With a $295 million shortfall facing our state, the time has come to enact comprehensive reform that closes the loopholes multi-state corporations exploit to avoid paying the same taxes our Rhode Island-owned small businesses are paying. Although several changes were made to curtail corporate tax-avoidance strategies in 2007, the reforms were piecemeal and widely believed to be ineffective as companies quickly found new ways of sheltering their profits.
One of the tricks many multi-state or multi-national corporations use to dodge state taxes is to hide their Rhode Island profit in a “shell” corporation or other out-of-state entity that is not subject to our state’s taxes. In response to this problem, we have introduced legislation that would stop this end-run by implementing “combined reporting” in Rhode Island. Under combined reporting, corporations that have businesses in other states or countries must combine all subsidiaries as a unitary entity and then pay taxes to Rhode Island based on the percentage of net business profit or loss generated by its Rhode Island operations. Under combined reporting, tax liability is determined by the level of corporate in-state activity, not by the sophistication of corporate structure.
The main arguments in opposition to ending the shell game will be simple, vociferous and unfounded. The first claim opponents will make is that combined reporting will create a huge administrative burden on corporations. Additionally, critics will say that corporations will leave the state and go to states without combined reporting, taking their jobs with them. But many of our state’s largest employers are already subject to combined reporting in other states. CVS employs 6,300 people here, and operates in 21 combined reporting states, while Bank of America has 3,500 employees and exists in all 23 combined reporting states. New York, Maine, Vermont and New Hampshire have combined reporting, and Massachusetts joined them in 2009. There are serious ongoing discussions of enacting it in Connecticut as well. The momentum has shifted in New England and the country as a whole, and presently, a majority of states that collect corporation business taxes now use the combined reporting method to appropriately capture taxes owed in state. It is time for Rhode Island to join them.
Through combined reporting, Rhode Island not only stands to reclaim tax revenue from corporations that circumvent the system, but we also stand to level the playing field for our small businesses that play by the rules. Combined reporting is not “raising” a tax on big business; It’s simply stopping them from using a shell game to evade the taxes that our homegrown businesses are paying. It’s fair to all businesses, and it would help the state collect the money that it is owed – money our state needs now more than ever.
Rep. Teresa Tanzi is a Democrat who represents Dist. 34 in South Kingstown and Narragansett. Rep. Christopher R. Blazejewski is a Democrat who represents District 2 in Providence and East Providence. Rep. Jeremiah T. O’Grady is a Democrat who represents District 46 in Lincoln and Pawtucket.