To raise revenues, tax reductions for businesses that invest in the state's nine enterprise zones will be eliminated.

08:23 AM EST on Thursday, February 26, 2004

BY ANDREA L. STAPE
Journal Staff Writer

Journal photo / Gretchen Ertl HELPING HAND: Gail Bembenek, owner of Olf World Imports and Antiques, in West Warwick, says a $3,000 enterprise-zone grant helped her buy signs for her store.

In an attempt to raise about $13.5 million, Governor Carcieri has recommended repealing a number of tax breaks for businesses, changing an income tax filing requirement for business owners, and raising an annual tax for companies that operate in the state.

The proposals, in Carcieri's budget, are part of the governor's jobs agenda and his plan to raise revenue to fill a budget hole, make tax breaks more efficient, and invest in economic development projects.

On the investment side, Carcieri has requested: a capital gains tax cut for the owners of a specifically defined set of companies that create high-paying jobs; $200,000 to develop a marine bioscience research center at Quonset Port and Commerce Park; $500,000 for municipalities to complete economic development projects; $48 million in bonds to make infrastructure improvements at Quonset; and $4 million for the Samuel Slater Technology Fund that invests in young companies.

However, to raise revenue, Carcieri proposes eliminating three tax breaks for businesses that invest in the state's nine enterprise zones -- Pawtucket/Lincoln, Bristol/Warren, Providence/Cranston, Central Falls/Cumberland, West Wariwck, Woonsocket/Cumberland, East Providence, Portsmouth/Tiverton, and another section of Providence.

These tax incentives have been aggressively championed by legislators from those nine areas over the past 12 years. The tax breaks were established to encourage companies to create jobs in urban or underdeveloped areas of the state. The rationale was that the state would make the money back through the income taxes paid by the new employees.

Under the laws, a company in an enterprise zone that increases its employment by 5 percent in a year can reduce its state income taxes by up to $15,000 for each new employee. Also, companies that make investments in publicly supported improvement projects in an enterprise zone, or lend money to companies in an enterprise zone, receive tax breaks.

The state budget office and the Rhode Island Economic Development Corporation, though, say the breaks cost the state significantly more money than they return. A high percentage of the companies taking advantage of the tax breaks hired employees who make less than $25,000 a year, according to the state budget office. In some instances, the state would have to collect income tax from these lower-income workers for 27 years to recover the cost of the tax break, according to Paul Dion, an economist with the state budget office.

"We started with the philosophy that this is a tough budget environment. . . . If we're going to ask for money from an operating point of view . . . you have to make tough choices, and our conclusion was there are many other ways to encourage job development in the core cities," said Michael McMahon, executive director of the Rhode Island Economic Development Corporation.

The governor has also recommended repealing the tax credit that small businesses receive when they apply for loans from the U.S. Small Business Administration. He has also proposed repealing another credit that companies receive when they qualify for specific industry certifications.

By eliminating these five business tax credits, the state budget office expects to save $4.5 million.

In addition, the governor proposes raising $7 million by increasing the annual minimum corporate income tax and by raising the franchise tax for businesses to $450 a year from $250 a year. And he proposes making business owners who don't live in Rhode Island, but earn income here, withhold state income tax during the year -- a change the could generate $2 million.