The Rhode Island Economy: A Snapshot of Doing Business in Rhode IslandApril 18, 2017
John P. Thomas, CPA, MST
Rhode Island’s business and tax climate has not received high marks from national statewide rankings, or from steps to improve the business climate over the past several years. The state has lowered various tax rates and offered tax incentives to new businesses. Two rankings that provide insight into Rhode Island’s business and tax climate are the Economic Index and the often cited Tax Institute rankings.
Opportunity and Economic Indexes
The Opportunity Index is designed to provide a snapshot of what opportunity looks like at the state level. This index consists of three dimensions: Economic, Education and Community Health/Civic Life. Rhode Island’s 2016 opportunity index ranking was 26th. Massachusetts’ and Connecticut’s rankings were 2nd and 4th, respectively.
The Economic Index includes factors such as unemployment rate, median household income, poverty percentage, economic inequality and access to such services as banking, affordable housing and the internet. The following is a ranking for each of Rhode Island’s Economic Index factors:
- Unemployment rate (34)
- Median household income (20)
- Poverty - percentage of population below poverty line (24)
- Economic inequality (47)
- Access to banking (40)
- Access to affordable housing (47)
- Access to the internet (11)
Based on the factors above, the 2016 Economic Index ranked Rhode Island 32nd among the 50 states and Washington, DC. Rhode Island trailed its neighbors; Massachusetts ranked 15th and Connecticut ranked 20th.
The Tax Foundation, which annually ranks each state’s business tax climate index, gave Rhode Island a less favorable ranking than the Economic Index. Rhode Island was ranked 45th in 2016 and 44th in 2017 among the 50 states and Washington, DC. As expected, Massachusetts ranked much higher (27th) and Connecticut, ranking 43rd. The primary factors contributing to Rhode Island’s low rating were unemployment insurance tax and property taxes. Rhode Island’s rankings for these two items was 50th and 44th, respectively. Other factors included in the ranking were corporate taxes (31), individual income taxes (39) and sales taxes (22).
Rhode Island Business Tax
Rhode Island has made some significant business tax law changes over the last few years in an effort to improve its business and tax climate. These changes included:
- Corporate income taxes: Top corporate tax rate decreased from 9% in 2014 to 7% in 2015.
- Personal income taxes: Top individual tax rate decreased from 9.9% in 2010 to 5.99% in 2011.
- Entity level tax: The LLC and corporate minimum tax decreased from $500 (2015) to $450 (2016) and down to $400 for tax years beginning on or after January 1, 2017.
- Section 179 expense deduction: Section 179 of the United States Internal Revenue Code allows a taxpayer to elect to deduct the cost of certain types of property on their income taxes as an expense, rather than requiring the cost of the property to be capitalized and depreciated. For 2014, Rhode Island adopted the Federal rules allowing businesses to deduct up $500,000 of the cost of business assets. Prior to 2014, the maximum deduction was only $25,000.
- State unemployment insurance tax: This employer-paid tax has pulled Rhode Island down in the Tax Institute ratings, ranking 49 th out of 50 states. The tax rates, which now range from 1.69% to 9.79%, will drop to 0.99% to 9.59% starting in 2017. While not appearing significant, the decreased tax rate is estimated to save Rhode Island employers $30 million in 2017.
- Pensions, 401(k), 403(b) and other plans: Qualifying individual taxpayers will be able to exclude up to $15,000 of their pension and/or annuity income from Rhode Island tax beginning with the 2017 tax year.
In addition to the tax cuts listed above, Rhode Island offers substantial business tax incentives to larger businesses. The primary benefits to smaller businesses is in the form of free counseling, training and education.
Rhode Island Tax Incentives
Dedicated to stimulating economic growth in Rhode Island, the Commerce Corporation is a customer service-focused agency that invests in Rhode Island’s businesses. By helping to navigate the public sector, providing financing vehicles, deploying state incentives, and investing in networking opportunities, the Commerce Corporation is in the business of helping businesses.
Two significant Rhode Island tax credits include the following:
- Qualified Jobs Incentive
- Rebuild Rhode Island
Both of these credits help to reduce Rhode Island’s unemployment rate through job creation.
Qualified Jobs Incentive Tax Credit
Companies expanding their workforce in Rhode Island or relocating jobs from out of state can receive annual, redeemable tax credits for up to 10 years with the Qualified Jobs Incentive program. Credits can equal up to $7,500 per job, per year, depending on the wage level and other criteria. The minimum number of new jobs needed to qualify varies by industry and company size, but can be as few as 20 or even 10 jobs. The first 500 jobs approved under the program will receive the maximum credit available.
Rebuild Rhode Island Tax Credit
If a real estate project cannot raise sufficient funding, or is at risk of locating in another state, Rebuild Rhode Island can fill the financing gap with redeemable tax credits covering up to 20% – and, in some cases, 30% – of projects costs. Commercial office, industrial, residential, mixed use development, ground-up construction and historic rehab can qualify. A minimum project cost of $5 million and certain square footage/project size minimums may apply. Approved projects may also be exempted from sales tax on construction materials, furnishings and equipment.
Recent recipients of the Rebuild Rhode Island Tax Credit with the maximum amount of incentives are:
- A.T. Cross - $1.9 million
- Virgin Pulse - $6.1 million
- Waldorf Capital Partners LLC - $2.9 million
- Surplus Solutions LLC - $450,000
Rhode Island has numerous organizations that serve the needs of small business.
Rhode Island SCORE’s mission is to assist startups and existing businesses in Rhode Island. With locations throughout the state, Rhode Island SCORE provides free business consulting with 35 counselors, including accountants, attorneys, prior corporate executives and experts in technology, sales, marketing, etc. During 2016, Rhode Island SCORE counseled over 900 clients and conducted 40 workshops.
The Center for Women & Enterprise (CWE) is a regional organization with an office in Providence. CWE provides opportunities for women entrepreneurs and women in business to increase professional success, personal growth and financial independence. CWE’s expertise is in training and education programs.
The Rhode Island Small Development Center provides comprehensive business assistance services to both existing and prospective small business owners and entrepreneurs. The Center’s primary service is to provide one-on-one confidential no-cost business counseling in a wide range of areas.
The tax cuts described above and small business services have been beneficial, but are not enough. At the Small Business Economic Summit in North Smithfield, RI on January 6, 2017, small business leaders gathered at the forum with state leaders, including Governor Raimondo, to share their concerns. One factor raised was the inconsistency within the state for business regulations and taxation. One participant stated that there are 39 communities and 39 business requirements, making it untenable to do business.
The motor vehicle tax was also cited due to the various tax rates imposed by each municipality. Providence and Warwick, two of Rhode Island’s largest cities, differed drastically on the car tax. The 2015 rate for Providence was $60 (highest in the state) per $1,000 of assessed value while Warwick was $34.60. Wealthy municipalities, such as Block Island and Little Compton had the lowest rates in Rhode Island, at $9.75 and $13.90, respectively.
The Tax Foundation rankings above do not reflect the recent decrease in entity level taxes, taxation of retirement plans or the reduction in unemployment taxes. Rhode Island has made strides in improving its tax climate. However, for Rhode Island to see a positive change in its business and tax climate rankings, additional reform is needed in reducing its property and unemployment taxes and streamlining its business regulations.
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