December 2, 2009

A Corporate Tax by Any Other Name

Justin Katz

So, Governor Carcieri and his Director of the Department of Revenue, Gary Sasse, have switched from a "gross receipts tax," which would essentially be an expanded and hidden sales tax, to a "net receipts tax," which Providence Journal reporter Neil Downing describes as follows:

Under a net receipts tax, a corporation generally would pay tax on its revenue after claiming only a limited number of deductions (the number and nature of which have not been set). Thus, more of a business's income would be subject to Rhode Island tax. But a lower tax rate would apply, Sasse said. ...

Sasse also said that any such plan would not harm the many small businesses that are organized as "pass-through" entities, such as limited liability companies and subchapter S corporations.

Sounds a bit like an expanded corporate income tax, no? Downing reports that the plan would be to "eliminat[e] at least one other tax, such as the state's corporate income tax, the sales tax or the personal income tax"; if it's not the first that goes, then Rhode Island would be killing its economy, not helping it. If it is the first that goes, it would essentially be a name change with the promise of future increases. Once the deductions are eliminated through the trick of changing what we call the tax, the General Assembly will find it a relatively simple matter to ratchet the rate up.

Suppose that the income tax is what's eliminated. Corporate entities will have an irresistible incentive to organize as pass-through entities, which will limit their ability to expand and ultimately undermine estimates of the revenue that the state receives from the "net receipts tax," because more income will flow to the untaxed channel. (Except for the restraint on expansion, that's not an unattractive outcome, but it will ensure the continuation of continual budgetary shortfalls.)

And if it's the sales tax, we're left with a gimmick that increases prices and shifts the tax burden to businesses from out-of-state consumers.

The faster Rhode Island's leaders come to the realization that there is no easy way out of this mess, the better off we'll all be. Taxes have to be cut, not reconfigured. Regulations have to be relaxed. And mandates have to be rescinded. Start selling that message now, because it's going to be a long, hard fight. Tossing out a new taxation buzz-phrase every few months merely delays decisiveness and confuses the public.

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1) One suspects that New Hampshire doesn't have a "gross receipts tax."

2) Look at your electric bill. Note the line item for "gross receipts tax" above the bottom line of what you must pay.

3) Will this be applied to services????

A better name might be the "gross sales tax" for, as Justin pointed out, ultimately it's paid by the consumer - whether applied to purchases, services, or both.

One wonders if this is a stealth way of taxing businesses experiencing losses (since it's on gross, not net) AND/OR extending a de facto sales tax to services.

More tax increasing and rearranging the deck chairs instead of addressing the real problem -- RI government spends far, far too much on redundant and unnecessary positions (via patronage and union featherbedding) and welfare.

Alas, this is why Rhode Island's future is very, very bleak.

Posted by: Ragin' Rhode Islander at December 2, 2009 11:24 AM

"Tossing out a new taxation buzz-phrase every few months merely delays decisiveness and confuses the public."

"confuses the public" is right. There is a viable economic theory that businees do not pay any tax, they simply pass it on to the consumer. I wonder why the ProJo hasn't pointed this out.? There seems to be a public attitude that we are going to "sock it to GM". GM? GM?

Posted by: Warrington Faust at December 2, 2009 12:29 PM

Enactment of a "gross receipts tax" will be quickly followed by my emigration from Rhode Island to an American state.

Posted by: BobN at December 2, 2009 1:02 PM

The only discussion of taxes, in this environment, should be about lowering them. All of them.

Raising taxes, ANY tax, will only make matters worse.

The Governor, of all people, should know better.

Posted by: George at December 2, 2009 2:14 PM
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