The state of Rhode Island has one of the highest corporate tax rates in the nation. This works against us mainly in two ways.
First, it discourages businesses both big and small, new and old from setting up shop in our state. Why pay 9% in Rhode Island when they can pay 6% in Georgia or 7.1% in New York?
Secondly, National or International Companies use things like "Licensing Fees" and other such work arounds in order to pay taxes elsewhere. They do this by having a parent office, in say... South Carolina, charge the branch in Rhode Island Fees for using it's name and logo.
That fee is now an expense and it directly reduces the profits made in Rhode Island and increases the profits of the Parent office in South Carolina. Due to this practice the Business now reports a smaller amount to Rhode Island with our 9% Corporate Tax rate but reports a higher amount to South Carolina at it's much lower 5% Corporate tax rate, thereby reducing the Business's overall state tax burden.
Specific to this example, Delaware does not tax on "Intellectual Property" which a logo or Trademarked Product is. Due to that, "Delaware Holding Companies" (DHCs) have popped up. Those DHCs charge the "fees" for the use of the logo or Trademarked name and then pay NO TAXES on that money in Delaware while now paying smaller taxes in Rhode Island and other states.
The way to fix this issue is two fold.
1. Combined "Sort of, but not really" Reporting.
Combined Reporting makes it so that Corporations with different Branches or other multiple entities are regarded as one single taxpaying entity.
Several states have gone to a type of this model (There are two forms of tax apportionment associated with Combined Reporting, the Joyce and Finnegan models) and it has initially shown an increase in tax revenue from these businesses.
Maryland conducted a study in 2009 and has shown an initial increase of 13% to 20% in tax revenue. Rhode Island has also flirted with this idea in the past and has decided to conduct a study of it's own.
The reason I keep writing, "initially" is because the Combined Reporting method will cause Corporations and other large businesses to eventually move and/or expand elsewhere.
As talked about in the NYT article by Robb Mandelbaum linked above (flirted), "...Amgen, a California-based pharmaceutical giant that has 1,500 employees in Rhode Island, told legislators that “combined reporting would create disincentives for future expansion and investment for Amgen in Rhode Island, dramatically increase our tax liability by unfairly subjecting income that is unrelated to our Rhode Island manufacturing activity to Rhode Island tax, and put our site at a competitive disadvantage with our other manufacturing locations throughout the United States and globally."
Because of the above, there would have to be some changes with a Combined Reporting system. It would not be fair to a company like Amgen to have to pay taxes in Rhode Island for items produced or sold elsewhere plus it does the exact opposite of what this road map is about.
To fix this, Corporate taxes will be applied to the value of any products produced and profit made in Rhode Island but that any fee, loss or cost charged by a Parent Company or another entity owned by by the Parent Company can not be figured into the total profits/products produced unless said cost are for materials needed create any products or to sell in the state.
An example of the exception would be, if a Plant in RI needed a widget produced in a plant in Michigan, and for either book keeping, or they are different companies (under the same parent Corporation) they actually had to pay for the widgets. That cost can be added to the operating cost of the Rhode Island plant but if they were paying the Parent company a fee so that they could call themselves, "Corporation A", since it has nothing to do with the actual production, it would not count when figuring out profits for that plant.
Note to myself and readers: So far, this is the most likely area (worked on so far)to be adjusted and changed. It will be a difficult exercise to get the right balance between taxing what we should be taxing while still inviting them to set up shop in the state.
2. Reform/Adjust the Corporate Tax Rates.
The first part of this is to take into consideration small businesses that report their earnings as businesses and not as individual income. To do this we're going to establish brackets. We also have to define a small business as one that employs more than just the owner or owners, they'll need either one additional person full time, or at least two people part time, none of whom can be a spouse.
The second part is to keep taxes, even at the highest bracket, lower than the national average. Remember, the whole point of these first four steps are to get businesses to open up shop in RI.
If you have one Business in RI getting $1 Million taxed at the current 9%, that's $90,000 but if having it at 5% gets you another two businesses that make a million, not only are you now picking up the payroll taxes and the individual income taxes from the workers but you're making $110,250 in corporate taxes and that's the goal of this whole exercise.
My current suggested brackets (for both C and S type companies) and taxes are.
>$100,000 0%
>$250,000 2%
>$500,000 3.5%
>$1,000,000 5%
Obviously, there are other taxes and fees that would go into this. As I work through the road map, I will research those additional taxes and fees, how they rank nationally and add the changes(if any) to this step.
