Is it right and does it make good public policy to provide tax breaks to certain companies operating in Rhode Island in return for those companies hiring new workers? That’s one of the issues facing the General Assembly right now in its budget deliberations. The issue of tax breaks for new hires – the program is called the Jobs Development Act (JDA) and 11 in-state companies benefit from it - is controversial on its face and it has been hard for the state to track because it has to rely on the participating companies to report back on their staffing levels.
The issue has becomes even more sensitive with Governor Chafee’s stated desire, made in his budget proposal, to cut the state’s corporate tax rate to 7-percent from its current 9-percent rate over a three-year period. As a businessman operating in the Ocean State, I applaud the Governor’s call to reduce the corporate tax rate; doing so will ease the tax burden on Rhode Island businesses, which they could certainly use, make Rhode island more competitive with our neighbors, and it also sends a pro-business message out to companies that might be looking at our state to do business in. It will also help keep companies here.
However, one can’t cut tax revenue without making it up somewhere else. To replace the lost revenue the Governor wants to take an axe to the Jobs Development Act and cut it in half over two years. The JDA currently reduces the corporate tax rate from 9-percent down to 3-4-percent. Under Chafee’s plan the qualifying companies’ tax break would be reduced to 6-percent, one percentage point lower than the new corporate tax rate of 7-percent.
Halving the credit will cost some very big companies a lot of money, and no other company more so than CVS of Woonsocket. CVS, as has been reported, has saved millions each year under the Jobs Development Act. For example, last year the pharmacy giant (2011 net revenues of $107 billion) saved over $15 million on its tax bill to Rhode Island because of the JDA. And, naturally, it is fighting back against any thought of cuts to the JDA and holding up the prospect that it can grow its workforce outside Rhode Island if it so decides. It could even choose to relocate its corporate and other operations out of the Ocean State entirely, taking thousands of jobs with it. Just the thought of something like that that makes legislators nervous, as it should.
Regardless of the arguments pro and con when it comes to tax breaks for new hires and maintenance of employment levels, what has CVS done to deserve such breaks? The company is making a forceful argument on its behalf. To qualify for the JDA tax credits, companies have to add jobs starting at $40,000 a year with benefits; CVS says it has added and retained 2,100 job in-state since 1997, while also adding infrastructure and contributing more than $1.2 billion to the state’s GDP. GDP contributions are important because companies create a “multiplier effect” when they engage vendors and suppliers and their employees spend their earnings in the local economy. Plus, companies like CVS support many good causes – the CVS Caremark Charity Classic and their recently announced pharmacy program with the RI Free Clinic, to name just two. Undoubtedly, having CVS remain headquartered here in Rhode Island paying good wages and contributing to the community is vital to our economy.
But all companies face the same challenges, and all companies hire when they need to, so why should taxpayers subsidize certain companies for doing what most companies would do anyway? Even accepting the fact that life is unfair, the principle of tax fairness after all should not create a special class of favored employers, who share their tax savings with investors on the backs of taxpayers.
So both arguments have merit and the hard choice is which side to favor at this point to accomplish a larger purpose. Lowering the corporate tax rate will benefit all businesses, small and large, while allowing certain companies to take advantage of tax credits based on hiring and retention of good paying jobs helps those companies grow their workforce and pump more money into the local economy. Since the art of successful politics is compromise, we should expect our legislators to find a common middle ground that satisfies both sides of this debate.