Big year for ‘big business’

ZONE DEFENSE: Gov. Lincoln D. Chafee’s budget would eliminate the Enterprise Zones program, which awards credits for hiring in one of 10 “distressed” zones in the state. / PBN FILE PHOTO/FRANK MULLIN
ZONE DEFENSE: Gov. Lincoln D. Chafee’s budget would eliminate the Enterprise Zones program, which awards credits for hiring in one of 10 “distressed” zones in the state. / PBN FILE PHOTO/FRANK MULLIN

Gov. Lincoln D. Chafee’s proposed state budget for next year puts big business in the spotlight.
It would slash the state’s corporate tax rate, paid for exclusively by large companies, while scaling back Rhode Island’s biggest big-business, tax-break program.
Although Chafee proposed something similar in his first budget two years ago, that plan also included a variety of tax changes affecting a broad array of activities and industries. The fiscal 2014 budget, by contrast, has no broad-based tax increases and leaves tax structure and programs for individuals and small businesses largely untouched.
Outside of the handful of large corporations expected to lose out on tax breaks, the new budget is bound to be more popular than the sales tax increases that were rejected by the legislature after a revolt by business leaders.
Across the border in Massachusetts, Gov. Deval L. Patrick is taking a dramatically different approach, hiking personal income taxes 1 percentage point while cutting the state sales tax 1.75 percentage points. (The combined plan raises taxes $1.9 billion.)
“The theory is you want to reduce the rates so it helps everyone, and I think we do want to move in that direction,” said Mark Higgins, dean of the University of Rhode Island’s College of Business Administration.
“But the corporate tax change is only about $8 million [in fiscal 2014], so it is not that significant in the context of the economy,” Higgins said. “The bigger thing is what Massachusetts is doing with sales tax and income taxes. I am afraid the legislature might raise income taxes in Rhode Island in response.”
So far, Rhode Island small-business reaction to Chafee’s budget has featured a mix of relief that no new taxes have been proposed, and disappointment that tax cuts are focused on big corporations.
“I’m not completely satisfied, but it is moving in the right direction and holding the line on taxes,” said Grafton H. “Cap” Willey IV, managing director of Providence accounting firm CBIZ Tofias Inc. and a member of the Smaller Business Association of New England. SBANE has proposed a capital gains tax holiday for startups to spur innovation. R.I. House Republicans have proposed eliminating the state sales tax entirely.
By all appearances, the business winners in the Chafee budget are the roughly 1,700 companies who pay the state’s 9 percent corporate tax, but don’t benefit from one of the incentive programs being scaled back or terminated.
The vast majority of Rhode Island companies, 40,800 in tax year 2011, only pay the $500 corporate minimum fee, according to figures from the R.I. Division of Taxation.
For the companies paying the corporate tax, Chafee’s budget would reduce the rate their earnings are taxed from 9 percent now, to 8 percent starting in January 2014, 7.5 percent in January 2015 and 7 percent in January 2016. The rate cut is projected to cost the state $8 million in the fiscal year starting in July, $21.1 million in fiscal 2015 and $31.1 million in fiscal 2016, and by fiscal 2017, the first fiscal year in which the 7 percent rate is in full effect, the state would stand to lose $36.7 million compared with the current rate.
Rhode Island is now the only New England state with a 9 percent rate. Connecticut corporations currently pay 7.5 percent and Massachusetts charges 8 percent.
Of course, not all Rhode Island companies subject to the corporate tax pay 9 percent, and Chafee has proposed paying for part of the rate cut by cutting in half the state’s largest tax-incentive program, the Jobs Development Act.
The Jobs Development Act awards companies a quarter-percentage point cut in their corporate tax rate for every 10 new jobs they have created, if they have fewer than 100 to start with, or for every 50 new jobs if they started with more than 100. The rate reductions, once approved, are permanent until the company lays off any of the new hires. The maximum decrease in a company’s income tax rate is 6 percentage points, meaning that the recipient of the break could potentially be paying state income tax at a rate of 3 percent. In fiscal 2012, Jobs Development Act tax breaks went to eight companies and were worth $16.4 million in lost revenue, nearly half of the $34.5 million in total credits and incentives for all programs that year.
Of that $16.4 million, $15.4 million went to CVS Caremark Corp., which has been the largest recipient of Rhode Island tax incentives since at least fiscal 2008, the first year the Division of Taxation began publishing a comprehensive tax-credit report.
The Jobs Development Act was created by lawmakers in 1994 and since then no state agency or committee has conducted an analysis summarizing the program’s historical costs and benefits, according to the Division of Taxation.
Chafee proposed eliminating the program entirely in his fiscal 2012 budget proposal, but the legislature rejected that idea.
In Chafee’s current proposal, the Jobs Development Act credits would be reduced by one quarter in January 2014 and by half for tax years thereafter.
According to Peter Marino, director of the R.I. Office of Management and Budget, when the proposal was fully phased in, Jobs Development Act tax breaks would still be calculated from the old 9 percent rate, even though they would be worth half as much.
For example, the 2.25 percent rate cut approved for Alexion Pharmaceuticals last year, which would have cut the company’s rate to 6.75 percent, would instead drop it to 7.31 percent in 2014 and just under 8 percent in 2015. Under that scenario, Alexion would be better off paying the 7 percent for all corporations.
The Connecticut-based company, which received the break for hiring 113 people since it bought and renovated a Smithfield factory in 2006, is not happy about the proposal.
“We are deeply disappointed – the act is an effective tool for jobs creation,” said Irving Adler, director of corporate communications at Alexion. “It was a critical factor in our decision to remain in Smithfield. The changes proposed directly affect our ability to grow and invest in Rhode Island.” Asked whether paying 7 percent instead of 6.75 percent would really cause a company that invested $200 million in a new factory to move jobs elsewhere, Adler said those kinds of calculations have not been made yet.
In an email about the budget proposal, CVS Caremark spokesman Michael DeAngelis said the company “applauds” Chafee’s focus on the corporate tax rate, but views the Jobs Development Act as “an important tool for bringing more business to Rhode Island and making it an attractive place for us to continue hiring in the future.”
The Chafee budget projects savings of $10.3 million from trimming the Jobs Development Act when the plan is fully implemented in fiscal 2016.
Behind CVS, the company that received the second-most tax relief under the Jobs Development Act in fiscal 2012 was General Dynamics Electric Boat, which received $602,160.
An Electric Boat spokesman declined to comment.
The other, much smaller, tax-incentive program slated for elimination under Chafee’s budget is the Enterprise Zones program, which awards credits for hiring in one of 10 “distressed” zones in the state.
In fiscal 2012, 20 companies received enterprise-zone credits worth a combined $701,935. Pass-through companies had already been made ineligible for enterprise-zone credits, raising a fairness concern for small businesses.
Enterprise-zone credits were part of the package the state used to attract British medical-alert company Tunstall to Pawtucket last fall.
Requests for comment through Tunstall’s local public relations firm, Providence-based (add)ventures, did not receive a response.
The PR firm itself received $7,500 in enterprise-zone credits in fiscal 2012, but is an S corporation and now does not receive the credit, said Executive Vice President Mary Sadlier.
As for how the proposed rate reductions and incentive cuts for big business will impact the majority of smaller businesses, Willey at SBANE said every large company attracted helps smaller ones.
“We have to be competitive for large business because they spin off services to smaller ones,” Willey said. •

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