First, it discourages businesses both big and small, new and old from setting up shop in our state. Why pay 9% in Rhode Island when they can pay 6% in Georgia or 7.1% in New York?
Secondly, National or International Companies use things like "Licensing Fees" and other such work arounds in order to pay taxes elsewhere. They do this by having a parent office, in say... South Carolina, charge the branch in Rhode Island Fees for using it's name and logo.
That fee is now an expense and it directly reduces the profits made in Rhode Island and increases the profits of the Parent office in South Carolina. Due to this practice the Business now reports a smaller amount to Rhode Island with our 9% Corporate Tax rate but reports a higher amount to South Carolina at it's much lower 5% Corporate tax rate, thereby reducing the Business's overall state tax burden.
Specific to this example, Delaware does not tax on "Intellectual Property" which a logo or Trademarked Product is. Due to that, "Delaware Holding Companies" (DHCs) have popped up. Those DHCs charge the "fees" for the use of the logo or Trademarked name and then pay NO TAXES on that money in Delaware while now paying smaller taxes in Rhode Island and other states.
The way to fix this issue is two fold.
1. Combined "Sort of, but not really" Reporting.
Combined Reporting makes it so that Corporations with different Branches or other multiple entities are regarded as one single taxpaying entity.
Several states have gone to a type of this model (There are two forms of tax apportionment associated with Combined Reporting, the Joyce and Finnegan models) and it has initially shown an increase in tax revenue from these businesses.
Maryland conducted a study in 2009 and has shown an initial increase of 13% to 20% in tax revenue. Rhode Island has also flirted with this idea in the past and has decided to conduct a study of it's own.
The reason I keep writing, "initially" is because the Combined Reporting method will cause Corporations and other large businesses to eventually move and/or expand elsewhere.
As talked about in the NYT article by Robb Mandelbaum linked above (flirted), "...Amgen, a California-based pharmaceutical giant that has 1,500 employees in Rhode Island, told legislators that “combined reporting would create disincentives for future expansion and investment for Amgen in Rhode Island, dramatically increase our tax liability by unfairly subjecting income that is unrelated to our Rhode Island manufacturing activity to Rhode Island tax, and put our site at a competitive disadvantage with our other manufacturing locations throughout the United States and globally."
Because of the above, there would have to be some changes with a Combined Reporting system. It would not be fair to a company like Amgen to have to pay taxes in Rhode Island for items produced or sold elsewhere plus it does the exact opposite of what this road map is about.
To fix this, Corporate taxes will be applied to the value of any products produced and profit made in Rhode Island but that any fee, loss or cost charged by a Parent Company or another entity owned by by the Parent Company can not be figured into the total profits/products produced unless said cost are for materials needed create any products or to sell in the state.
An example of the exception would be, if a Plant in RI needed a widget produced in a plant in Michigan, and for either book keeping, or they are different companies (under the same parent Corporation) they actually had to pay for the widgets. That cost can be added to the operating cost of the Rhode Island plant but if they were paying the Parent company a fee so that they could call themselves, "Corporation A", since it has nothing to do with the actual production, it would not count when figuring out profits for that plant.
Note to myself and readers: So far, this is the most likely area (worked on so far)to be adjusted and changed. It will be a difficult exercise to get the right balance between taxing what we should be taxing while still inviting them to set up shop in the state.
2. Reform/Adjust the Corporate Tax Rates.
The first part of this is to take into consideration small businesses that report their earnings as businesses and not as individual income. To do this we're going to establish brackets. We also have to define a small business as one that employs more than just the owner or owners, they'll need either one additional person full time, or at least two people part time, none of whom can be a spouse.
The second part is to keep taxes, even at the highest bracket, lower than the national average. Remember, the whole point of these first four steps are to get businesses to open up shop in RI.
If you have one Business in RI getting $1 Million taxed at the current 9%, that's $90,000 but if having it at 5% gets you another two businesses that make a million, not only are you now picking up the payroll taxes and the individual income taxes from the workers but you're making $110,250 in corporate taxes and that's the goal of this whole exercise.
My current suggested brackets (for both C and S type companies) and taxes are.
>$100,000 0%
>$250,000 2%
>$500,000 3.5%
>$1,000,000 5%
Obviously, there are other taxes and fees that would go into this. As I work through the road map, I will research those additional taxes and fees, how they rank nationally and add the changes(if any) to this step.
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