The Governor’s Tax Policy Strategy Workgroup today released its final report on long term tax policy reform for Rhode Island. The mission of the workgroup was to develop proposals for tax policy reforms that would give Rhode Island a “competitive advantage” in recruiting firms to the state and expanding the operations of firms already located in Rhode Island.
“I extend my deepest gratitude to the members of the Workgroup,” said Gary S. Sasse, chairman of the Workgroup and Director of the Departments of Administration and Revenue. “Each individual who served did so with professionalism and provided a unique perspective on the issues. Much debate took place and serious consideration was given to any proposal that was put forth, and that is a true testament to the commitment of each member of the Workgroup. This was a long and, at times difficult process, but one that was critical if, as a state, we are going to become more competitive.”
The objective of their study was to develop a long-term strategy to enhance Rhode Island’s tax competitiveness. How the government taxes individuals, businesses, and property owners has a bearing on the economic success of all Rhode Islanders, quite apart from short-term state budget concerns. The Workgroup’s focus was on long-term, structural changes to Rhode Island’s tax system in order to position Rhode Island to take advantage of the economic recovery when it takes hold. Their goal was to study whether and how Rhode Island tax policy has put the state at a competitive disadvantage to other states, how to remedy that situation, and how to remove obstacles to job growth and economic development.
To accomplish the goals and objectives, the Workgroup considered three areas of tax policy:
- Taxes paid by individuals, including an overview of income tax systems and tax credits in the 50 states; a review of the costs and benefits of Rhode Island individual income tax credits; an analysis of the tax treatment of capital gains; an assessment of the role estate taxes play in capital formation and retention; and the trade-offs between expanding the sales tax base in lieu of lowering the sales tax rate.
- Taxes paid by businesses, including an overview of Rhode Island Connecticut, and Massachusetts business taxes; a review of Rhode Island tax credits and rates; a study of alternative business taxes, such as gross receipt taxes; an assessment of combined reporting; an analysis of tax incidence on different organizational structures; and the burden of the sales tax system on business-to-business transactions.
- Taxes on property, including an overview of property assessments and the property tax levy; a review of tax classification and homestead exemption strategies throughout the state, a study of personal and statutory exemptions, tax treaties, and revaluation; a comparison of property taxes and local government finance in Rhode Island, Connecticut, and Massachusetts; and an analysis of location and retention decisions by firms and individuals.
The following proposals are offered for consideration in each of the three areas of taxation: individual, business, and property.
REFORM OF THE PERSONAL INCOME TAX
The Tax Policy Strategy Workgroup proposes that:
- The starting point for the state’s personal income tax system be Federal Adjusted Gross Income (AGI) but that the number of modifications to Federal AGI that are made to determine Rhode Island Adjusted Gross Income be reduced.
- A state determined standard deduction and state determined personal and dependent exemptions, both indexed for inflation, be the only deductions from Rhode Island AGI in determining Rhode Island taxable income.
- The personal income tax system consist of four taxable income brackets with a top marginal tax rate of 5.5 percent.
- Income from capital gains be taxed at ordinary income tax rates regardless of how long an asset has been held before sale.
- The personal income tax system allow only four tax credits: a refundable Earned Income Tax Credit, a Property Tax Relief Credit, a Lead Paint Abatement Credit, and Credit for Income Taxes Paid to Other States.
REFORM OF THE ESTATE TAX
The Tax Policy Strategy Workgroup proposes that:
- The Rhode Island estate tax exemption be raised immediately to $1.0 million and be gradually increased to match the federal estate tax exemption which in 2009 is $3.5 million
Of all aspects of the state’s taxation of individuals, consensus on reform of Rhode Island’s sales and use tax system was the most elusive. The Tax Policy Strategy Workgroup did agree to the following:
- Any expansion in the state’s sales tax base must be accompanied by a reduction in Rhode Island’s sales tax rate and a thorough assessment of the impact of such an expansion on small business
The Tax Policy Strategy Workgroup offers two options for consideration of Business Corporation Tax Reform. The first option would:
- Eliminate the Business Corporation Tax and replace the current Franchise Tax system with a tiered system according to corporations’ net income.
