Long-term Strategy to Improve Rhode Island’s Business
Climate
Rhode Island’s lagging economy demands focused attention. Recent Department of Labor and Training labor
force reports suggest that while the number of employed Rhode Islanders is recovering, the size of the state’s
labor force continues to decline by relatively large margins, and its unemployment rate is still one of the
high-est in the nation. Furthermore, the state’s economic growth rate continues below levels necessary to deem a
recovery from the
Great Recession
. Most worrisome are the unknown fiscal impacts of short– and long-term
policy decisions relating to implementation of the Affordable Care Act, state revenue losses from table gaming
in Massachusetts, and federal spending reductions .
To address these challenging economic headwinds, a diverse coalition of business trade associations, including
several of the state’s Chambers of Commerce, has set out to study Rhode Island’s economic challenges and
provide suggestions for making the business climate more competitive. Members of this coalition include:
Associated Builders and Contractors of Rhode Island- Robert J. Boisselle, President Central Rhode Island Chamber of Commerce- Lauren E.I. Slocum, President/CEO
Greater Providence Chamber of Commerce- Laurie White, President Greater Westerly/Pawcatuck Area- Lisa Konicki, Executive Director
East Bay Chamber of Commerce- Mark G. DeVine, Chairman
East Greenwich Chamber of Commerce- Stephen M. Lombardi, Executive Director East Providence Area Chamber of Commerce- Laura A. McNamara, Executive Director
National Federation of Independent Businesses- Bill Vernon, State Director Newport County Chamber of Commerce- Jody Sullivan, Executive Director
North Central Chamber of Commerce- Deborah J. Ramos, President North Kingstown Chamber of Commerce- Martha Pughe, Executive Director Northern Rhode Island Chamber of Commerce- John C. Gregory, President/CEO
Oil Heat Institute of Rhode Island- Julie Gill, Executive Director Rhode Island Builders Association- John V. Marcantonio, Executive Director
Rhode Island Hospitality Association- Dale J. Venturini, President/CEO Rhode Island Independent Contractors & Associates- Matthew R. Olson, President
Rhode Island Lumber and Building Materials Dealer Association- Jeff Keller, Manager of Legislative and Regulatory Affairs Rhode Island Manufacturers Association- William McCourt, Executive Director
Rhode Island Mortgage Bankers Association- Deborah A. Imondi, President
Rhode Island Small Business Economic Summit- Gary Ezovski, Regulations Committee Chairman Rhode Island Small Business Economic Summit- Grafton Willey, Tax and Budget Committee Chairman
Rhode Island Society of Certified Public Accountants- Robert A. Mancini, Executive Director
Smaller Business Association of New England (SBANE)- Robert Shea, Chairman; Ralph Coppola, Chair SBANE RI Govern-ment Affairs Committee
Southeastern New England Defense Industry Alliance – Molly Donohue Magee, Executive Director Southern Rhode Island Chamber of Commerce- Elizabeth Berman, Director of Mission Development
Utility Contractors Association of Rhode Island– Timothy J. Walsh Executive Director
This document, prepared by the Rhode Island Public Expenditure Council on behalf of this coalition, is
intend-ed to serve as a statement of this coalition’s policy priorities for improving Rhode Island’s competitiveness and
cost-of-doing-business. This coalition recognizes that there will be no one act, or “game changer,” that will
improve the state’s economy. Rather, stakeholders must accomplish a variety of reforms across multiple
sub-ject areas including, but not limited to taxes, education, regulatory, and employer-employee relationship
re-form.
Tax Reform
Rhode Island consistently receives low scores in
national business climate rankings’ tax burden
cate-gories. The coalition believes Rhode Island’s tax
sys-tem needs to be more competitive. The coalition
suggests tax reform in the following subcategories:
Corporate Tax Reform:
The RI corporate tax rate of
9.0 percent is becoming an outlier as our
neigh-boring states of Massachusetts and Connecticut
are reducing their corporate tax rates.
Unemployment Tax (UI) and Temporary Disability
Insurance (TDI) Reform:
Rhode Island is one of the
few states that have a state-run TDI system. It is
costly to employees and appears to be overused
by a large number of the participants when
com-pared to other states.
