Managing a Phase-In of Major Sales Tax Reform

The state budget is like a talisman that government officials and special interests raise to ward off the evil spirits of tax reform.  Anything that promises not to raise taxes, or at least not to be “revenue neutral,” is said to be entirely unworkable — destined to eliminate every valued program of government.  And when they’re really stuck, budget protectionists will claim that even a reform that they ought to support for every economic and humanitarian reason is impossible because the budget couldn’t absorb the shock of the first year.  The withdrawals of revenue dependency might kill the junkie.

When it comes to dropping Rhode Island’s state sales tax to 3%, as RI House bill 8039 and Senate bill 2919 would do, the problem is not so dramatic.  To begin with, the companion bills would implement the change at the beginning of 2015, which maintains the higher tax rate through the summer tourist season and the holiday shopping season.  (The latter period on the calendar might also help to reduce the likelihood that people would hold off on purchases in the months leading up to the tax reduction, while also producing a boost during a slower time of the year.)

The following chart, part of the RI Center for Freedom & Prosperity’s “complete solution,” shows the RI Center for Freedom & Prosperity’s suggested approach to managing the implementation of this unprecedented tax reform, taking advantage of the state government’s access to two respected economic modeling tools:  the RI-STAMP model used by the Center and the REMI PI+ model used by the state’s Office of Revenue Analysis.

ricfp-salestax-genrev-3percentplan-web

The total height of the column is the governor’s recommended general fund (state) revenue for the next fiscal year.

  • The dark gray block at the bottom is the $3.054 billion that would be under no risk at all, even if the state dropped its sales tax rate from 7% to 3% for the entire year and the reform had no dynamic effect increasing tax revenue somewhat by improving the economy.
  • The silver block is the $134.25 million that the state secures by starting the reform halfway through the fiscal year plus the dynamic revenue that the REMI PI+ model projects for the reform.  (For a variety of reasons, the Center believes these results to be overly pessimistic.  One very substantial reason is that the Office of Revenue Analysis assumed across-the-board cuts to make up for the reduced revenue, which bit into areas of spending that, they claim, have a strong benefit for the local economy and, therefore, the dynamic effects of the reform.)
  • The red block shows the portion of the revenue for which the state should have some plans to reduce spending if REMI’s pessimism turns out not to have been unreasonable.  The top of this block is the budget that the Center recommends that the General Assembly actually pass.
  • The green block represents the added revenue that RI-STAMP projects the state will realize above the Center’s recommended budget.  If legislators wish to minimize the effects of the reform, they can plan for spending and program increases that would go into effect as this revenue actually comes in.
  • The sliver of blue at the top of the column is the $28.9 million that the Center expects the state to have to trim from the governor’s recommended budget as an investment in the 3% sales tax reform.

The light-green block to the left represents the $224.5 million in savings that the Center’s Spotlight on Spending report identified in the governor’s proposed budget (spanning both his suggested revision for FY14 and spending for FY15).  As the chart shows, these potential savings cover all but the most pessimistic $43 million at the bottom of the red block.

The next chart zooms in on the upper part of the column, with some explanation.  Basically, the strategy calls for the state to pass an initial budget (of $3.3 billion in general revenue spending) and then follow the monthly cash flow reports from the Office of Revenue Analysis.  If the dynamic effects of the more optimistic RI-STAMP model are proving to be the case, nice-to-have spending like grants and pilot programs can be phased in.  If the pessimism of the REMI model is proving to be the case, reductions of a more fundamental (but still non-essential) nature can be phased in.

ricfp-salestax-phasedplan-web

 

Click here for a PDF of these two charts and the full table of Spotlight on Spending recommendations.

PolitiFact Should Fact-Check Itself in Bogus Ruling

Update: PolitiFact acknowledges that the major elements of my statement were indeed true, before RULING that the statement was “Mostly False”. Read their twisted logic here … 

Read the full story – what the PolitiFact article did not tell you – below.

Commentary, April 4, 2014

Earlier this week our Center published its Spotlight On Spending report. That same day the Providence Journal published a related OpEd piece that I co-authored along with David Williams of the Taxpayers Protection Alliance, which partnered with the Center in creating and publishing the report.

PolitiFact, the Journal’s fact-checking unit, noticed a slight discrepancy in the description of a the same item that was referred in both my opinion piece and in the report. PolitiFact believes this semantic discrepancy is of significant enough public value to warrant an investigation; I do not. It completely misses the material reason why this item was included our report.

As it turns out, it was PolitiFact that made a significant error in mis-characterizing my original statement. See below for the explanation.

Sometime next week, PolitiFact will rule on the truth-fullness of my statement in the OpEd. Our Center believes in government transparency and applies that belief to our exchange with PolitiFact. It is important that interested readers know the whole story.

