About RI-STAMP

RI-STAMP (State Tax Analysis and Modeling Program) was developed by the Beacon Hill Institute and was customized for the state of Rhode Island for the exclusive use by the RI Center for Freedom and Prosperity. Various versions of STAMP have been successfully utilized throughout the country as a credible predictor of the effects of tax policy on a state’s (or city’s) economy.

Accuracy

Massachusetts STAMP

In May of 2009, the Beacon Hill Institute used its STAMP model to estimate that the proposed increase in the Massachusetts sales tax from 5.0% to 6.25% would increase sales tax revenue by $1.038 billion annually. The sales tax increase was implemented on August 1, 2009. The state collected $950 million in additional revenue in the first 12 months that the measure was in place. However, during the prior 12 months sales tax revenue was down $220 million from the previous year due to the recession. BHI used a logarithmic trend to estimate that sales tax revenue would have been down by an additional $140 million in the year to July 31, 2010. Thus we estimate that the sales tax increase actually generated $1.09 billion in that period. Thus the STAMP model projection was off by only 5.5% from the actual revenue change.

New York STAMP

STAMP has a strong reputation for accuracy. A quote from a March 14, 2003 article in The New York Sun illustrates the predictive accuracy of STAMP. In discussing the Manhattan Institute’s analysis of a property tax increase, the article states:

A fiscal policy analyst at the Manhattan Institute, E.J. McMahon, estimated that it would cost the city 62,000 jobs. He made his estimate based on the State Tax Analysis Modeling Program, which models interaction between economic and tax variables using historical data. It seems that the mayor’s own Office of Management and Budget may have reached similar conclusions to Mr. McMahon’s: Between the mayor’s November financial plan and the January adjustment – i.e. before and after the property tax increase – the administration has revised downward its estimate of the number of jobs in New York City in 2003 by 63,000.

Thus, as predicted by STAMP, the tax increase did cost the city approximately 62,000 jobs.

Effectiveness

Since 1991, BHI has constructed STAMP® models for 25 states and three local areas, including New York City. Over the past decade, researchers armed with STAMP® models have successfully fought back tax increases and advocated tax cuts. Here is a partial list of those efforts:

• Massachusetts, 2000. Voters rejected a graduated income tax.
• New Hampshire, 2001. The legislature rejected a proposal to introduce a sales tax.
• Florida, 2002. The legislature rejected an expansion of the sales tax.
• Alabama, 2003. Voters turned down a tax increase.
• Texas, 2005. The legislature rejected a payroll tax.
• Iowa, 2006. The legislature passed a bill to exclude the income tax for elderly taxpayers.
• Michigan, 2007. The legislature vote for and then repeal an expansion of the sales tax.
• Oregon, 2009. The legislature rejected a cap-and-trade regime for greenhouse gases.
• Washington, 2010. Voters reject the imposition of a state income tax.

Background: CGE MODELS

A computable general equilibrium (CGE) tax model is a computerized method of accounting for the economic effects of tax policy changes. A CGE model is specified in terms of supply and demand for each economic variable included in the model, where the quantity supplied or demanded of each variable depends on the price of each variable. Tax policy changes are shown to affect economic activity through their effects on the prices of outputs and of the factors of production (principally, labor and capital) that enter into those outputs.

A CGE model is in “equilibrium,” in the sense that supply is assumed to equal demand for the individual markets in the model. For this to be true, prices are allowed to adjust within the model (i.e., they are “endogenous”). For instance, if the demand for labor rises, while the supply remains unchanged, then the wage rate must rise to bring the labor market into equilibrium. A CGE model quantifies this effect.

Finally, a CGE model is numerically specified (“computable”), which is to say it incorporates parameters that are believed to be descriptive of the actual relationships between quantities and prices. It produces estimates of changes in quantities (such as employment, the capital stock, gross state product and personal consumption expenditures) that result from changes in prices (such as the price of labor or the cost of capital) that result from changes in tax policy (such as the substitution of an income tax for a sales tax).

Because it consists of a large number of interrelated equations STAMP requires the development and application of a sophisticated computer program for the solution of its equations.

About The Beacon Hill Institute:

The Beacon Hill Institute (BHI) is an independent, nonpartisan economic research organization located in the Department of Economics at Suffolk University in Boston, Massachusetts. Articles and references to BHI’s work have appeared in leading publications, including the Boston Globe, Wall Street Journal, Los Angeles Times Magazine, U.S. News & World Report, State Tax Notes and the Cato Journal. For the last seven years, BHI has been a leader in the development of econometric models for the analysis of state tax policy changes.

