Gary Sasse: Small Wins Strategy—A Case for Business Tax Reform

Wednesday, April 09, 2014

Gary Sasse, GoLocalProv MINDSETTER

Once a small win has been realized, forces are unleashed that favors another small win, believes Gary Sasse.

The March employment report shows that U.S. businesses finally added enough jobs to replace the 8.8 million that were lost during the Great Recession. While making gains, Rhode Island has only made-up about one-half of the jobs it saw disappear during the recession.

While the Rhode Island Foundation’s “Make It Happen” initiative has been aimed at jump-starting the economy, the efforts by the State’s public policy makers has not been outstanding.

On a positive note, a Rhode Island Senate report “Rhode To Work’ has focused on several programs to help get Rhode Islanders back to work and prepare them for a changing workplace. For this program to achieve meaningful results it should be funded at scale and be user–friendly. Also the recently elected Speaker has proclaimed the House’s top priority this year would be jobs and the economy.

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Last year the General Assembly gave priority to legislation reorganizing the state’s economic development structure. The legislature did not target “bread and butter’ programs to improve the overall business climate. While reorganization was needed, its success is always dependent upon a committed and enthusiastic chief executive. Therefore, it should be no surprise that the majority of organizational modifications were not scheduled to go into effect until the next gubernatorial term. Given the Ocean State’s tepid economic recovery, 2013 may have been a year of lost opportunity.

Small wins strategy

What is urgently needed is a small but significant win that will help reduce the cost of doing business and improve the productivity of the Rhode Island economy. In the classic article Small Wins-Redefining the Scale of Social Problems organizational theorist Karl E. Weick defines a small win “as a concrete, complete, implemented outcome of moderate importance.” Weick goes on to point-out that “Small wins are controllable opportunities to produce visible results.”

Small wins have been designed and implemented in different situations. A struggling football team’s small win of an initial first down has changed the momentum of games and entire seasons. The goal of Alcoholics Anonymous is to stay sober one day at a time. One of the best examples of a leader using a small wins strategy was President Dwight Eisenhower’s approach to building a consensus and reaching a final agreement for the D-Day Invasion.

Small wins strategy works because it produces a consistent pattern of winning. Once a small win has been realized, forces are unleashed that favors another small win. As Coach Paul “Bear” Bryant said; “Winning isn’t everything, but it beats anything that comes in second.” To succeed a small wins strategy must be specific, doable, and have an immediate impact.

Improving RI’s business tax structure

There are several challenges that the General Assembly can address in the coming weeks that can result in small but concrete economic development wins for Rhode Island families and businesses. One of these would be to take meaningful steps to improve Rhode Island’s business tax structure.

Rhode Island’s corporate income tax rate is one of the highest in the nation and the highest in New England. The Tax Foundation’s “Business Tax Climate Index” ranked the Ocean State’s corporate income tax 43^rd. A rank of “one” is assigned to the state tax that is the most favorable.

The Rhode Island Division recently issued a study of the state’s corporate income tax structure. Based on tax year 2012 this report found that if the corporate tax used a technique known as combined reporting it could yield somewhere between $20 and $44 million. The exact amount would depend on several factors including the method by which a corporation’s tax liability was calculated.

The current corporate income tax system allows multi-state corporations the ability to shift income out of state to other portions of their operations in states where there is less or no corporate tax. Combined reporting requires that a corporation account for their taxes as single business with the activity of all units counted together. Rhode Island would then use a formula to apportion the amount of the combined income to Rhode Island for tax purposes.

Appointment formula

Rhode Island’s apportionment formula includes three factor—sales, property and payroll. While the apportionment formulas vary among the states, most states use a single sales factor. Analysis indicates that four out of five corporations would either experience no change or a decrease in their tax liability under combined reporting. However, it is particularly important to understand the potential impact of combined reporting and alternative apportionment options on major employers like Amgen and CVS.

If combined reporting is enacted the resulting windfall could be used to reduce the corporate income tax rate from nine percent to either six or seven percent and possibly increase the estate tax exemption.

The future is now

Corporate tax reform is not the only reform needed to enhance Rhode Island’s competitiveness. However, it may be the type of substantive small win that can ignite an economic revival. If the General Assembly means business there is no reason why a decision on business tax reform cannot be made during this legislative session.

Rhode Island’s economic future is now.

Gary Sasse is Founding Director of the Hassenfeld Institute for Public Leadership at Bryant University. He is the former Executive Director Rhode Island Public Expenditure and Director of the Departments of Administration and Revenue.

Related Slideshow: Smallest + Largest Tax Increases in RI

Below are the largest—and smallest—tax increases in Rhode Island cities and towns for fiscal year 2014. The data measures the overall change in the amount levied in taxes between last year and this year. It does not compare changes in individual tax rates for homeowners, which may have been higher than the overall increase if the change in the rates was lower for another group of taxpayers in the community. This year, for the first time, all communities stayed below the annual tax cap, which for 2014 was 4 percent. (The cap applies to the overall levy not individual tax rates. Note that the levies for any independent fire districts in a community are not included.) Below communities are ranked starting with those that had the lowest increases. Data was provided by the state Division of Municipal Finance and is current as of January 7.

Gary Sasse: Small Wins Strategy—A Case for Business Tax Reform

Small wins strategy

Improving RI’s business tax structure

Appointment formula

The future is now

Related Slideshow: Smallest + Largest Tax Increases in RI

#39

Pawtucket

#38

Hopkinton

#37

Cranston

#36

Jamestown

#35

North Providence

#34

Glocester

#33

West Greenwich

#32

Foster

#31

Warren

#30

Barrington

#29

South Kingstown

#28

Lincoln

#27

North Kingstown

#26

Cumberland

#25

Warwick

#24

Little Compton

#23

East Providence

#22

Westerly

#21

Middletown

#20

Charlestown

#19

Tiverton

#18

Narragansett

#17

Portsmouth

#16

Providence

#15

Smithfield

#14

Scituate

#13

Johnston

#12

Exeter

#11

Bristol

#10

Richmond

#9

Newport

#8

Coventry

#7

Burrillville

#6

North Smithfield

#5

New Shoreham

#4

West Warwick

#3

East Greenwich