’s comment of his “review” of state tax revenue statistics:

I was reviewing some statistics about state tax revenues last week, and looked at business taxes. Along with the income tax and sales tax, business taxes were once the third important leg of funding state operations, but no longer. Between 1996 and 2006, income tax collections rose by 76%, sales tax collections by 97% and business taxes by — wait for it — 14%, far less than inflation over that decade.
Why have business tax revenue declined so much? The economy has suffered recently, but not for all of that decade. The biggest reason for the decline is a nearly endless stream of special tax breaks. We offer businesses several different investment tax credits, an R&D credit, a credit for wages paid in an Enterprise Zone, a jobs development credit, a job training credit, a biotechnology tax credit, an “innovation and growth” tax credit, and much more. Some of these are worth millions of dollars. For others, we simply don’t know what the effect is on the state budget. But the result is that 94% of the businesses in our state pay the minimum corporate tax of $500.

For one thing, it’s difficult to measure the significance of percentage change without knowing the dollar amount for each category. More to the point, however, Sgouros’s analysis requires that one ignore economic realities: It may be, for example, that the same policies that kept business taxes down enabled or encouraged increases in salaries and sales, thus increasing those taxes. One ought also to remember that offshore outsourcing has also expanded during the period in question, peeling off business revenue and making it advisable for the state to decrease the cost of doing business here.
Rhode Island clearly doesn’t do economic development well, but presenting percentage change statistics isolated from context and lamenting pro-business tax policies bespeak precisely the approach that will bury Rhode Island, if permitted to affect our tax structure.

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chuckR
chuckR
13 years ago

Same old, same old. And dumb as it gets. It wouldn’t surprise me to find that 94% of businesses, give or take, in this state are small businesses run as LLCs, S Corporations or partnerships where the corporate profits flow directly to the shareholders/owners/proprietors and are taxed as personal income. However, I agree we’d be better off with a generally favorable business climate than with all sorts of special deals.
You can’t make any comments about tax policy without comparing RI’s provisions with those of MA and CT. It would be a PITA, but I’m already aware of several strip malls in CT and MA where I can relocate if the RI legislature does its desperate worst. If that happens, the net in my case will be a loss to RI as one or the other of those states will get a cut of my state income tax payments. Some businesses are locked in place, others like mine can easily move. I’ve previously established offices in three states – its about a week of work to find and get an office set up with phones, computers, internet and furnishings and about an hour with the accountant and lawyer. Not a big deal.

Tom W
Tom W
13 years ago

I don’t recall exactly, but the option of LLC’s first became available in RI around the early / mid-1990’s.
So that would explain the drop in business taxes.
ALSO, but this might also explain Pat Crowley’s “increase” in incomes over $200k – a lot of it could be gross business receipts funneling through to individual tax returns via an LLC, whereas previously it would first have funneled through a separate business tax return ((a CPA would need to confirm this; not my area of expertise).
Presumably Sgouras and Crowley (and the Poverty Institute) are well aware of LLC’s and the pass-through, but why let that get in the way of some good propaganda?

Marc
13 years ago

Tom/Chuck, Good points. FYI, LLCs came into being in RI in September, 1992, according pg.86 of the Design-build Contracting Formbook. Found via Google books. You don’t think I’d just have that laying around, do ya?

Marc
13 years ago

Tom/Chuck, Good points. FYI, LLCs came into being in RI in September, 1992, according pg.86 of the Design-build Contracting Formbook. Found via Google books. You don’t think I’d just have that laying around, do ya?

Jim
Jim
13 years ago

Many of those business’s in the state that pay the minimum tax of $500 are dormant companies like one that I have. The company has no assets, no income, no nothing. I keep it in case I might want it. Just raise that to $1,000 and I gurantee you I will close it. Sgouros doesn’t know what he is talking about. This is a big source of income to the state – for doing nothing. Hike that fee to $1,000, like has been floated, and just watch this source of revenue go down big-time.

John
John
13 years ago

Hmm, what else happened between 1996 and 2006? Let’s see. LLCs have been mentioned. But there was also the entry of China into the world economy, the boom in outsourcing, the radical shrinkage of RI’s jewelry industry, the loss of large corporate HQs like Hospital Trust, Old Stone, Fleet, etc., and a significant worsening of the business tax and public policy climate. Taken together, it makes the fact that corporation taxes increased at all quite impressive, no?

Monique
Editor
13 years ago

“We offer businesses several different … credits … Some of these are worth millions of dollars. For others, we simply don’t know what the effect is on the state budget. But the result is that 94% of the businesses in our state pay the minimum corporate tax of $500.”
“The result”? That’s quite a leap. So that we can examine this cause and effect together, please provide a list of the companies which receive/received tax credits but do not pay more than the $500 minimum corporate tax.

Roland
Roland
13 years ago

Here’s one data point, Monique.
My business paid the minimum corporate income tax last year. Because it is an S-corp., the income tax burden passes through to my RI-1040.
I was awarded credits of about $26k in 2008 by spending more than $2 million on capital equipment over the last three years and paying my production employees more than the average in the state. Under those guidelines, the “planners” categorize my business as a “high-performance manufacturer” and deem me worthy of the credit.
Those investments, and the inertia keeping my business in the state, generated roughly $400k in combined tax receipts for the state and town last year between payroll taxes, personal income taxes and business property taxes (in addition to any sales/gas/lottery/tobacco/alcohol tax receipts generated from the spending of my employees).
Of course, the tax credits wouldn’t be necessary if the burden was not so high in the first place. The “Planners” spend ridiculous resources trying to identify, attract or retain the best industries, and then introduce layers of complexities with credits and the like.
Heck, look at the EDC spending of more than $20 million. By their own report, they “created” around 1,000 jobs and “retained” around 5,000. So basically, we’ve gotta spend $20 mil just to slow the exodus. Why not just pass a law prohibiting any business from leaving or expanding out of state instead and spend $20 million enforcing it? (note the sarcasm please)
Stop taxing businesses and we won’t need to do all that “planning”. If they insist on taxing anyone (as detestable as that is), tax individuals as they take proceeds out of the business (i.e. owners and employees). As long as the bucks stay in the business, more jobs are created than would be if those same bucks ground the State bureaucracy.

Tom W
Tom W
13 years ago

>>the loss of large corporate HQs like Hospital Trust, Old Stone, Fleet, etc.,
They were probably Delaware domiciled corporations, and only paid RI taxes on revenues generated within RI, but not on that generated in other states.

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