Gary Sasse: Is RI’s Tax Climate Really The 5th Worst?
Wednesday, October 23, 2013
Validity of the SBTCI
Economists question whether or not this ranking presents an accurate reflection of the actual tax burden a state places on its businesses. In Grading Places-What Does the Business Climate Rankings Really Tell Us? The Economic Policy Institute concluded that the SBTCI “ends up generating a number that has little relation to the actual taxes falling on new business investment in a state.” In other words, the SBTCI does not measure what it claims to measure.
Rhode Island’s leaders have neither publically questioned nor challenged the Tax Foundation’s methodology or ranking results. We can only conclude that either they do not care or their silence is a sign of acquiescence. In fact, the State Senate’s report Moving the Needle seems to use the Tax Foundation’s ranking as a measure of Rhode Island’s business tax competitiveness.
The State Business Tax Climate Index is widely quoted by the media and frequently cited by business location professionals and public officials when gauging how state business tax burdens compare. Rhode Island needs to respond to the Tax Foundation’s report because if it does not the national perception will persist that the Ocean State’s tax structure is anti-business. In responding the Governor should 1) identify the reasons why the Tax Foundation gives Rhode Island such a horrific grade, and 2) if justified, devise a plan to improve the business tax climate and concurrently move us out of the bottom ten least business tax friendly states.
The SBTCI includes several taxes to determine an overall tax system ranking. In the 2014 Tax Foundation index the Ocean State ranked 46th overall. Rhode Island ranked dead last (50th) for unemployment taxes, 46th for property taxes and 43rd for corporate taxes. We were more competitive with regard to the personal income and sales taxes, ranking 36th and 27th respectively. The conclusion is obvious, there is a need to revisit the way unemployment insurance, property and corporate income are taxed in order to determine if the business tax climate can be improved in a fair and balanced manner.
Unemployment Insurance and Corporate Tax Rates
It has been suggested that Rhode Island’s relatively high unemployment insurance costs result, in part, because the system is being gamed. Companies that are frequent users of the system pay the highest tax rates. While these firms collectively contribute over $50 million to the fund, payments made to workers they lay off equal almost $90 million. This suggests that businesses with few layoffs are paying higher taxes to subsidize seasonal type companies. The Department of Labor and Training should determine the facts and make recommendations to deal with the costs high-use employees, employers and industries have on the system.
Rhode Island has the highest corporate income tax rate in New England. Last year the Governor proposed decreasing the corporate tax rate from 9% to 7% over a three year period and phasing out certain tax credits to help pay for the rate reduction.
The General Assembly rejected the Governor’s plan but mandated a cost-benefit analysis of economic development tax incentives. To improve the business tax climate Governor Chafee should resubmit a plan to significantly reduce the corporate tax rate and finance it by closing tax loopholes. Using the tax code to pander to the well-connected is nothing but crony capitalism.
The elephant in the room when it comes to improving Rhode Island’s business tax climate is the property tax. Property taxes are the largest component of many companies’ state and local tax burden. According to Ernst and Young 44% of the property taxes collected by Rhode Island’s 39 cities and towns are paid by businesses. This compares to 35% nationally.
The General Assembly has worked to reduce our over-reliance on property taxes. In 2006 under Senator Pavia Weed’s leadership the General Assembly mandated a 4% cap on property tax levies, and in 2010 Governor Carcieri signed a new school aid formula into law. Today a Joint Municipal Service Committee is identifying ways to deliver municipal service more economically. Unfortunately little has changed when Rhode Island’s property tax burden is compared to the other 49 states. The most recent study shows our property tax burden as percent of income is 50% higher than the national average. In the year the property tax cap was enacted it was 43% higher.
Ways to Improve the Ranking
Improving Rhode Island’s property tax ranking will require the turning the school and municipal cost-curve down and adopting a property tax classification system that does not treat commercial property as the goose that lays the golden egg.
Pragmatic steps that can be taken to reduce property tax burdens and improve our fifth worst ranking are outlined below.
- Incentivizes and require cities and town as well as special purpose districts to enter into cost-saving joint service and regionalization agreements,
- Reduce the 4% property tax cap to 2.5% over the next four years. The State estimates that inflationary growth will range from 1.9% to 2.5% between now and fiscal year 2018, and
- Adopt a uniform property tax classification system which limits commercial property tax rates to 50% of owner-occupied residential rates. In 2009 the Governor’s Tax Policy Strategy Workgroup (which I chaired) found that the current property tax structure was a detriment to economic development. Providence recently froze its commercial property rate which is the highest in the United States.
The late Republican strategist Lee Atwater was fond of saying that “perception is reality”. Whether fair or not, the perception that Rhode Island has a dismal business tax climate is hurting the State’s reputation and can no longer be ignored. Temporarily eliminating the sales tax on a bottle of wine may make us feel better but it is not an answer to the tax concerns being raised about Rhode Island by national think tanks. The Governor and General Assembly must proactively respond to a widely publicized national report that says Rhode Island has the fifth worst business tax climate in the nation.
Somebody needs to get the facts and speak up for the citizens of Rhode Island.
Gary Sasse is Founding Director of the Hassenfeld Institute for Public Leadership at Bryant University. He is the former Executive Director Rhode Island Public Expenditure and Director of the Departments of Administration and Revenue.
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