Sales
and
and
and Use Tax Reform:
Rhode Island’s 7.0 percent
sales tax rate is tied with four other states
(Indiana, Mississippi, New Jersey, and Tennessee)
for the second-highest statewide rate in the
na-tion. Of the New England states, Rhode Island has
the highest state sales tax rate. Connecticut’s 6.35
percent state rate is the next highest, followed by
Massachusetts’ 6.25 percent state rate.
Property Tax Reform:
RI ranks 5th in the US for state
and local property tax revenue collections per
$1,000 of personal income.
Estate Tax Reform:
Currently the RI estate tax has a
“cliff effect ” when the current exemption is
reached. There is an opportunity to expand the
exemption amount to all estates—not just those
under the set exemption level .
Tax Incentives for Investments in Rhode Island
Busi-nesses:
Rhode Island currently offers tax incentive
programs for various types of economic
develop-ment purposes.
Tax Administration and Technical Corrections:
Ad-ministration of the RI tax system often places
un-Suggested areas for reform
include:
Reduce corporate income tax rate over time, so that it is more in line with Connecticut’s and Massachusetts’ rates.
Analyze the forthcoming two year combined reporting study to determine whether a form of combined reporting results in a more competitive method of taxation on multi-state entities.
Conduct a complete, full system review of RI's UI and TDI system for
competitiveness and potential reforms. Repeal recent TDI expansion.
Examine ways to make the sales tax system more competitive through rate reductions or further elimination of taxes on business inputs.
Monitor findings of Sales Tax Study Commission.
Promote ways to eliminate the estate tax “cliff.”
Review RI’s current tax incentive offerings for effectiveness.
Reintroduce and modify the
Manufacturing Industry Revitalization Act.
Make technical corrections to the state’s tax code.
Maintain property tax cap (S3050). See the Appendix for a complete listing of tax recommendations.
Education Reform
Rhode Island’s public education system plays a critical role
in preparing its workforce. This coalition suggested
educa-tion reform in the following subcategories:
Common Core Standards:
In 2010, Rhode Island joined
45 other states in adopting Common Core State
Edu-cation Standards (CCSS). This initiative was state-led,
and it identified one set of educational curriculum
standards for K-12 in subjects such as math, and
Eng-lish.
Testing/Assessment Tied to Diploma System:
In
Febru-ary 2013, Commissioner Deborah Gist introduced
new graduation requirements. Starting with the 2013
graduating juniors, high school graduates must score
partially proficient on the NECAP to graduate.
Higher Education:
Access to higher education can lead to
a more educated workforce commanding more
skilled jobs with higher salaries.
Race to the Top:
Over the past few years, Rhode Island
has won a $75 million Race to the Top Grant, and a
$50 million Race to the Top Early Learning Challenge
Grant.
Teacher Accountability and Outcome-based
Measure-ment:
Under Commissioner Gist’s leadership, Rhode
Island implemented a more stringent method for
evaluating teachers and principals. Criteria for
evalu-ations include classroom observevalu-ations, proposed
cur-riculum, professional responsibilities, as well as
stu-dent growth and achievement (which is measured
through testing and student learning objectives).
Teachers are measured on a four-tier scale ranging
from “highly effective” to “ineffective.”
Suggested areas for reform
include:
Monitor and support the state’s implementation of the Common Core State Standards to determine impact on student performance, and whether current resource levels for implementation are sufficient.
Stand by the Commissioner’s decision to emphasize accountability in the K-12 education system.
Conduct a baseline analysis of Rhode Island’s public higher education expenditures and performance. This analysis should review the state’s system for enhancements in efficiency and effectiveness.
Consider tying state higher education funding to student outcomes and reward institutions that make progress.
Monitor the implementation of federal Race to the Top funding for effectiveness.
Regulatory Reform
Rhode Island’s regulatory code is consistently cited as an
ob-stacle to doing business. Of utmost importance is ensuring
that new regulations are not more burdensome or complex
than existing regulations. This coalition suggested additional
regulatory reform in the following subcategories:
Ongoing Regulatory Reform Efforts:
The state’s Office of
Regulatory Reform (ORR) is charged with overseeing
the regulatory reform process passed by the General
Assembly and signed by Governor Chafee. ORR
re-cently has submitted regulatory look backs, which
in-cluded several recommendations for reform.
Electronic Permitting:
The current process for regulatory
compliance is still somewhat arcane and archaic.
There has been a shift towards electronic or online
permitting capabilities across various agencies, but
not uniformly.
