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Rhode Island Sends Approved Budget to the House, Bill Would Improve Business Tax Climate

2 min readBy: Scott Drenkard, Courtney Michaluk

The Rhode Island House Finance Committee approved a budget Thursday night which includes notable changes to the corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate and structure, the estate tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. , and transportation policy. At $8.7 billion, lawmakers say the 2014-15 fiscal year proposed budget would eliminate the current $67 million gap. The highlights:

  • The corporate tax rate, currently 9 percent, would be reduced to 7 percent.
  • The budget would implement combined reporting, which means multi-state or multi-national corporations would be required to combine all subsidiaries and pay tax to Rhode Island based on single sales factor apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. .
  • The estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. credit would increase from $921,655 to $1.5M. Heirs would be required to pay tax only on amounts exceeding $1.5M (adjusted annually for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. ). This is an improvement over the “cliff provision” Rhode Island has now—currently, heirs are required to pay tax on the entire estate if its value exceeds the credit (so it’s really an exemption).
  • The real estate-conveyance tax would increase from $2 per $500 property value to $2.30.
  • The 10 cent toll on the Sakonnet River Bridge would be eliminated. Instead, the infrastructure fund would be funded by a 1-cent gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. adjusted for inflation every two years (Rhode Island already has the 14th highest gas tax in the country), an increase in the vehicle inspection fee from $39 to $55, and an increase in the driving record violation fee from $35 to $60. All vehicle-related fees, which currently go into the state’s general fund, would be eventually redirected to the infrastructure fund over 5 years.

The budget is not stellar, but certainly a step in the right direction. Policymakers should be commended for the plan to reduce the corporate tax rate to 7 percent and raise the estate tax exemption. Rhode Island could even consider making the estate tax reform more robust by moving the exemption up further to match the federal exemption as New York, Maryland, and DC have already done this year.

Less-than-good changes are the introduction of combined reporting (which would add more complexity to the corporate tax code), and the transportation changes, which move away from tolls, meaning drivers are a bit less connected with the costs of roads they use.

All in all though, we’ve scored the corporate tax component of the budget in our State Business Tax Climate Index, and it would improve Rhode Island’s overall ranking from 46th to 45th, continuing Rhode Island’s effort in the last decade of making improvements to its uncompetitive tax code.

Figure 1: Rhode Island State Business Tax Climate Index Rankings Under 2015 State Budget

Current law With changes
Overall 46 45
Corporate 43 31
Individual 36 36
Sales 27 27
Unempl Insur 50 50
Property 46 46

Note: Index run assumes policy in place on snapshot date of the July 1, 2013.

The budget will be presented to the full House on Thursday, June 12th.

See our recent coverage of Rhode Island budget talks here and here.

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