The Beacon Hill Institute has developed and built STAMP (State Tax Assessment Analysis Modeling Program) models for 25 states and LAMP (Local Area Assessment Modeling Program) models for 3 cities, including New York City.

The Institute has created a State and City Competitiveness Model and Index. The institute has conducted a comparative analysis of the competitiveness of the US States and 50 largest metropolitan statistical areas (MSAs) and published the results in the form of an annual ranking for the past three years. BHI produces reports for states and cities included in our ranking analyzing the strengths and weaknesses that contribute to its current competitive profile and the steps that need to be taken to improve the competitive posture.

The Institute has provided state revenue forecasts for the Massachusetts and presented them to the Massachusetts Joint Legislative Committee for Ways and Means for the fiscal years.

Center for Freedom presents at RI Hospitality Board Meeting

Mike Stenhouse, CEO for the RI Center for Freedom & Prosperity, presented the findings from the Center’s Policy Brief on the Governor’s proposed “sales tax hike” to the Board of Directors of the RI Hospitality Association this morning. Also discussed was the upcoming “Eliminate the Sales Tax” report that the Center hopes to release before the end of April.

The presentation was well-received by the 25 or so Board members on hand. Following Stenhouse’s presentation and a brief Q & A session, the two organizations agreed to seek to work more closely together on issues of common interest.

The Board presentation was requested following Stenhouse’s popular speech at the Anti-Meals Tax Rally held in March., which was organized by the RI Hospitality Association. See the entire speech, photos, and a post-event interview on the Dan Yorke show … by clicking here.

Special thanks to Executive Director, Dale Venturini, and Chairman, Ken Cusson, for inviting our Center to make its presentation.

Center for Freedom research at anti Meals-Tax Rally

On March 22, CEO Mike Stenhouse presented research detailing the negative consequences Rhode Island might expect if the Governor’s proposed Sales Tax increase were to be implemented.

See the full Policy Brief here …

Listen to the Mike Stenhouse Radio Interview w/ Dan Yorke

Mike Stenhouse presents research at the anti Meals Tax rally at Waterplace Park

 

 

 

 

 

Watch Mike Stenhouse’s speech here on YouTube …

See the entire anti-meals tax speaking program here …

MEDIA COVERAGE:

RhodyBeat: http://rhodybeat.com/stories/Protesters-didnt-cry-over-spilled-tea,69209

Woonsocket Call: http://www.woonsocketcall.com/node/4887

 

Commentary: Fabrication by Rhode Islanders for Tax Equity

George Nee and RIFuture.org should be Called-Out for Promoting Misleading Info

In promoting their plan to tax the rich, the Rhode Islanders for Tax Equity group recently put out a misleading video and chart attempting to equate a drop in Rhode Island’s income tax rates on the wealthy to the rise in the state’s unemployment rate.

Absent any credible citations, the group might just as well have blamed America’s exploding national debt on Rhode Island’s state income tax.

The group, RIFuture.org (its web partner), and George Nee (group member and president of the AFL-CIO) should be called out for propagating these non-credible assertions.

From a professional research perspective, there is a significant difference between causation and correlation. Their video and chart strongly imply that the drop in income tax rates actually caused the unemployment rate rise, yet it fails to provide any evidence to support this absurd claim. There isn’t even any documentation to support how the two measurements may even be correlated; further, they don’t even attempt to explain a correlation. Simply plopping two graph lines on top of each other does not qualify as legitimate research, and certainly does not prove a correlation or causation. Any claim derived from this amateurish effort is a pure fabrication and should be viewed as nothing less than political propaganda.

From a factual perspective, their representation of state income tax rates lacks full transparency. The chart used to support the video shows flat-tax income tax rates only, based on 2006 changes to the law. It does not mention that the 9.9% rate still remained on the books until 2011; and it fails to mention that the flat-tax was merely an “option” for anyone to choose. And they also neglected to mention that upon choosing the flat-tax option that personal exemptions or deductions would be limited; meaning that the effective top tax rate was not reduced by as much as they try to make it appear.

The 2011 tax rate bill was a compromise that eliminated the flat-tax option, lowered the top tax rate, but also severely capped exemptions and deductions. This 2011 amendment was revenue neutral and was not a windfall for the wealthy. Some will pay more income taxes under this scenario, while others may pay less.