- Reduce the Business Corporation Tax rate to 8.0 percent, eliminate all but three tax credits, and maintain the current Franchise Tax system.
- The Jobs Development Rate Reduction Tax Credit be re-structured to make the eligible employee requirement be full-time employees with benefits and a minimum salary of at least 250 percent of the hourly RI minimum wage, currently $18.50.
- The tax appeals process be restructured by moving tax appeals to a tax calendar in Superior Court. Also, the requirement to pay the tax assessment in full prior to the appeal would be eliminated.
The Tax Policy Strategy Workgroup proposes that.
- The standardization of maximum tangible property and commercial property tax rates in every municipality. Tangible property tax rates should be capped at no more than double residential property tax rates while commercial property tax rates should be capped at no more than 50.0 percent greater than owner-occupied residential property tax rates.
- Motor vehicle excise rates be standardized among municipalities while maintaining or expanding the current state $6,000 vehicle exemption. The standard rate would be $25 per thousand the same rate as Massachusetts.
- Personal property tax exemptions be limited to a fixed 2.0 percent of the total municipal levy. These exemptions should also be limited by a statewide personal income and residency qualifier.
- Current statutory tax exempt standards be retained, however, tax assessors would be given the authority to limit or eliminate the exemption based upon substantial and material unrelated business taxable income, as defined by the Internal Revenue Code, associated with any particular parcel owned by a tax exempt organization.
- The state have greater involvement in the assessment of certain types of property such as public utility or affordable housing property.
- State Aid Incentives be offered to encourage municipalities to comply with state property tax policy.
- The Judiciary establish a state tax court or special calendar in Superior Court to hear commercial real estate and residential property appeals which exceed a certain threshold. Fine tune the appeal process in other ways to expedite the process.
In May 2008, Governor Carcieri appointed twenty-one members to the Tax Policy Strategy Workgroup. These twenty-one members included a broad spectrum of experts. Among them are accountants and attorneys who specialize in tax matters, economists, business and labor leaders, and state and local government officials. The members of the Governor’s Tax Policy Strategy Workgroup are:
|Members of the Governor’s Tax Policy Strategy Workgroup|
|Mary F. Bernard, CPA||Former President, RI Society of Certified Public Accountants Principal, Kahn, Litwin, Renza, & Company|
|Edward F. Cooney||Chairman, Greater Providence Chamber of Commerce Vice President/Treasurer, Nortek, Inc.|
|John J. Gelati||President, RI Association of Assessing OfficersAssessor, City of Providence|
|John Gregory||President & CEO, Northern RI Chamber of Commerce|
|Karen S. D. Grande, Esq.||Partner, Edwards, Angell, Palmer & Dodge|
|Mark Higgins, Ph.D.||Dean, College of Business, University of Rhode Island|
|J. Michael Saul||Executive Director, RI Economic Development Corporation|
|Leonard Lardaro, Ph.D.||Professor, Department of Economics, University of Rhode Island|
|E. Hans Lundsten, Esq.||Shareholder, Adler, Pollock & Sheehan|
|Michael Mazerov||Senior Fellow, Center on Budget and Policy Priorities|
|George Nee||Secretary-Treasurer, RI AFL-CIO|
|H. Peter Olsen, Esq.||Partner, Hinckley, Allen & Snyder|
|Edward P. Pieroni, JD, CFP||Partner, Andsager, Bartlett & Pieroni, LLP|
|Michael Sabitoni||President, RI Building & Construction Trades Council|
|Gary S. Sasse, Chair||Director, RI Departments of Administration and Revenue|
|John Simmons||Executive Director, Rhode Island Public Expenditure Council|
|Robert Tannenwald, Ph.D.||Director, New England Public Policy Center Vice President, Federal Reserve Bank of Boston|
|Patricia A. Thompson, CPA||Tax Partner, Piccirelli, Gilstein, & Company, LLP|
|Al Verrechia||Chairman of the Board, Hasbro, Inc.|
|Robert A. Walsh, Jr.||Executive Director, National Education Association RI|
|Grafton H. Willey, IV||Managing Director, CBIZ Tofias Former Chair, National Smaller Business Association|