In an effort to address his state’s uncompetitive corporate tax system and attract new business to Rhode Island, Gov. Lincoln Chafee recently proposed reducing the state’s corporate income tax rate over three years while broadening the base of the tax.
Corporate income taxes are considered by many economists to be the most destructive tax, stunting many of the main factors driving economic growth. Under Chafee’s proposal, the state’s corporate income tax rate would be reduced from 9 percent to 7 percent over the next three years. This would move Rhode Island from among the highest rates in New England to the lowest.
The rate cuts would result in a loss of revenue for the state, $5.3 million in 2014, $12.9 million in 2015, and upwards of $20 million in the years following, according to the Tax Foundation. In order to replace some of this revenue, the proposal would phase out several corporate income tax credits.
One of these is the Jobs Development Act tax credit. Under this program, businesses that meet certain hiring and wage requirements, such as new jobs added, receive a reduction in their corporate income tax. Only eight companies took advantage of this program, costing the state $16.4 million. Of this amount, 94 percent went to a single company, CVS Caremark, a pharmacy firm headquartered in Rhode Island. CVS is one of the biggest opponents of Chafee’s tax plan.
Another proposed change is the elimination of the Enterprise Zone Credit, which subsidizes new development in areas considered economically distressed. Only 20 companies took the credit in 2012, costing around $700,000.
Had Rhode Island implemented the proposed tax package in 2012, the state would have ranked 30th best rather than 42nd best on the corporate tax component in the nonpartisan Tax Foundation’s State Business Tax Climate Index, and 44th best rather than 46th best overall.
The proposed changes would eliminate high taxes that slow development and would therefore improve Rhode Island’s economic competiveness. The state should focus on creating a less-complicated tax system that benefits businesses and consumers with lower rates rather than carving out tax incentives for a small number of companies.
The following articles examine state tax reform from multiple perspectives.
Ten Principles of State Fiscal Policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. These range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Rhode Island Governor Proposes Positive Corporate Tax Reform
Elizabeth Malm of the Tax Foundation examines the proposed Rhode Island tax reform and supports the governor’s efforts. Malm argues tax reform that broadens the tax base in order to lower the overall rate ensures neutrality and simplicity in the tax code and removes the incentive for companies to lobby for special tax treatment: “Trading targeted tax incentives for a better tax system for everyone is positive tax reform, as is moving away from revenue sources that can harm growth and generate instability in a state’s overall revenue system.”
The Potential Effect of Eliminating the State Corporate Income Tax on Economic Activity
Laura Wheeler, senior researcher at the Fiscal Research Center (FRC) of the Andrew Young School of Policy Studies, summarizes some of the better studies on the effect of state corporate income tax changes on economic activity. Wheeler then uses the results of those studies to estimate the economic effect of eliminating a state’s corporate income tax. Wheeler concludes low state corporate income taxes spur investment and employment in the state.
Personalizing the Corporate Income Tax
Gerald Prante and Scott Hodge discuss in this Fiscal Fact article the effect of corporate income taxes on individual households. “Examining income groups, Chamberlain and Prante found that low-income households pay more in corporate income taxes than they pay in personal income taxes. Geographically, households in largely urban congressional districts and metropolitan areas bear a disproportionate share of corporate income taxes today and, thus, would receive a significant boost in living standards if the corporate tax burden were reduced,” they write.
Research & Commentary: The Best and Worst Ways to Eliminate a Budget Deficit
Heartland Institute Government Relations Director John Nothdurft identifies some of the most and least effective and economically advisable ways states use to trim their budget deficits.
Tax Efficiency: Not All Taxes Are Created Equal
Jason Clements, Niels Veldhuis, and Milagros Palacios examine how governments can extract tax revenues in the least costly and least economically damaging manner in order to improve economic performance.
Competitive Realities, Common Sense Economics and Tax Reform in the States
Raymond J. Keating of the Small Business and Entrepreneurship Council discusses the proposed Rhode Island tax reform and concludes Chafee’s budget includes no tax increases and proposes a positive reform on the corporate tax front.
The U.S. Tax System: Who Really Pays?
Writing for the Manhattan Institute, economist Stephen Moore examines popular conceptions and misconceptions about the impact of tax rates on economic productivity and fairness.
Taxes Really Do Matter: Look at the States
Economists Arthur Laffer and Stephen Moore examine the claim that tax rates don’t matter and thus raising income taxes, dividend taxes, and capital gains taxes won’t hurt the economy. Analyzing the evidence for more than two decades, with data going back to 1960, the authors find that in any 10-year period, states without an income tax consistently outperformed those with the highest income taxes.
The Corporate Income Tax: Repeal, Not Reform
In this 2011 Research Spotlight from the John Locke Foundation, Roy Cordato examines corporate taxes in North Carolina and concludes they represent additional layers of taxation and make the common mistake of assuming corporations do not pass on the cost of taxes to their customers: “The corporate income tax imposes a second and even a third layer of taxation on people’s incomes and is hidden, dishonest, and inconsistent with informed decision making in a free and democratic society.”
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News Web site at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].