Questions and Clarifications Posed by PolitiFact’s Gene Emery

THREE SEPARATE EMAILS:

1) Hi Mike,I want to fact-check the statement in your commentary, “A grant for $5,000 went to teach an employee at a company that makes ornamental business card holders how to use Facebook and Twitter.” That seems to be referencing the part of the report that talks about “$5,000 to provide social media training for employees at Ahler’s Designs.” So it is one employee or several employees? And did the $5,000 just for teaching someone to use Facebook and Twitter, or was there more involved? If you could point me to your sources, that would useful. Thanks, — Gene Emery

2) That factoid was featured in your Journal commentary. Not only was it repeated in the Journal story the next day, it was played up prominently by Channel 10 and GoLocalProv.I asked you about it because you are the lead author of the commentary, and paying $5,000 to teach one person how to sign up for Facebook and Twitter, which millions have figured out for themselves, seems pretty outrageous. However the report, and the footnoted document, seems to tell a slightly different story: more than one employee and broader training in social media. Actually, according to the reference document in your own report, it’s 3 employees trained at $2,500 and 1 student trained at the same price. So is the report in error, did you misstate the facts in your commentary, or is your commentary referencing something else? –Gene
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3) In the interim, I spoke to the company. They say 3 employees and 2 students received 32 hours of training over eight weeks, making the argument that it’s important for today’s businesses to know the ins and outs of social media, and being a business using social media involves a lot more than setting up a personal Facebook account. I mention this because you might want to react to that argument. — Gene
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Full Response by Mike Stenhouse

We agree with PolitiFact that taxpayer dollars being spent on something that millions have figured out for themselves is outrageous. We question, however, the public service value of fact-checking the semantic difference between “an employee” and “employees’ when a much larger public policy question is at the core of the issue.

There was no mistake in either statement. However there was a mistake in PolitiFact’s characterization of my commentary piece in an email that asked me to respond to the alleged statement –  “‘$5,000 to teach one person how to sign up for Facebook and Twitter’, which millions have figured out for themselves, seems pretty outrageous.” In my commentary, I never made that statement; I never used the term ‘sign-up’, but instead used ‘how to use’; nor did I say ‘one person’; I said ‘an employee’. For a fact-checking organization to call a statement I never made “outrageous”, is outrageous in and of itself.

Both statements accurately identify the same material finding: that $5000 in taxpayer money went to a private company for social media training.[http://www.gwb.ri.gov/pdfs/FY13ExpressGrantAwards.pdf]

The more superfluous descriptions of how that funding was used vary only in that the statement from the OpEd describes a subset of the broader and more inclusive statement from the report.

  • It is true that “an employee” received training, even if others received training as well

  • It is true that the Ahler’s Designs makes business card holders

  • It is presumably true that Facebook and Twitter were part of the larger social media training

The reason we included this item in our report, is not because of the amount of money spent per employee, as PolitiFact appears to be concerned with, but rather that any taxpayer dollars were spent in this regard in the first place. This spending was outrageous, regardless of whether or not the business owner feels that it was important for her business.

Either way, this scenario where many companies pay into a fund that gets re-distributed to just a few, is itself unfair, while also creating potential for cronyism and insider politics. In fact, an additional GWB post notes that in 2013, this same company, “Ahlers Design received $8,150 to train three employees; it also received $8,150 in youth bonus funding.” [http://www.rihric.com/news/news062013.htm] .

The lack of transparency and specificity in the GWB’s reporting apparently also has confused someone at Ahler’s or at GWB. The referenced source in our report indicates that four employees received training; yet Ahler’s stated to PolitiFact that five employees received training. Will this discrepancy be PolitiFact checked? Is this even an important distinction? Like the original premise of this PolitiFact investigation … I think not.

Spotlight on $pending Report

OVER $220 MILLION IN WASTEFUL SPENDING detailed.

When the political class says it can’t be done … this is how to pay for tax and other reforms!

[button url=”http://www.rifreedom.org/?p=10402″ target=”_self” size=”medium” style=”royalblue” ]Spotlight on $pending report[/button]

Fat Tuesday = Fat Rhode Island

March 3, 2014
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RI one of only five “Fat Tuesday” states!

