October 3, 2007

Roland Benjamin: "It is time for a bold solution that eliminates the corporate income tax in Rhode Island"

Engaged Citizen

Massachusetts Governor Deval Patrick visited Rhode Island last evening to discuss his state's triple-casino proposal, but Roland Benjamin thinks there are better ways for Rhode Island to compete with Massachusetts than by expanding gambling here…

Quite a stir regarding the “not quite dead yet” Casino discussion. The debate reopens in response to rumblings from Massachusetts discussed in the Projo here:

Murphy said gambling revenue critical to the state budget, which is projected to run a deficit for the next few years, will drain away to Massachusetts without action to protect Rhode Island’s slot parlors.
It’s doubtful that the primary intent of the Speaker is to “protect” the slot parlors. It is more plausible that the revenue streams to the General Fund are more coveted. After all, that’s what they are looking for in Massachusetts.
Patrick estimates the casinos would create 20,000 permanent jobs and raise $400 million in new annual revenues for Massachusetts.
So the competing power brokers in the two states are looking to tap into a stream flowing largely into Connecticut, with some residual to Lincoln and Newport. The arguments always reference jobs and economic impact. But it is important and non-trivial to note that these casinos thrive off of wealth generated in other segments of the economy. They create no new wealth for anyone save a handful and end up effectively taxing the entire gaming population.

Instead of taking the Me-Too approach, Rhode Island could view this as an opportunity to take an aggressive competitive stance with neighboring New England states. Why not go after an economic sector that creates wealth instead of one that consumes it? This would be a tremendous challenge given the current business climate of the state and the country for that matter.

According to this KPMG study, the United States compares somewhat horribly to other countries with respect to corporate income tax rates. Of the 60 countries represented, the U.S. has a marginally lower rate than only 5 countries before adding in any state income taxes. Taken in conjunction with this study from the Tax Foundation, Rhode Island ranks worst among states in business tax climate. Add our own corporate income tax rate to the federal rate and the Rhode Island business tax climate is the worst on the planet.

It is time for a bold solution that eliminates the corporate income tax in Rhode Island. After all, corporate income taxes are nothing more than an indirect tax on the employees working for the affected corporation or its owners. Dollars flowing to stakeholders (employees, shareholders, customers, etc.) will be taxed anyway, and dollars staying in the organization will be invested to generate more wealth for more people. Since corporations are far more able to move operations and capital to tax friendly regions, the brunt of this impact is felt by the actual workforce according to this CBO analysis.

Given those values, when capital is perfectly mobile and the tax does not affect the world prices of traded goods, domestic labor bears slightly more than 70 percent of the long run burden of the corporate income tax.
Because we do not have a competitive climate when compared to neighboring states, the effect on the workforce is even greater as many find employment in Massachusetts or Connecticut. But if Rhode Island were to slash the corporate income tax rate to zero, we would compete across ALL economic sectors, not just gaming. We would eat their proverbial lunch in attracting wealth creating business to our state. We would not have to worry about negotiating revenues from slot machines. Until we do something bold, every business that starts up or expands in Massachusetts is a missed opportunity here in Rhode island.

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About 15 to 20 years ago Ireland slashed its corporate tax rates ( down to about 10 % I believe ). Ireland is now known as the "Celtic Tiger" because its economy has the most vitality in Europe. I support Roland's proposal and I am calling for an Irish Revolution in Rhode Island !

Posted by: SeanO at October 3, 2007 3:25 PM

Stop making sense!

We rely upon class warfare and resentment, and demonizing "corporations" is a key element of our shtick. A vibrant economy and growing prosperity threatens our market share.

So stop it.

Signed,

AFL-CIO
The Poverty Institute
The Democrat Party of RI

Posted by: Ragin' Rhode Islander at October 4, 2007 10:02 AM

Wait a sec, Ragin'. It was the Democrats who cut taxes on the rich. If anything, Murphy, Montalbano and Alves are kissing up to corporations.

Posted by: rhody at October 4, 2007 11:12 AM

Oh, c'mon Rhody. Those kind of facts only confuse the issue. Get with the program: Democrat=liberal=union=spendthrift=america hater=bad, and that's that.

Posted by: Thomas at October 4, 2007 12:28 PM

After making a snide comment above, I thought I'd drop a belated note on the substance of the post. I thought the post was interesting enough to follow up on Mr. Benjamin's sources, and found something curious.

Here is Mr. Benjamin's argument that we should eliminate corporate income taxes in RI:

"According to this KPMG study, the United States compares somewhat horribly to other countries with respect to corporate income tax rates. … Taken in conjunction with this study from the Tax Foundation, Rhode Island ranks worst among states in business tax climate. Add our own corporate income tax rate to the federal rate and the Rhode Island business tax climate is the worst on the planet."

This leads Mr. Benjamin to his conclusion:

"It is time for a bold solution that eliminates the corporate income tax in Rhode Island. "

Now, the Tax Foundation does indeed rank RI as having the worst business climate in the country. When you look at the index for corporate taxes separately, however, RI ranks at 35th.

It turns out that corporate taxes account for only 19% of the total business climate index calculated by the Tax Foundation. What drags us from 35th down to 50th? That would be our individual income tax (48th), unemployment insurance tax (50th) and our property tax rates (50th). So, maybe eliminating corporate taxes is not the quickest way to get out of the last slot on the Tax Foundation's list.

Of course, there's another question: how does the Tax Foundation list relate to a state's economic well-being? Among the states ranking below us on corporate taxes are AR, CA, DE, IA, KS, KY, MA, ME, MI, MN, NH,NJ, NM, OH, & PA. Interestingly, those states, all had better economic growth than RI in 2006 except MI, NH, OH and PA,
(http://www.bea.gov/newsreleases/regional/gdp_state/gsp_newsrelease.htm) so I think it's not clear how much of RI's lackluster performance to attribute to corporate taxes.

For another perspective on all of this, I hopped over to the Poverty Institute website. Their data is a little old (2003) but since the Tax Institute does comparisons with 2003, I could verify that the relevant numbers haven't changed much. Here are some figures from their report which compare MA and RI.

Corporate income taxes as a share of state revenue: MA 5.5% (rank 10th highest) RI 1.3% (rank 44).

As a percent of Gross State Product: MA .4% (7th), RI .16% (38th)

As a percent of State personal income: MA .33% (11th), RI .16% (46th)

By the way, in 2006, RI's state GDP grew 1.8% while MA's grew 2.9%, despite a dramatically worse ranking on corporate taxes. (The Tax institute raked MA ranked 47th on corporate taxes, compared to RI's 35 rank.) Wyoming, which the T.I. gave it's #1 ranking, had a 2.2% increase in GDP in 2006…..worse than MA's 2.9%)

Bottom line: RI's corporate taxes are not the highest in the nation, and lots of states with higher tax rates perform better economically, including our neighbor to the north.

(Before one of the usual suspects chimes in about the "poverty pimps" at the Poverty Institute, please note that the Tax Foundation is ideologically driven and will never publish anything in favor of taxes on corporations, and Mr. Benjamin's corporation presumably stands to benefit directly from his proposal as well. So let's just skip the ad hominems entirely and focus on getting the numbers right)

Posted by: Thomas at October 6, 2007 12:36 PM
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