Over the past two years, Rhode Island has given $87 million in tax breaks to businesses, with the goal of creating jobs and encouraging business expansion. So have these tax breaks actually had their intended effect? Sadly, nobody really knows for sure.
Since 2008, the state's Department of Revenue has been required by law to issue two reports relating to tax credits for businesses. Before the credits go into effect, the department has to report on the businesses that will benefit and their job creation goals. At the end of the fiscal year, the department must provide a status report detailing to what extent businesses have lived up to their side of the deal. Unfortunately, in both of the last two years, the latter report — the "accountability report" — has not been issued.
When it comes to tax policy, Rhode Island is caught between a rock and a hard place. The state has a notoriously bad business climate — a recent report by the non-partisan Tax Foundation ranked Rhode Island's tax code 46th out of 50 states in terms of business friendliness. At the same time, the state government is in a difficult financial situation. As part of an effort to plug a $590 million budget gap, all state employees will have to work up to 12 days without pay between now and next June.
Any tax credits that might stimulate the economy come at a direct and painful cost to the state's treasury. But without tax credits, the state will likely face continued economic stagnation. Since this tension is so extreme in Rhode Island, measuring the impact of tax credits for businesses is simply a necessity. That's why the state's failure to issue the accountability reports is disappointing.
According to a recent article in the Providence Journal, the reports have not been issued because information crucial to the reports — namely, employee wage records — is held by the state's Department of Labor and Training and protected by federal confidentiality laws. Legislators thought they had paved the way for cooperation between the revenue and labor departments when they first passed the law, but now they must revisit this problem and work to ensure that the reports can proceed.
In an interview with the Editorial Page Board, Russell Dannecker, a former Rhode Island Senate Fiscal Adviser and current fiscal policy analyst at the Poverty Institute at Rhode Island College School of Social Work, offered several suggestions on how the legislature might rectify this problem. To alleviate concerns about individual employees' privacy, the Department of Revenue should accept information in aggregate form. Businesses might also be called upon to report hiring and wage statistics directly to the Department of Revenue as a condition of receiving the tax credits. To keep businesses honest, the information obtained through this self-reporting process could be subject to a possible audit. We endorse these suggestions and encourage legislators to take time during this week's special session to discuss these and other potential solutions.
It is extremely upsetting that the state has little to say about the impact of the $87 million it has already given away. With Governor Donald Carcieri '65 now suggesting that significant changes in Rhode Island's tax code may be coming, we call on the state to ensure that any changes to the tax code are accompanied by strong, effective accountability and impact-measuring mechanisms. The taxpayers of Rhode Island deserve no less.
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