Tax Credits in Rhode Island - Research Paper Example

Tax Credits in Rhode Island Rhode Island is particularly famous among economic circles for its inability to provide a viable environment for starting and conducting business. The cost of doing business involves much more than just registration logistics. It also includes real estate costs, utilities, labor costs, and taxes that are considered significant factors in business climate evaluation. In this area, Rhode Island has the largest prospect to enhance its reputation in national rankings. Rhode Island’s comparatively lofty tax burden and intricate regulatory structure are two major areas that have made business impossible within the island (Bardach 23). Several proposals have been forwarded with the intention of easing the pressure on businesses. One of these suggestions involves the introduction of tax credits to ease the tax burden and encourage local and foreign enterprises to thrive in the island. The following sections attempt to discuss the pros and cons of introducing such a macroeconomic policy as well as its effects and viability within Rhode Island. Elements such as a high tax burden and intricate regulatory setting have made it challenging the government to develop an appealing environment for commerce. Rhode Island’s business tax burden can be considered one of the highest globally. Based on the KPMG study entitled “Location Matters”, Rhode Island recorded higher than normal rates for its tax rate index at 28.4%. This figure was significantly higher than all the New England states (Bardach 26). The workforce quality, cost of doing business and business climate in Rhode Island has been cited by different surveys as being below standard while it has performed exceedingly well in terms of quality of life, access to capital and education levels. The region has struggled with tax reforms for several years since taxes are a significant factor that determines the extent of success within the island. Most of the factors responsible for the poor state of business in Rhode Island might be uncontrollable for instance, utility costs. However, the state is able to control the minimum wage and tax levels through its policymakers (Bardach 17). Tax credits can be defined are economic benefits that are deducted from the total debt that taxpayers owe the government. Tax credits can apply to numerous forms of taxes including income, VAT, and property tax. Many governments extend various incentives for companies to invest their finances in certain sectors or operate in weak areas. Governments extend tax credits with the hope that they will encourage activity by businesses that might result in serving the greater population through increased jobs opportunities and promoting development of an industry. In introducing a tax credit, it is important to create the enabling environment and framework for its success. A key element of this framework is establishing the criteria by which the particular tax credit can be evaluated as having accomplished its objectives (Bardach 31). Tax credit initiatives have the potential of spiraling into chaotic and uncoordinated programs to an extent that businesses are remunerated with multiple tax credits for engaging in the same activity. The argument holds that if tax credits are formulated to encourage a certain behavior, definite measures should be installed to ensure that constant evaluation of the changed behavior is done and consequently, render the subsidy useless. The rationale behind the enactment of tax credits is not quite clear in the Rhode Island case. Before its enactment, the Rhode Island government should investigate into whether there is a genuine need for the introduction of tax credit. More importantly, the question should ask why the state needed to offer incentives in the particular business area. One of the key reasons why tax credits may not work in Rhode Island effectively lies in the fact that these incentives are hardly ever the final factor that attracts businesses or influences the investment and hiring within a country’s borders. State and federal taxes constitute a small aspect of the ability to engage in business, approximately 1% on average (Bardach 45). Additionally, large tax credits have a similarly limited impact to a company’s profit margins. Based on numerous studies in academic literature that discuss the receptiveness of business decisions to taxes, it was discovered that most businesses did not react as quick as expected to take advantage of the tax incentives. Hypothetically, most of the companies that have not invested in the island will not only consider the tax credits (Marwick, Top of Form Spengel & Oestreicher 39). Other hidden issues such as cultural barriers and currency conversion create new problems that still discourage companies from venturing into Rhode Island. Therefore, introducing tax credits may fail to attract the expected amount of investors but at the same time, cost the state in terms of higher budgetary allocations (Lammersen, Lothar, and Schwager 19). The other problem with introducing tax credits within Rhode Island is the high possibility of runaway benefits. Rhode Island is surrounded by Connecticut, New York, and Massachusetts. Given that most of these states are interconnected in terms of transport, communication and the economy, designing a tax credit policy will not only benefit Rhode Island as it will not remain within the state (Bardach 55). Even in the exceptional cases where tax credits trigger the decision by a business to invest in Rhode Island, the incentive’s advantages will rapidly seep out beyond the state’s borders if, for example, the company acquires equipment produces outside the state (Lammersen et al. 29).  Likewise, present residents may realize insubstantial benefits from an enticement if the privileged company employs foreigners to assume its new post vacancies, especially since importing the labor force from outside the state places greater new pressures on government resources. Furthermore, given that the central government permits businesses to subtract a large proportion of their domestic and state tax payments, many tax credits can actually set off a federal tax raise for the companies benefitting from the incentive. This can be considered a zero-sum game for companies given that the same incentive takes away their income through tax (Marwick 34). Recommendations After an early diagnosis of the tax incentive, the Rhodes government sought to introduce tougher measures that would ensure all future incentives would be assessed and ratified as viable before being implemented. Because of this bill, the island is set to evolve into a leader among many states on matters concerned with tax incentives. It is expected that the tax exemptions, deductions, and credits will translate into increased employment opportunities and businesses. First, the scope of evaluation should be widened. By scope, it is assumed that it relates to the number of departments and levels that are accessed by regulatory boards. These evaluation processes should also be increased in number to ensure that complacency does not set in the departments as well as the companies benefitting from the incentives (Boortz, Neal, and Linder 28). Future evaluations should also have an allocation for evaluating companies in order to reduce the bureaucracy and waste that currently dogs the Rhode Island tax environment. The next recommendation involves improving the quality of the assessment procedure. Assessors must calculate the profits and expenditure of each tax credit including its effect on the national economy and budget. The evaluation must put in mind several aspects: Are the economic advantages remaining within the borders or flowing to other regions? A key aspect of establishing the extent of success for an incentive is its effect within the state’s borders. Each evaluation process must also present lucid conclusions about the effectiveness criteria and indicate the extent of objective accomplishment as well as the various methods through which it could be improved. From the discussion, it is clear that a comprehensive legislative framework serves as an important background for implementing tax incentives regardless of the political setting. Conclusion In the same light, tax credits are difficult to evaluate and understand given that it takes a long time for the economic effect to evaluate fully. In the earlier section, the effect of tax credits in Rhode Island was analyzed at the international level. From the analysis, it can be deduce that the state took an extraordinary long duration before collecting enough information on the state of affairs as far as tax incentives are concerned. Furthermore, the assessment revealed that tax credits were performing poorly and in some instances, even creating further financial complications for companies. The recent legislative changes that occurred in 2013 represented a reaction to the failures. The new law dictates that all economic development tax incentives were to be subjected to thorough examination before being rolled out as policies. Work Cited Top of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bardach, Eugene. A Practical Guide for Policy Analysis: The Eightfold Path to More Effective Problem Solving. Los Angeles: Sage, 2012. Print. Top of Form Boortz, Neal, and John Linder. The Fairtax Book: Saying Goodbye to the Income Tax and the IRS. New York: Regan Books, 2005. Print.Bottom of Form Top of Form Lammersen, Lothar, and Robert Schwager. The Effective Tax Burden of Companies in European Regions: An International Comparison. Heidelberg: Physica-Verlag, 2005. Internet resource.Bottom of Form Marwick, Peat. Location Matters: A Comparative Analysis of State Tax Costs on Business. Washington, DC: Tax Foundation, 2012. Print. Top of Form Spengel, Christoph, and Andreas Oestreicher. Common Corporate Tax Base in the EU: Impact on the Size of Tax Bases and Effective Tax Burdens. Heidelberg: Springer, 2012. Internet resource. Bottom of Form Bottom of Form Bottom of Form Bottom of Form Read More