STATE HOUSE – Rep. Edwin R. Pacheco has introduced legislation to repeal the flat tax that provides an income tax break for high earners and replace it with a tax break for small business owners who hire new employees.

The legislation would provide business owners a tax credit of $1,000 per new full-time employee and $500 per new part-time employee, to be taken in the year those employees are hired. The credit would be capped at $3,500 per person annually, and would be available only for businesses with between five and nine employees grossing less than $5 million in annual sales would be eligible.

The goal of the bill is to stimulate employment and help small businesses.

“When we enacted the flat tax, it was supposed to attract the kind of people who own businesses, and the premise was that they would bring companies and employment with them. But nothing in the flat tax legislation ever tied the tax break to the creation of jobs. The result is that the state is losing money and getting nothing in return, while unemployment and the state deficit are both on the rise,” said Representative Pacheco (D-Dist. 47, Burrillville, Glocester). “With this bill, we’d be getting rid of a tax break that isn’t working and replacing it with one that is absolutely linked to the creation of jobs.”

The credit could be carried forward if the taxpayer doesn’t use it all in the given year, but if that taxpayer ceased to own the business, the remainder of the credit would be forfeited.

The alternative flat tax eliminated by the bill allows the highest-grossing taxpayers to opt for a flat state income tax, instead of the standard 9.9-percent rate, minus deductions, typically paid by people in the highest tax bracket. For the 2009 tax year that just ended, that flat tax rate is 6.5 percent. Under the law that created it, the rate will fall by .5 percent each tax year through 2011, after which it will remain at 5.5 percent in perpetuity.

About 838 people qualified and took advantage of the flat tax in 2007, and most earned more than $200,000. According to information provided by the Poverty Institute at the Rhode Island College School of Social Work, in Fiscal Year 2009, the flat tax cost the state $23.4 million. This fiscal year, the state is expected to lose $37.3 million on the break. When fully implemented in 2012, the Poverty Institute estimates that 7,416 residents and 5,703 non-residents who work in Rhode Island will choose the flat tax, costing the state about $69 million in lost revenue. Most of the tax savings will be seen by people earning at least $336,550, about 1 percent of Rhode Island taxpayers, the Poverty Institute says.

Although proponents of the flat tax argued it would attract titans of industry who would bring with them companies and employment, Rhode Island has seen nothing but deepening unemployment since its implementation. The state’s unemployment rate is currently 12.7 percent.

Representative Pacheco says his legislation would replace the flat tax with a break that would do what the flat tax can’t.

“We need to generate jobs, and if we’re going to use tax incentives to do it, they have to be tied to the creation of jobs. My legislation is available only to those who create jobs, so it does what the flat tax was supposed to do,” said Representative Pacheco.

The legislation (2010-H 7149) is cosponsored by Rep. Arthur Handy (D-Dist. 18, Cranston), Rep. Roberto DaSilva (D-Dist. 63, East Providence, Pawtucket), Rep. Chris Fierro (D-Dist. 51, Woonsocket) and Rep. Scott J. Guthrie (D-Dist. 28, Coventry).

For more information, contact:
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State House Room 20
Providence, RI 02903
(401) 222-2457