Tort Reform:
Rhode Island currently permits the award
of both pre- and post-judgment interest on damage
awards in civil suits. Rhode Island’s interest rate of
12% is among the highest in the country and begins to
run from the earliest possible time. This makes
Rhode Island out of the mainstream with other states
and with the other New England states.
Suggested areas for reform
include:
Support the recommendations in the ORR’s regulatory look backs, including providing increased opportunities for business community participation in ORR process.
Enhance electronic permitting capabilities and set penalties for non-compliant government regulating entities.
Consider legislative proposals to develop a Joint Legislative Committee of the Repealer, which would compile suggestions for the repeal of statutes, regulations, and executive orders that are considered archaic and out of date.
To bring Rhode Island into the mainstream, consider proposals to make interest accrue from the date of the filing of the civil action. In light of economic conditions, consideration should also be given to lowering the interest rate.
Employer-Employee Relationship Reform
Rhode Island’s labor market faces serious structural
chal-lenges. Policymakers should seek reforms that accentuate
the existing workforce’s strengths, while also preparing for
the workforce tomorrow. Along these lines, legal and
reg-ulatory requirements of employers should be as clear and
predictable as possible.
Holiday Sustainability and Flexibility:
Rhode Island has
not yet adopted a policy in which private companies
can be flexible with providing state and federal
holi-days (without having to pay overtime).
Prevailing Wage Requirements:
Prevailing wage is the
hourly wage paid to contract workers for contracts up
to a certain level. Rhode Island currently allows
pre-vailing wage laws to set in for contracts above $1,000,
which is a lower threshold than several other states.
For example, Connecticut’s threshold is $400,000 for
new construction or $100,000 for remodeling.
Project Labor Agreements:
A project labor agreement is
when the government awards contracts for public
construction projects exclusively to unionized firms.
Approximately 18 states have enacted legislation
pro-hibiting these types of agreements.
Apprenticeship Requirements:
Apprenticeship programs
have historically allowed potential employees to
de-velop important workforce skills, predominantly in
the trade industries. However, recent legislation
would have required state, municipal, and
quasi-public trade projects to rely on a particular proportion
of apprenticeship work.
Independent Contractors:
The use of independent
con-tractors is effective in a diverse set of business
mod-els. However, proposed changes to Rhode Island’s
current method of classifying employees and
inde-pendent contractors has the potential to weaken
reg-Suggested areas for reform
include:
Reintroduce legislation to allow employers the flexibility to provide holidays to their employees.
Study competitive states’ prevailing wage law thresholds and consider increasing Rhode Island’s threshold.
Consider various reform measures including the ban on project labor agreements in Rhode Island.
Resist apprenticeship
requirements for municipal and quasi-public projects, and explore ways to strengthen traditional and nontraditional career-readiness programs.
Support proposals to increase oversight of employee
classification, and resist proposals that would eliminate the spirit of the IRS twenty-point factor employee classification test.
Appendix
Corporate Tax Reform:
Corporate tax reform should address the following action items:
Examine ways to reduce the rate to make it more competitive with Massachusetts’ and Connecticut’s rates.
Analyze the forthcoming two-year combined reporting study to determine if a form of combined re-porting results in a fairer method of taxation on multi-state entities. Concerns should be granted to struc-turing a tax system that encourages economic development within the state and does not unduly hurt ma-jor employers.
Review all corporate tax credits and incentives to determine if they are appropriate and are producing the economic development goals that they were intended to produce. Consider elimination and/or sun-setting of corporate tax credits.
Since a large number of business entities in RI are pass-through entities that pay taxes at the individual level, and the state underwent individual income tax reform in 2010 which eliminated many tax credits against the individual income tax, consideration must be granted to creating tax parity for all business enti-ties.
Consider reforming the RI minimum corporate tax of $500.
Eliminate the corporate franchise tax, which hinders the development of high tech firms that often re-quire large numbers of shares for investors and stock options for employees.
Unemployment Tax and Temporary Disability Insurance Reform:
Rhode Island’s unemployment tax is paid to state workforce agencies and is used for benefits paid to eligible unemployed workers. It is an “experience rate,” in which employers with a higher percentage of former employees receiving benefits pay a larger amount of money into the Unemployment Insurance pro-gram. Rhode Island’s persistently high unemployment has strained its unemployment insurance trust funds. Policymakers should review to ensure that Rhode Island’s UI system is not overly complex or bur-densome, and that the state’s UI minimum, maximum, and new employer rates are competitive with other states. Similarly, Rhode Island’s taxable wage base should be reviewed for competitiveness.
