House Speaker K. Joseph Shekarchi assured reporters Friday night that a proposed tax law rewrite requested by Citizens Bank was not dead, despite its glaring absence in the revised fiscal 2025 budget.

Less than 72 hours later, the Warwick Democrat produced the proof: revised legislation authorizing the shift in state bank income tax calculations, with hearings before both chambers’ finance committees Tuesday.

What changed?

“It wasn’t ready,” Shekarchi said, speaking to reporters at the State House Monday afternoon. “Taxation was opposing it. The administration was opposing it. I certainly wasn’t going to put it in the budget for debate. Now, those two House priorities have been met.”

He added, “I wanted to make sure the taxpayer was protected.” 

McKee pushes state tax rewrite to keep Citizens Bank rooted in Rhode Island. But will it fly?

The updated companion bills, sponsored by Rep. Joe Solomon, a Warwick Democrat, and Sen. Lou DiPalma, a Middletown Democrat, come after months of behind-the-scenes negotiations between state officials and bank executives dating back before Christmas, Shekarchi said.

The tax change, in essence, offers banks the option to calculate their taxable income based only on in-state sales, replacing the longtime “three-factor” calculation encompassing in-state sales, property and payroll. While not explicitly written for Citizens, the financial services giant has the most to gain from the proposal; unlike other banks in Rhode Island, Citizens makes most of its money from services outside state borders, yet its physical presence and payroll are weighted toward the Ocean State.

Other states, including neighboring Massachusetts, have already moved to a similar tax calculation method, a trend referenced by Mike Knipper, executive vice president and head of property and procurement for Citizens Financial Group Inc., in an April letter to state lawmakers.

Knipper in his letter warned that without a similar tax update in Rhode Island, the company “would strongly consider expanding its corporate footprint and employee base outside of Rhode Island because of differing tax treatment among the states.”

On May 10, Gov. Dan McKee proposed a budget amendment offering up the requested rewrite of the bank income tax calculation, with an estimated $15.6 million in state tax revenue loss for a full fiscal year.

However, McKee’s proposal did not make the cut when lawmakers unveiled their revised fiscal 2025 spending plan on May 31, with Shekarchi citing lack of detail and time to vet the proposal before finalizing the state budget.

Yet Shekarchi also said he would not be responsible for losing one of the state’s top employers, which boasts a 4,200 in-state payroll and a $285 million Johnston headquarters.

Negotiations ramped up in earnest over the last week and half, with Shekarchi texting key players in the tax proposal from the rostrum of the budget debate Friday night. A weekend of closed-door meetings and phone calls later, the deal emerged.

Key to Shekarchi’s change-of-heart was the OK from the Rhode Island Division of Taxation, which had initially expressed concerns with the legislation when first introduced by Solomon in March. Tax officials gave the green light to the revised proposal Sunday, Shekarchi said.

The updated legislation clarifies the way taxes are calculated to avoid double-taxation — one of Citizens’ concerns —  and refines the information the state tax division must collect and review, with a report to lawmakers detailing the impact of the tax change due no later than March 2027.

“Citizens is encouraged by recent progress and greatly appreciates the leadership of Governor McKee, Speaker Shekarchi, Senate President Ruggerio and all others involved,” Keith Kelly, president of Citizens Bank Rhode Island, said in a statement. “We look forward to continuing to work closely with the state towards an outcome that is a win for both the business community and Rhode Island.”

Citizens declined to offer further comment Monday.

‘Vigorous and robust debate’

The tax calculation change is still expected to reduce state tax revenue by $7.5 million in tax year 2025, with a forecasted $15 million revenue loss in fiscal 2026. While the policy is not accounted for in the state’s fiscal 2025 budget, there won’t be any cuts or structural imbalances, Shekarchi said.

Instead, the state will take $6.5 million from the $55 million set aside for a supplemental rainy day fund in fiscal 2024, with another $1 million siphoned from the state surplus, to make up for the expected revenue shortfall in fiscal 2025.

“It was a judgment call,” Shekarchi said when explaining his decision to not include the policy change in the fiscal 2025 budget. “I didn’t want this one unsettled article to be the focus of the budget.”

He insisted multiple times, however, that the proposal will have plenty of time for a thorough vetting by lawmakers; the House Committee on Finance hearing Tuesday marks the third time a version of the tax change has been considered, with prior hearings held on Solomon’s bill and the governor’s budget amendment.

“There will be a vigorous and robust debate,” Shekarchi said. 

There’s still no guarantee that the hours of closed-door negotiations prevent Citizens from uprooting anyway, Shekarchi acknowledged.

However, he added, “I think Citizens would be hard-pressed to move. They wanted this very badly.”

As for concerns raised by some lawmakers that changing state tax law to benefit one business will set a precedent for other corporations, Shekarchi dismissed the logic.

“In my mind, there’s no precedent,” he said. “Just because you do it for one, doesn’t mean you do it for another.”

McKee and Senate President Dominick Ruggerio also expressed support for the tax deal in statements on Monday, stressing the importance of parity between Rhode Island and Massachusetts, which is scheduled to move to the single-factor tax calculation starting Jan. 1.

Laurie White, president of the Greater Providence Chamber of Commerce, also welcomed the revival of the tax change, having issued an email warning last week when it appeared the policy would not make it into the fiscal 2025 budget.

“Happy to see that all sides are working towards finding a solution,” White said in a text message Monday. “I applaud the progress being made by Gov. Dan McKee, Speaker Shekarchi, President Ruggerio and Citizens.”

If signed into law, the tax change would take effect Jan. 1.

The House Committee on Finance will take up the revised tax change at 3:30 p.m. Tuesday at the State House. The Senate Committee on Finance will follow suit with a hearing on companion legislation Tuesday night.