What Are Tax Expenditures? Tax expenditures are subsidies that occur - PDF document

12/ 20/ 2016 Rhode I sland Revenue Roundtable Tax Expenditures: Shining a Bright Light on $ Billions in “Hidden Spending” December 20, 2016 What Are “Tax Expenditures”? • Tax expenditures are subsidies that occur through the tax code, as tax credits, exemptions, deductions, or preferential tax rates. • Tax expenditures are very similar to expenditures occurring through the appropriations process – essentially “spending by another name”. • Tax expenditures differ in one very important respect: unlike appropriated expenditures, they are not affirmatively approved on an annual basis by elected officials www.economicprogressri.org 1

12/ 20/ 2016 Tax Expenditures and A Shared Vision for Rhode Island Most Rhode Islanders share a vision of what the Ocean State should strive for: great schools for our children, safe roads and bridges, vibrant communities, prosperous families, and access to quality and affordable health care, housing and child care. The primary way we pay for these things is through our taxes…. …and tax expenditures are one of the m ain w ays w e erode our tax base. www.economicprogressri.org Three key reasons to focus on tax expenditures 1. Foregone revenues 2. Transparency 3. Accountability for tax incentives used as primary tool for economic development www.economicprogressri.org 2

12/ 20/ 2016 A Closer Look at Foregone Revenues www.economicprogressri.org www.economicprogressri.org 3

12/ 20/ 2016 www.economicprogressri.org Examples of sales and use tax (SUT) tax expenditures ($1.251 Billion total) 1. The single tax expenditure with largest amount of revenue foregone is a sales and use tax exemption for purchases used for manufacturing purposes . • Accounts for $341 million in foregone revenue • 18 percent of all revenue foregone 2. Veterinary and testing lab services exempt from SUT ($4.4 million) 3. Storage, maintenance, repair or sale of boats exempt from SUT 4. Sale of boats generally exempt from SUT ($6.1 million) www.economicprogressri.org 4

12/ 20/ 2016 Examples of sales and use tax (SUT) tax expenditures (continued) 5. Charitable, educational, or religious organizations exempt from SUT ($104 million) 6. Clothing and footwear (up to $250 per item) exempt from SUT ($43.5 million) 7. Food and food ingredients exempt from SUT ($151 million) 8. Food items paid for by Food Stamps (aka SNAP) exempt from SUT ($19 million) www.economicprogressri.org Examples of personal income tax (PIT) tax expenditures ($470 million total) 1. Earned Income credit ($10.3 million) 2. Tax credit for taxes paid to other states ($152 million) 3. Standard deduction ($169 million) 4. Railroad retirement benefits not subject to PIT due to modification of gross income ($182,000) www.economicprogressri.org 5

12/ 20/ 2016 Tax Incentives as Primary Economic Development Tool www.economicprogressri.org 5 reports track tax expenditures in Rhode Island Rhode Island Economic Development Tax Incentives Evaluation Act of 2013 Annual Report of This report will elevate our understanding Report on Tax Credit and Tax Credits and RI Department of of economic development tax incentives Commerce Incentive Incentives Revenue, Office of well beyond our current level. Under the Corporation Report: Covers Administered in Revenue Analysis Incentive provisions of this act, the Office of 5-7 (varying by Conjunction with (ORA): Biannual Tax Programs* Revenue Analysis (ORA) will undertake year) specific the RI Commerce Expenditure Report specific tax analyses of 18 of RI’s economic (TER): provides tax incentives, Corporation incentives, development tax incentives (expanded to aggregate data on each providing firm- specific tax providing firm- 21 credits with addition of new credits specific data incentives, tax expenditure. No specific data approved in 2015) to determine their identifying the providing firm- information on tax identifying the efficiency and effectiveness at achieving name and specific data expenditure recipients, name and address of identifying the their objectives . Initial analysis of all and no information address of credit recipient, name and address credits will be complete by June 30, 2017, assessing effectiveness credit recipient, of tax expenditure and the size of of credit recipient, a significant delay from initial schedule for and the size of and the size of credit received. completion, which indicated 1/3 of credits credit.** credit received. would be evaluated in each of FY15, FY16, and FY17. * The Report on Commerce Corporation Incentive Programs also includes information on incentives that do not operate through the tax code. We have not included them in this report * * The Report on Commerce Corporation Incentive Programs provides separate information on tax credits allocated and planned job creation, as well as credit amount dispersed, and actual job creation. www.economicprogressri.org 6

