February 11, 2008

Rhode Island's Corporate Tax is an Income Tax

Monique Chartier

Effectively, for nine out of ten corporations. Source: Senator Steve Alves.

Let's remember that the corporate tax (already $500 per year) is assessed regardless of profit generated by that corporation. If the corporation lost money, this tax must still be paid. So if, as Senator Alves asserts, 94% of corporations in Rhode Island are paying the minimum corporate tax, it's a good bet that most if not all are losing money or at best, breaking even. That means that the owners of over 90% of Rhode Island's corporations are reaching into their own pockets to pay this tax.

Reviewing once again Senator Alves' comments at the Greater Providence Chamber of Commerce's legislative luncheon:

Of the 45,840 corporations registered in Rhode Island, 94 percent pay only $500 in annual corporate income taxes to the state

The modifier "only" is inaccurate from the jump. Most Rhode Island corporations are not Coca Cola. So $500 is a lot of money. More importantly, it is grotesque for a legislator to imply that corporations are not paying their fair share when the basis of his accusation is a mandatory minimum tax payable regardless of profits. Essentially, Senator Alves is saying, "Look, they're paying $500 (that we're forcing them to pay). That must mean they can afford to pay more."

Senator Alves has confused the tax gun with affordability. Just because someone is forced to pay doesn't mean that they can afford to pay. Or that another waggle of the tax gun ("cough up more dough") is the correct course of action for a state which does not lack for revenue and already ranks dead last for business tax climate.

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S corporations and LLCs are special cases where there is no corporate level profit or loss. The profit or loss flows through to the business owners and is taxed as personal income. It is absolutely disingenuous of Alves to suggest that somehow these businesses - and their owners - are getting off scot free - he damn well knows better.

Sub S's and LLCs have limits on number of owners, aren't publicly traded, but do shield the owners from personal liability, just like a grown up C corporation does for its shareholders.

This is a franchise tax. As you say, it is not an income tax.

Posted by: chuckR at February 11, 2008 3:55 PM

I can assure Senator Alves that this is not the panacea he may think. I have a "company" that had very little business in 2006 and none in 2007. I have kept it "open" in the hopes that I may do more with it in the future. I will say that the $500 price of keeping a dormant company alive was already making me think about closing it. I can assure you that $1000 will seal the deal That's it, no more money for the state. Thank you Senator Alves for making my decision that much easier.

Posted by: Mike Cappelli at February 11, 2008 5:44 PM

Besides this being among the most "regressive" taxes possible (I thought liberals didn't like regressive taxes?), it is only the latest in a very long line of disincentives to have or own a business based in Rhode Island.

For that amount of money, you could incorporate in a business-friendly place like Delaware, or just file online for incorporation somewhere else. Do we want "Anywhere but Rhode Island" to be our new state motto?

What I think the not as yet indicted Senator needs to realize, is that not all "corporations" are brick and mortar operations. Most are one man (or woman) operations -- and the vast majority are just regular people like us trying to make a living in an increasingly unlivable business climate. They need encouragement; not another burden.

PS My family made a decision a few years back to move our business over the state line into Massachusetts, after having been in RI for around 50 years or so. We've had rough times and good times over the years, but "the way Rhode Island works" was enough to make the difference (I'll tell you about being solicited for bribes another time). Although it is a physical business, moving less than two miles for big tax savings (income tax, sales tax, property tax, TDI -- for starters), while inconvenient, was not a huge issue. Anyone who's visited Seekonk, and compares it to East Providence, knows exactly what I'm talking about. When "Taxachusetts" is a relative tax haven, we've got serious issues here.

Posted by: Will at February 11, 2008 8:32 PM

The trend has been clear for some time. I ended my Rhode Island "S" corporation last year and will be starting over in a western state this year or next. Its alternate minimum tax is 1/10th of Rhode Island's, with other taxes also lower while services (like tourist promotion and business help and statistics)are tremendously better.

Posted by: Barry at February 11, 2008 10:36 PM

We also closed an "S" corporation last year. Moved out of state. We have one more company in RI, but I am seriously thinking of incorporating in Delaware. I don't need it to be in RI. I will not pay the $1000. I will move the company elsewhere.

Posted by: Susan M at February 12, 2008 4:26 PM
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