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Rhode Island ranks among the five worst “Fat Tuesday States” when it comes to bloated interest expenses on debt per person, according to  data released yesterday by Truth In Accounting, and commented on today by the Rhode Island Center for Freedom and Prosperity, a nonpartisan, state-based think tank. Taking on new bond projects would worsen this ranking.
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“Fat” states, according to the data, have high levels of interest payments per capital based on total debt, both state and local. Rhode Island suffers from a related debt burden of approximately $14,000 per person, about 50% higher than the 50-state average.
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According to data specially provided to the Center by Truth In Accounting, Rhode Island has seen a 60% increase in this ‘interest expense’ measure since 2006, more than twice the 28% average increase of the five fat states, and the largest increase of any state in the nation during this period, which, ironically, is a period that has seen interest rates dramatically decrease.
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“Not only do we spend-and-tax at levels significantly higher than our state can sustain, but we also pile massive debt burdens on the backs of our taxpayers,” said Mike Stenhouse, CEO for the Center. “These interest payments alone can crowd out spending on other critical budget areas such as education, infrastructure, and public assistance. Just another reason why a new repeal and roll back policy culture is needed in Rhode Island.”
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The Governor’s FY-2015 budget would add to this debt and interest expense with about $275 million in proposed new bond projects. This would mean that approximately $36 million in additional interest debt service payments would be imposed on the state’s budget, or another $36 per resident per year on top of an already worst “fat five” ranking.
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“With Lent beginning this week, perhaps the Ocean State should go on a leaner diet, instead of devouring even more fatty pork,” suggested Stenhouse.
With the Ocean State’s economy burning all around us, politicians just keep fiddling the same old spend-and-tax tune

Non-essential Spending in Rhode Island

HOW CAN TAX CUTS BE PAID FOR? Read about non-essential spending that can be trimmed in our report preview. It is simply a matter of setting spending priorities so that crushing tax burdens can be lessened for all Rhode Island families and businesses.

[button url=”http://www.rifreedom.org/?p=10237″ target=”_self” size=”medium” style=”royalblue” ] Report Preview: Pork Spending[/button]

Non-Essential Spending in RI: How to Pay for Tax Cuts

Non-Essential Spending

in the Ocean State

Budget Savings vs Job Creation

February 24, 2014
Report Preview (check back in March for complete report)

With the state of Rhode Island in economic crisis, and with massive structural budget deficits projected for years to come, Ocean State lawmakers have the opportunity to both grow the economy and reduce deficits by trimming non-essential spending and cutting taxes in the FY2015 state budget.

Good government is about setting spending priorities, so that opportunities exist for those who wish to succeed. Creating jobs and savings for Rhode Island families while reducing the crushing tax burden on the state’s business sector must be weighed against the excessive and often wasteful spending for projects that produce little or no benefit to the average resident.

Developed in cooperation with the national Taxpayers Protection Alliance, the full Spotlight on Wasteful Spending report, which will be released in March by our Center, will outline over two-hundred million dollars in opportunities for savings without cutting budgets for essential services such as education, public assistance programs, aid to cities and towns, or infrastructure. Examples of pork spending projects that can be repealed or rolled-back in order to effect tax reform,  include:

With the Ocean State’s economy burning all around us, politicians just keep fiddling the same old spend-and-tax tune

With the Ocean State’s economy burning all around us, politicians just keep fiddling the same old spend-and-tax tune

  • $38 million to defund HealthsourceRI and transfer the exchange to the federal government
  • $26 million to privatize the money-losing Convention Center Authority
  • $14 million for higher education ‘capital’ projects
  • $12 million to forgo payment of the 38 Studios ‘moral obligation’ bond
  • $9 million in corporate welfare handouts
  • $8 million in often crony spending from the Governor’s Workforce Board
  • $8 million in Community Service Grants from the legislature
  • $5 million in waste and fraud from SNAP
  • $3 million from the Facilities Management budget
  • $2.5 million for a sailing center
  • $1 million in Legislative Grants

These items, plus an additional $100 million or so in dubious spending and other savings opportunities will be discussed in the upcoming March report. Other areas where non-essential budget savings can be realized include: state government operations and excessive overtime compensation; occupational licensing management costs; non-vital commissions and other bureaucratic entities; historical preservation projects; arts & culture subsidies and film incentives; and more.

It is a myth, often perpetuated by those who defend the status quo spending levels, that tax reform ideas that are non revenue-neutral would result in cuts to critical state services. This report clearly shows otherwise – that frivolous spending is rampant. In reality, tax and budget reforms can happen if proper spending priorities are considered.

To help ensure that unnecessary spending practices will not re-emerge, the Center’s full report will also recommend creation of a fully-empowered Office of the Inspector General. The Center also supports the concept of an “Office of the Repealer”, which would have  the sole responsibility of making recommendations to the legislature in areas of government waste, duplication and out-of-date regulations that should be removed from the state law. Related ‘repealer’ legislation is before the RI General Assembly in 2014.

When it comes to tax and budget reforms that will help Rhode Island families and businesses, public debate must ask the critical question:

Are keeping non-essential spending items worth denying renewed economic opportunities for Rhode Island families?