Da Ponte bill will lower corporate tax, improve competitiveness
STATE HOUSE – Senate Finance Committee Chairman Daniel Da Ponte will submit legislation tomorrow to lower the rate and amend the way corporate income is taxed to improve Rhode Island’s economic competitiveness.
Chairman Da Ponte developed the legislation, with assistance from the Rhode Island Public Expenditure Council, following a series of meetings with large employers from a cross section of industries. The legislation decreases the corporate tax rate from 9 percent to 7 percent starting in the next tax year, January 1, 2015. This rate change moves the state from among the highest in the nation to the lowest in New England and about the national average.
“A two percentage point reduction in the corporate tax dramatically improves Rhode Island’s competitive position nationally and regionally. After meeting with more than a dozen important corporate partners, I’m convinced this will improve the business climate here. This allows existing companies to expand, and helps to attract new companies and new jobs to our state,” said Chairman Da Ponte.
The bill would also change the apportionment formula that presently could be seen as a disincentive for businesses investing in Rhode Island. Under the current formula, companies are taxed based on three factors, each weighted equally: sales activity, property and payroll within Rhode Island. A company with a heavy payroll and property presence in the state – such as a manufacturing company or a company that is headquartered here – may be disproportionately taxed based on national sales.
The bill would shift Rhode Island to a single-sales factor apportionment formula, calculating a corporation’s tax based on its sales in Rhode Island versus its total corporate and affiliate sales.
“This change provides an incentive – or at least removes a disincentive – for companies to invest in payroll and property in Rhode Island,” noted Chairman Da Ponte (D – Dist. 14, East Providence). “We want to encourage the creation of jobs here in our state, and this change helps to accomplish that goal.”
Currently, nine states and the District of Columbia use the three-factor formula. The most widely used apportionment calculation is single sales, with 20 states using it.
Finally, the legislation institutes the combined reporting method of taxing multi-state companies, effective January 1, 2015. Combined reporting prevents companies from shifting their profits made in Rhode Island to states with lower corporate taxes.
According to John Simmons, Executive Director of the Rhode Island Public Expenditure Council, “the shift towards combined reporting with single-sales factor apportionment better aligns Rhode Island’s tax structure with those in other states. Coupled with a corporate income tax rate reduction, this change provides an alternative to our current structure and is an important step towards making Rhode Island’s tax climate and cost-of-doing-business more competitive. We look forward to working with the state’s business community to gain additional insight into the implementation implications and opportunities of this legislation.”
A study by the Department of Revenue required by the General Assembly and presented to the Senate Finance Committee in March showed that multi-state companies would have paid more in corporate taxes if combined reporting were in place. Using a single sales factor apportionment as envisioned in the Da Ponte legislation, the corporations that filed pro-forma combined reporting with their taxes for the study would have paid $44.4 million more in corporate taxes, using the apportionment calculation method included in the legislation.
The corporate tax raised $131.8 million in fiscal year 2013. Each percentage point reduction in the tax rate results in between $12.0 million and $13.0 million in reduced revenue collections annually.
Expanding the single-sales factor apportionment formula for all corporate filers, and not just those subject to combined reporting, is estimated to reduce revenues by an additional $4.4 million, according to the Division of Taxation.
Chairman Da Ponte noted that the reaction from the business leaders with whom he has met has been positive, when combined reporting is coupled with a reduction in the corporate tax rate and other efforts to improve competitiveness.
“This is not being done to fill a budget hole. It is an attempt to make the state more competitive, and to incentivize investment in our state,” he said.
For more information, contact:
Brenna McCabe, Publicist
State House Room 20
Providence, RI 02903