Is an increase in the cards for Rhode Island’s minimum corporate income tax?

General Assembly leaders said last week that they plan no increases in the state’s “broad-based” taxes, such as the personal income tax and state sales tax.

But two key senators would not rule out an increase in the minimum corporate income tax (sometimes called the minimum franchise tax).

The subject came up on Thursday at the Greater Providence Chamber of Commerce’s legislative luncheon, held at the Rhode Island Convention Center in Providence.

Outside, the weather was gray and gloomy. Inside, the atmosphere wasn’t much better.

The gathering took place amid big budget problems — the state faces a deficit for the year that ends June 30, and an even bigger one for the year that starts July 1. And even though a recession has not officially been declared, it sure feels like one is here.

So business people were obviously anxious to hear what legislative leaders had to say.

Comments by state Rep. Steven M. Costantino, D-Providence, were warmly received.

“I don’t believe you stimulate the economy by raising taxes,” said Costantino, head of the House Finance Committee. “The state can hold the line on taxes,” he declared.

House Minority Leader Robert A. Watson, R-East Greenwich, said, “We are against tax increases.”

Their positions are important, partly because the House is where tax legislation typically originates.

But the Senate has a say, too, don’t forget. The state budget is, after all, a matter of negotiation.

And Senate leaders last week weren’t quite as prepared as their counterparts in the House to rule out tax hikes.

Among those attending were Senate President Joseph A. Montalbano, D-Pawtucket; Senate Majority Leader M. Teresa Paiva Weed, D-Newport; Senate Minority Leader Dennis L. Algiere, R-Charlestown; and Senate Finance Committee Chairman Stephen D. Alves, D-West Warwick.

And each of them took care to talk about the hard times that working Rhode Islanders are facing, and about the need to “share the pain” when it comes to resolving the state’s budget crisis.

One thing Alves specifically mentioned was the minimum corporate income tax, or franchise tax.

Think of it as the minimum amount that must be paid for the right to do business in Rhode Island.

It used to be $250.

In 2004, because of a revenue-raising measure proposed by Governor Carcieri and subsequently amended and approved by the General Assembly, it was raised to $500.

Now might be time to raise it again, Alves indicated.

There are 45,840 corporations in Rhode Island, and about 94 percent of them pay “just $500 a year” in corporate income tax, Alves told the group.

“I think we really need to think about the balance” between what working people pay and what corporations pay in tax, he said.

When I asked him afterward about his remarks, Alves said that state tax collections were down last month, compared not only with January 2007, but also with January 2006.

“This is getting larger and larger,” he said of the state’s budget problem, “and passing it to cities and towns” isn’t the way to go.

He said he doesn’t favor increasing the state’s personal income-tax rates. Nor does he favor raising the state’s sales-tax rates (although he said he would consider “expanding the scope” of the sales tax).

What about raising the minimum corporate income tax? “It’s certainly something we’re looking at,” he said.

For example, he said, raising the tax to $1,000, from the current $500, would mean an increase of about $10 a week for 94 percent of the companies that do business in Rhode Island, he said.

That seems reasonable, he said, especially given the deficits that Rhode Island is facing, and the costs that workers must shoulder, Alves said. “The pain has to be shared equally,” he said.

Montalbano said he agrees that there should be no increase in broad-based taxes.

But he also said that there could be changes to the state’s flat-tax system (which is an option for calculating your personal income tax) and to the state’s capital-gains tax. “I don’t think, at this point, it’s off the table,” he said of the two taxes.

When I asked him about the minimum corporate income tax, Montalbano remembered how controversial the last increase was, four years ago.

Raising that tax this year “may be something to be looked at,” Montalbano said, but he also said he hopes it won’t come to that.

What’s the big deal about the minimum corporate income tax? That’s the question I put to Mary F. Bernard, president of the Rhode Island Society of Certified Public Accountants.

She said the tax represents an additional load on businesses — especially on the thousands of small businesses that are organized as S corporations or limited liability companies (LLCs).

These companies — known as pass-through entities, or flow-through entities — typically don’t pay tax at the business level, at the entity level.

Instead, their income and expenses generally flow through to their owners, who essentially report the items on their personal returns and pay any resulting tax themselves.

But even though such a business typically doesn’t pay tax at the entity level, it still must pay to Rhode Island that minimum annual tax, Bernard said when I met with her at Kahn Litwin Renza & Co. Ltd., a CPA firm in Providence, where she is tax principal.

And the tax can quickly add up. Suppose, for example, that you own a small restaurant and a bakery, all in one building — and you own the building, too. Suppose, too, that you run each of the three business separately, with a different LLC for each.

In that case, you must pay to Rhode Island a total minimum tax of $1,500 ($500 for each LLC).

The tax can also be painful if your business is organized as a traditional C corporation. You still must pay the minimum tax — even for a year in which your business operates in the red.

If the tax is increased, businesses would protest, Bernard said. Raising it to $1,000 would put Rhode Island in league with such states as California and New Jersey, whose minimum taxes are among the nation’s highest, she said.

“Is that the kind of company you want to be in? We’re already considered a state that is not tremendously business-friendly,” Bernard said.

Besides, many businesses in Rhode Island are small businesses, and “a thousand dollars is a lot of money to a mom-and-pop operation,” she said.

In other words, an increase in the minimum corporate income tax — the franchise tax — would be painful to many businesses.

But Senate leaders last week kept saying that, to balance the state’s budget deficits, the pain must be shared by everyone.

So add the minimum corporate income tax to the growing list of items that are “on the table” for negotiation. There may be no increase in broad-based taxes on the horizon, but there will almost certainly be increases in some of the lesser-known taxes, and the franchise tax could be one of them.

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