The Benefits of the Business Net Receipts Tax

This is something you don’t expect to read in Rhode Island: Gov. Carcieri is proposing the elimination of either the state corporate income tax, sales tax, or personal income tax. The catch: in place of one of these taxes, Carcieri wants to institute a business net receipts tax. You might reply, What the heck is a business net receipts tax? Here is a good explanation from a tax news site:

Michigan and Texas already have variations of the tax that is, in effect, a value-added tax. Although to many it looks like a corporation/business tax, it is really a consumption tax collected by businesses. For decades conservatives have advocated using this type of tax at the federal level as a replacement for the U.S. corporation tax. From an economic growth perspective it is much better than a corporation tax because it does not penalize investment (like a corporate profits tax does), it does not discriminate against corporate business, and it does not favor debt over equity. In the minus column, because it is like a sales tax, it places a lot more burden on lower-income taxpayers than a corporation tax.

Here is how The Providence Journal explains it:

In calculating its Rhode Island corporate income tax, a business that is organized as a traditional “C” corporation typically lists its revenue first, then subtracts such items as the cost of the goods it has sold, its sales and administrative costs, interest expense and other items. The business then essentially pays tax on what is left over.

Under a net receipts tax, a corporation generally would pay tax on its revenue after claiming only a limited number of deductions (the number and nature of which have not been set). Thus, more of a business’s income would be subject to Rhode Island tax. But a lower tax rate would apply [according to Gary S. Sasse, director of the state Department of Revenue].

The point of all this, according to The Journal story, is to give Rhode Island a competitive edge when it comes to attracting businesses. Being able to advertise itself as a sales tax or income tax-free state would supposedly do this. The business net receipts tax, or BNRT, is also beneficial to the state government because it taxes services as well as goods, thereby providing a more stable source of revenue, according to the above referenced tax site.

For more on proposed BNRT in California, visit the Web site of the California Commission on the 21st Century Economy. Two other explanations of how the BNRT works are available here and here.

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