TDI needs to be reformed and possibly privatized.
Sales and Use Tax Reform:
General sales and use tax revenue is the second-largest contributor to general revenues in Rhode Island. Nationally, sales tax rates range from a low of 2.9 percent in Colorado, to a high of 7.5 in California. In addi-tion to these state rates, approximately forty-six states allow the use of local opaddi-tions sales tax rates at the at the county or municipal level. When state and local rates are combined, some states’ overall sales tax rates top 9.0 percent. For example, Tennessee and Arizona have the highest combined rates (9.44 and 9.18 percent, respectively). Currently, Rhode Island’s 7.0 percent sales tax rate is tied with four other states (Indiana, Mississippi, New Jersey, and Tennessee) for the second-highest statewide rate in the nation. Of the New England states, Rhode Island has the highest state sales tax rate. Connecticut’s 6.35 percent state rate is the next highest, followed by Massachusetts’ 6.25 percent state rate. Vermont is the only New Eng-land state with a local option sales tax, with a combined rate 6.14 percent. New Hampshire does not have a state or local sales tax.
Specific action items for reform include:
Consider ways to reduce Rhode Island’s sales tax rate to be more competitive regionally and nationally.
Monitor findings of Sales Tax Study Commission.
Review Rhode Island’s sales tax exemptions in comparison to neighboring states. While these modifica-tions are typically used to offset the regressive nature of the sales tax, too narrow of a base creates prob-lems (leaving the tax more vulnerable to economic shocks).
Appendix
Estate Tax Reform:
Currently the RI estate tax has a cliff effect:
When a taxpayer reaches the exemption limit, the tax is then applied to the full estate. There is an oppor-tunity to expand the exemption amount to all estates—not just those under the set exemption level. With the federal government expanding its exemptions to over $5 million, states are focusing on potential estate tax changes. Many states have eliminated their estate taxes. The RI exemption is among the lowest in the country.
At a minimum, the estate tax cliff should be considered for change including the eliminated over time .
The exemption should be raised and consideration should be given to eliminate the estate tax all together.
Tax Incentives for Investments in Rhode Island Businesses: Suggested changes include:
Rhode Island’s current tax incentive programs should be analyzed for their effectiveness in making Rhode Island a more competitive place to do business.
Reintroduce the Rhode Island Manufacturing Industry Revitalization Act, which establishes a manufactur-ing industry revitalization program for companies interested in undertakmanufactur-ing major capital investments in Rhode Island. Under this program, a manufacturing company must agree to: make a capital expenditure (or a series of capital expenditures) above an established minimum within two years following the effective date (and undertaken within a 10 year period); employ at least a set number of participants full-time em-ployees in excess of its stabilized employment in each calendar year; and cooperate in the development of a workforce training program in collaboration with other stakeholders.
Tax Administration and Technical Corrections: Suggested changes include:
Eliminate the requirement to file a tentative income tax return for pass-through entities to obtain a letter of good standing for the sale of business assets. The requirement is statutory, but provides no benefit for the state or the taxpayer because the minimum tax of $500 is all that would be remitted. It incurs unneces-sary professional fees for the taxpayer. A simple letter of explanation to the tax administrator of the transac-tion should be sufficient.
Correct an error in the calculation of the RI Net Operating Loss (NOL) that would allow companies to car-ryback their federal NOL without losing the ability to carry forward their RI NOL.
Correct an error in the personal income tax laws that allow for a modification for federally taxed income for which the taxpayer did not receive a state tax benefit. The primary adjustment for this problem is the state taxation of state income tax refunds for which the taxpayer did not receive a tax benefit for the prior year deduction. This is because we eliminated the state itemized deductions after the 2010 tax reform legis-lation.
Reduce the interest rate charged on overdue or amended assessment taxes from the current rate of 18.0 percent to the federal rate charged by the Internal Revenue Service. The interest assessed on disputed claims can exceed the assessments if there is a delay in settlement. The current rate is a throwback to a peri-od of time when the commercial rates of interest exceeded the rates charged by the state. A rate tied to the market rate would be fairer.
Establish a statute of limitation on the ability to collect past due assessments of 10 years (similar to what the federal government does). Currently there is no statute of limitation in the state of Rhode Island.