12/ 20/ 2016 Name of Report Responsible Agency Tax Expenditures Covered Total $ Amount of tax expenditures included 2016 Tax Department of Revenue, Office ALL Tax expenditures: 223 tax Expenditures Report of Revenue Analysis (ORA) expenditures in 9 categories $1.941 Billion Tax Credit and Department of Revenue, 5 economic development tax Incentive Report – FY Division of Taxation incentives existing prior to 2015: 2016 dominated by Jobs Development $29.4 Million Act ($23.5 million) Annual Report of Tax 5 new economic development tax Credit and Incentives incentives (Governor Raimondo’s Administered in Department of Revenue, “Economic Development Suite”: $44.1 Million Conjunction with the Division of Taxation dominated by Rebuild Rhode (approved by Rhode Island Island Tax Credit ($31.8 million) Commerce Corp – Commerce No credits issued) Corporation – FY 2016 Report on Commerce Rhode Island Commerce 4 of the 5 economic development Corporation Incentive Corporation tax incentives included in the $44.1 Million Programs for Fiscal Division of Taxation report on approved Year 2016 Governor Raimondo’s “economic development suite” www.economicprogressri.org Name of Report Responsible Agency Tax Expenditures Total $ Amount of tax Covered expenditures included Rhode Island Economic Department of Revenue, 21 economic Development Tax Office of Revenue Analysis development tax Incentives Evaluation (ORA) incentives, including the 5 ?? Act of 2013 incentives in the “Tax Credit and Incentive Report”, and Governor Raimondo’s 5 new economic development incentives www.economicprogressri.org 7

12/ 20/ 2016 Credits Covered by the Tax Credit and Incentive Report (FY2016) Statute Tax Credit Name Total Amount Purpose of Credit of Credit Encourages development in designated 42 ‐ 64.3 ‐ 6 Enterprise Zone $856,932 “enterprise zones” Jobs Development Act (Tax Provides rate reduction for creation of new 42 ‐ 64.5 ‐ 3 rate reduction) $23,532,893 jobs, based on schedule To encourage job creation, firms given RI Economic Development “Project Status” are exempt from sales tax 42 ‐ 64 ‐ 10 Corporation Project Status $350,000 on materials, equipment, furniture, etc. Provides a financial incentive to the film industry in order that the state might Motion Picture Production compete with other states for filming 44 ‐ 31.2 ‐ 5 Company Tax Credit $362,176 locations Provides financial incentives to address high Historic Preservation Tax vacancy rates and physical deterioration of 44 ‐ 33.6 Credits $4,300,136 historic buildings Incentive for Innovation and [sunsets effective December 31, 2016, has 44 ‐ 63 ‐ 3 Growth $0.00 not been used in recent years] www.economicprogressri.org TOTAL FY2016 $29,401,138 Credits Covered by the Annual Report of Tax Credit and Incentives Administered With RI Commerce Corporation Statute Tax Credit Name Amount of Purpose of Credit Credit Approved Provides tax credits for five years to qualifying firms to stimulate business development, retain or create good ‐ paying 42 ‐ 64.20 Rebuild RI Tax Credit $31,798,122 jobs. RI Tax Increment Encourages qualified development 42 ‐ 64.21 Financing $6,500,000 projects in qualifying TIF areas Stay Invested in RI Expands employment opportunities in RI, Wavemaker retains talented individuals by assisting with 42 ‐ 64.26 Fellowship $0 tuition loan repayment Anchor Institution Tax Rewards existing RI companies helping attract 42 ‐ 64.30 Credit $0 new businesses in their supply chain to RI New Qualified Jobs Tax credits for up to 10 years to reward the 44 ‐ 48.3 Incentive Act (2015) $5,805,971 creation of a designated number of jobs TOTAL FY2016 $44,104,093 www.economicprogressri.org 8

12/ 20/ 2016 FY2 0 1 6 www.economicprogressri.org www.economicprogressri.org 9

12/ 20/ 2016 Jobs Development Act (JDA) accounts for bulk of economic development tax incentives $362,176 $350,000 www.economicprogressri.org Com bined Revenue Loss, FY2 0 0 8 -FY2 0 1 6 : $ 2 7 1 .4 M www.economicprogressri.org 10

12/ 20/ 2016 Total = $271.4M www.economicprogressri.org Total = $69.5M www.economicprogressri.org 11