What is decoupling and why should Rhode Island pursue it?

Decoupling occurs when a state decides not to conform to the federal tax code, allowing the state to collect money it would otherwise have lost due to tax cuts for the wealthy.

I’m going to start this piece with some basics on how our state and federal taxes work, what decoupling is, and why decoupling is important in a world where the federal government has slashed assistance to states and to people dependent on government programs such as SNAP, Medicaid, and more.

When determining what state income taxes wage earners and businesses must pay, most states use the federal tax code as a starting point for the calculation. They do this because it makes it simpler for filers to figure out their taxes and easier for the state to enforce. You might notice that you use your completed federal tax form to calculate state income taxes owed; you don’t have to redo your taxes completely.

In general, Rhode Island is a “rolling conformity” state, meaning that, as changes occur in the federal tax code, Rhode Island automatically adopts them. Some states use “fixed-date conformity,” meaning that they have chosen a specific version of the federal tax code, from a specific point in time, and use that version of the federal tax code as the basis for calculating state income tax.

You might see the problem here: When the federal government grants huge tax breaks to large businesses and wealthy taxpayers, as happened last year with the passage of HR1, the For the People Act, and what President Donald Trump refers to as the “Big, Beautiful Bill,” not only do these wealthy individuals and business pay less taxes to the federal government, they also pay less taxes to the state.

States are already under enormous pressure. The Trump Administration continues to slash support for important federal programs, often leaving the states with the bills. Even if a state does not try to make up the funding shortfall for social programs like SNAP and Medicaid, it will still be hit with rising costs in policing, education, and emergency health interventions due to these federal cuts.

Hence, “decoupling”

Decoupling occurs when a state decides not to conform to the federal tax code, in whole or in part, when calculating state taxes. This allows the state to collect money it would otherwise have lost due to tax cuts for the wealthy, such as HR1.

On Thursday, the Senate Committee on Finance, chaired by Senator Louis DiPalma (Democrat, District 12, Middletown, ​Little Compton, Newport, Tiverton), heard testimony on Governor Daniel McKee’s proposed FY27 state budget, specifically about decoupling from federal research and development expensing.

Here’s the video of that discussion:

I’ll let Matt McCabe, Chief of the Office of Revenue Analysis (ORA) in the Rhode Island Department of Revenue, explain this, as he did before the Senate Committee:

“The governor proposes to permanently decouple from the HR1 provision that allows businesses to fully deduct research and development costs in the year they are incurred. To back up for a second, under prior federal law, starting in tax year ‘22, all businesses are required to amortize research and development costs over five years, in five equal installments. Rhode Island is generally coupled to federal definitions for expensing, depreciation, and things like that. We were coupled to this federal requirement to spread out these research and development costs over five years. HR1, the big federal tax bill that passed last year, now allows full expensing of research and development costs all in year one, when those costs are initially incurred. The bill also allows some businesses to fully recoup some of those costs, going back to 2022, when the federal law originally changed.”

This means, in part, that businesses can now deduct from their 2026 taxes some tax payments they made in 2023, 2024, 2025, and 2026!

More decoupling?

Certainly, preventing a $22.6 million hit to state revenue is a worthy goal, but could it be more? Alan Krinsky, director of research and fiscal policy at the Economic Progress Institute, argued before the committee and in written testimony that decoupling from other parts of the federal tax code could preserve between $35 and $50 million in state revenue.

Krinsky, in his written testimony, makes the case for decoupling:

• These provisions frequently subsidize out-of-state economic activity;

• Many benefits flow to investors and companies outside Rhode Island;

• These incentives, if they work at all, work at the federal level – not as state policy;

• Companies and investors can still claim the more generous federal benefits, even when RI decouples;

• These tax provisions primarily benefit wealthy households, large corporations, and investors, and not Rhode Island’s small business owners;

• Some provisions are retroactive, and retroactive tax breaks cannot incentivize future growth;

• State revenue will be reduced without strengthening Rhode Island’s economy;

• Decoupling protects revenue without harming Rhode Island’s small businesses; and,

• At a time of budget pressure and unmet needs, these provisions would drain funding for public priorities such as education, healthcare, housing, and infrastructure.

Here are Alan Krinsky’s suggestions for further decoupling and fiscal impact estimates from his submitted written testimony:

The Rhode Island wealth lobby is against decoupling

The Rhode Island Business Coalition (RIBC), representing “50 industries and 6,280 businesses that employ 231,200 people throughout Rhode Island,” submitted written testimony in opposition to decoupling.¹ RIBC Chair David Chenevert made two arguments:

• Decoupling the state from this change will make Rhode Island less competitive and attractive to the businesses we are looking to bring to the state and to retain.

  • In support of this contention, Chenevert used business climate rankings from “national firms that provide fifty-state comparisons.” I’ve written elsewhere why these rankings are bullshit [See: here, which is dependent on research by economist Peter Fisher and the EPI’s Alan Krinsky].

• Decoupling will add to the complexity of tax filing administration and preparation by requiring businesses to maintain two separate sets of records.

  • Decoupling, maintains Chenevert, will be “particularly challenging for small businesses, which are the backbone of our state’s economy.” Just as the Landlord Lobby presents “mom-and-pop” landlords as unduly burdened by new regulations, so does the Wealth Lobby present small businesses as unduly stressed by a slight increase in the complexity of their tax returns.

The other piece of written testimony in opposition to decoupling came from the Rhode Island Society of CPAs, which fleshed out Chenevert’s simplicity of tax compliance argument. They also attempted to make the case that Rhode Island “does not have a revenue problem; it has a spending problem.” For evidence of this contention, the CPAs presented what Chenevert did in his written testimony: bullshit business climate rankings from groups like the Tax Foundation.

Krinsky countered the tax simplicity argument in his testimony:

“While recognizing the value of tax simplicity achieved by remaining coupled with federal tax rules, our primary consideration ought to be preserving state revenue, particularly when foregoing such revenue will bring little or no benefit to the state or its economy... The revenue loss is not worth remaining coupled, nor is it worth remaining coupled when most of the benefit will go to large corporations and wealthy households and do little or nothing for Rhode Island’s small and micro businesses.

“In addition, I’ll note that if these various tax provisions work at all, and it’s not clear that all of them do, they work at the federal level, not on the state level. The federal benefit is much larger, and the additional marginal state benefit is unlikely to motivate significant business decisions. Even if we decouple, as we noted before, the tax filers still get that more generous federal provision. What the state does doesn’t affect that.”

In a $15 billion budget, the tens of millions in savings earned through decoupling may not seem significant, but it certainly is. That money could have a profound impact on the underfunded Rhode Island Public Transit Authority or help finance school lunches and breakfasts, which have been shown to boost test scores and attendance.

1. In addition to the Rhode Island Business Coalition, the following wealth lobby orgs signed onto Chenevert’s written testimony:

• Associated Builders and Contractors – Rhode Island Chapter

• Greater Newport Chamber of Commerce

• National Federation of Independent Business

• Northern Rhode Island Chamber of Commerce

• Propane Gas Association of New England

• Rhode Island Hospitality Association

• Rhode Island Lumber and Building Materials Dealers Association

• Rhode Island Small Business Economic Summit Regulations Subcommittee

• Rhode Island Small Business Summit Tax and Budget Committee

• Rhode Island Society of CPAs

• Rhode Island Staffing Association