The Tax Equity group also willfully ignores the most significant factor that must be highlighted in any discussion about state unemployment trends … namely the great national recession that negatively impacted every state beginning around 2008. Further, the 5.99 percent top tax rate did not take effect until 2011, well after the Ocean State’s unemployment rate had spiked.

Finally, any credible claim must also take into account a more comprehensive statewide picture. As our Center’s Report Card on Rhode Island Competitiveness clearly showed, even with lower top income tax rates, Rhode Island’s overall Tax Burden and Business Climate categories still grade-out as an “F”. Their attempt to blame the drop in income tax rates for the lack of progress in creating jobs and economic growth in Rhode Island is completely and shamefully inaccurate. Only reductions in the broader tax indices, which would serve to improve our overall individual and business tax climate, can be fairly judged to have an impact on our state’s economy. A final note here: the Tax Equity’s group’s misguided desire to raise income tax rates would turn our State’s best tax grade – a “C” in Personal Income Tax Rate – back into an “F”. Raising the rate, as they propose, would leave Rhode Islanders in a worse position than prior to 2006, as the top rate would be raised back to 9.99 percent, but with current levels of severely restricted deductions.

Moving foward, there will be many legitimate issues and points-of-view to be debated in the public arena, but we encourage the media, public officials, and all citizens to demand a higher standard than the level of distortions put forth in this video and chart.

Mike Stenhouse is the CEO for the Rhode Island Center for Freedom and Prosperity, a non-partisan public policy thank-tank.

See the non-credible video and chart here … by Rhode Islander’s for Tax Equity

See a well-researched analysis of their “Tax-The-Rich” plan here … by our RI Center for Freedom & Prosperity

Meet one of the “rich” who may be driven out of RI

Meet Jennifer Hushion. She’s one of the “rich” that some say we need to tax more. In our Center’s analysis of the ill-conceived “Tax The Rich” bill, we warned that not only would this tax harm our state’s fragile economy, but would also drive people, like Jennifer and her family, out of the Ocean State.

Read Jennifer’s story here …

Read our Center’s tax analysis here …

When your government taxes people to the point where they are forced to emigrate to other state, our economic liberties are encroached.

Tax the Rich Schemes Don't Work

Tax-the-Rich Proposal Contradicts Itself

Income Tax Hike on Wealthy would Cost Jobs and Fall Short of its Goal

Download a PDF of the Policy Analysis here … 

Background: In February 2012, a bill was submitted in the Rhode Island House of Representatives that would raise income taxes on individuals making over $250,000 in order to raise $118 million for social safety net programs. The bill includes a provision that the income tax hikes on the wealthiest Rhode Islanders would be temporary, in that those taxes would be gradually reduced as the unemployment rate drops. This concept is a contradiction in itself. Additionally, the bill would be poor public policy for our state, and the bill would not achieve its stated goal.

Analysis: Given the Ocean State’s fragile economy, any rise in taxes will put downward pressure on economic activity and will tend to raise the unemployment rate. A tax plan that is contingent on a decrease in the unemployment rate, but which itself serves to increase the unemployment rate, is contradictory and counter-productive.

An analysis by RI-STAMP (an economic modeling tool utilized by our RI Center for Freedom & Prosperity) of this proposal to raise income taxes by 4% on Rhode Islanders with the highest incomes, is projected to yield the following results and unintended consequences [1]:

• $13 million less than the $118 million in state tax receipts anticipated (or $105 million net)

• Loss of 1,372 jobs, increasing the unemployment rate by about ? of 1% (see Report Card reference)

• Loss of about 1,000 residents (0.09%, see Report Card reference)

Explanation: As with the laws of physics, economic laws are not easily changed by public policy. When something is taxed, it costs more, and the result will be less of it.

This is a common and fundamental miscalculation when it comes to projecting the effects of tax policy on tax receipts. Too often, the more short-sighted and simplistic “static”, or straight-line, calculation is utilized, when in reality the more complex “dynamic” impact should be evaluated. The downstream, ripple effects of tax policy on various aspects of the economy are rarely discussed or attempted to be quantified, either at the state or municipal level. RI-STAMP seeks to fill this void.

In summary, this tax hike plan will not reach its intended goal, as lower revenues will be realized and the state’s tax base will be reduced, while at the same time increasing the number of people who will qualify for or request aid.

Rhode Island’s Competitive Status: Other proposals to tax the rich have also been floated in the state, most with the aim of raising enough new revenues to fund planned spending levels.

The stated position of the RI Center for Freedom is that balancing the budget is the wrong goal for the Ocean State.

Seeking to balance the budget tacitly approves the current budget, and signifies that current spending and tax levels are effective for our state … they are not. The Competitiveness Report Card recently published by our Center illustrates how broadly non-competitive Rhode Island has become as compared with our New England neighbors and nationally.

The Ocean State’s tax burden and overall business climate already grade out at “F” … any increase in the income tax, would make this dire situation even worse.

In fact, in the area of ‘Personal Income Tax Rates’, Rhode Island currently grades a “C”; one of only two areas in the entire Tax Burden category that is not an “F”. By raising the income tax as proposed, this area would itself become an “F”, worsening our already dismal competitive standing … and imposing yet another stigma on Rhode Island as an excessively high tax state, even by New England standards.

In the sub-categories of Population Growth and Net Domestic Migration, Rhode Island also grades “F”. Our state cannot afford to lose more population by driving or keeping people out due to a higher income tax.

This kind of incremental tax-hike thinking, repeatedly over the recent decades, is what has steadily degraded the Ocean State’s ability to compete for the human and capital resources that are required to reinvigorate and grow our economy.

The message from this tax increase would be clear to businesses and individuals who have the mobility to move to or settle in other states … Rhode Island imposes a hostile level of taxes.

Alternative Recommendation: If instead, we would prefer to hang a “welcome” sign, the State must find the courage to cut taxes … and to cut spending. This is the best way to improve our standing in New England. This alternative line of thinking can help reverse the outflow of people and money from our state, and will help us attract the new investment in our state that is necessary to see our business sector expand so as to provide good jobs for our citizens.

Conclusion: A policy of tax “reduction” is consistent with an unemployment rate decrease. This proposed policy of tax “increase” is contradictory to it.

WHAT IS RI-STAMP?

Developed by the Beacon Hill Institute at Suffolk University, RI-STAMP is a customized, comprehensive model of the RI state economy, designed to capture the principal effects of city tax changes on that economy. In general STAMP is a five-year dynamic computable general equilibrium (CGE) tax model. As such, it provides a mathematical description of the economic relationships among producers, households, government and the rest of the world. It is general in the sense that it takes all the important markets and flows into account. It is an equilibrium model because it assumes that demand equals supply in every market (goods and services, labor and capital); this is achieved by allowing prices to adjust within the model (i.e., prices are endogenous). The model is computable because it can be used to generate numeric solutions to concrete policy and tax changes, with the help of a computer. And it is a tax model because it pays particular attention to identifying the role played by different taxes [2].

End Notes

 [1] The RI-STAMP model does not break out incomes at the “$250,000 and higher” level. We determined it would be a more accurate simulation to project the impact of a general $118 million income tax increase, in lieu of a 4% raise on the model’s “$125,000 and higher” level.

[2]  The Beacon Hill Institute, What Is STAMP?; http://www.beaconhill.org/STAMP-Method/STAMP.pdf

Tax hikes will cause a loss in jobs

Governor’s proposed Tax Hikes will Harm already Fragile Economy

Tax Increases Will Cost Jobs and Return Far Less than expected

Tax Plan Analysis

Download the entire Policy Analysis here … including detailed tables and additional information.

In late January 2012,Rhode Island’s Governor proposed a new budget that included a number of tax and fee increases, with the goal of balancing the state’s chronic budget deficits. In order to properly assess the impact of such hikes on the state’s economy, the RI Center for Freedom & Prosperity conducted a detailed, economic analysis, utilizing the Center’s dynamic tax modeling tool, RI-STAMP.

The Governor’s plan attempts to address the perpetual budget deficit by cutting some spending and raising some taxes. As demonstrated by RI-STAMP, this path will produce negative consequences.

 Analysis

To best simulate the Governor’s tax proposal, the following revenue targets were entered into RI-STAMP.

  •  $69.7 million increase in Sales Tax revenues via expansion of the base, with tax increases in some sectors
  • * $13.6 million increase in motor vehicle registration fees was input as a Fuel Tax increase
  • $7 million increase in revenues from smoking products and other items entered as a Cigarette Tax
  • $3.8 million in other misc. taxes & fees were not included in the projection

After running these inputs through the RI-STAMP algorithm, the negative economic consequences of the proposed tax and fee increases become clear. Full details can be found in the table on the following page, but in summary:

  •  The expected total revenue increases of $95 million are not attained, as tax increases depress overall economic activity … the state will see only a $35 million increase in revenues.
  • Over 1400 private sector jobs will be lost
  • Municipalities will lose $9.75 million in revenues due to lower commercial property taxes, as a consequence of lower overall economic activity
  • The State will lose almost 1% in overall Gross State Product
  • Investment in the State will drop by $27 Million

Because a sales tax increase would makeRhode Islandeven less competitive with its regional neighbors, and nationally overall, consumer and entrepreneurial behavior would be significantly altered, resulting in lower economic activity and actually worsening the state’s economic plight. Municipalities, all too often overlooked, will also suffer a loss in revenues from this unintended consequence.

 Balancing the budget is the wrong goal; and tax increases are precisely the wrong solution!

 Recommendation:

Conversely, if the OceanStatewas to cut its sales tax to 5%, a very different scenario is projected to occur, because our state would suddenly become a more attractive place to purchase goods and services, meaning economic activity would increase. (See the Policy Brief, Dynamic Effects of Tax Policy)

 If instead,Rhode Islandwants to address the larger economic picture, by looking to produce more jobs and a brighter economic future for our citizens …

 … cutting taxes and cutting spending will produce a more vigorous economy!

Download the entire Policy Analysis here … including detailed tables and additional information.

Media Coverage of this Analysis:

Warwick Beacon: Chewing over a 10% meal tax

Providence Business News – URI Professor Lardaro supports RI-STAMP economic modeling tool

630WPRO – Conservative think tank says new taxes will hurt RI

Boston.com – Think tank criticizes RI Gov.’s tax plan

Unemployment Up

Governor’s Sales Tax Hike will Hike Unemployment

Download the complete Policy Brief here; includes comparative table and reference end notes.

View or Download the Media Release here; includes quotes and additional information about Scott Moody and STAMP.

Lesson in Capitalism – “Dynamic Effects of Tax Policies”

Balancing the Budget via Sales Tax Increases would Cost Jobs for Rhode Island

January 23, 2012; by J. Scott Moody – adjunct scholar

Consider which of two tax-policy scenarios may be more beneficial for Rhode Island:

A) a policy that increases state revenues to sustain current spending, but which reduces the state’s economic output and where jobs are lost; where municipal revenues go down and where investment in our state is reduced.

B) a policy that reduces state revenues forcing cuts to current spending, but which increases our state’s economic output and where jobs are gained; where municipal revenues go up and where investments in our state rises.

This is the vital debate that must take place in the Ocean State during the 2012 legislative session.

2012 will predictably bring a vigorous debate about how to balance our state budget and how to pay for most of the current spending items in the budget – by some combination of increasing taxes and making cosmetic cuts to existing programs. This is the wrong debate and the wrong objective for the Ocean State!

Instead, debate should focus on how to make Rhode Island more competitive with our neighbors and how to grow our economy so as to add more good jobs for our citizens. Increased tax revenues will naturally follow from the expansion of economic activity.

Dynamic vs Static Tax Modeling

There is a common and fundamental miscalculation when it comes to projecting the effects of tax policy on state revenues. Too often, the more short-sighted and simplistic static calculation is utilized, when in reality is the more complex dynamic effect should be evaluated. The downstream effects of tax policy on various aspects of the economy are rarely discussed or quantified, either at the state or municipal level.

Take the state “sales tax” as an example. Rhode Island is expected to derive about $989.5 million from this tax, currently at 7%. In 2011, to balance the budget, the Governor proposed over $150 million in tax increases through an expansion of the state sales tax: reducing the sales tax on some items and charging new sales taxes on other items. For modeling purposes, assuming a overall target of $175 million in new revenues, this would have effectively raised the existing state sales tax rate to about 8.2%. While not an exact apples-apples comparison with the Governor’s 2011 plan, an analysis of the higher 8.2% sales tax, utilizing RI-STAMP, a state tax and analysis modeling program customized specifically for Rhode Island, shows the kind of negative consequences that can be expected to occur when any state sales tax hike is considered.

Tragically, this sales tax increase would not raise nearly the amount of revenues statically calculated because it would cause serious harm to our already deteriorating state and municipal economies. In summary, a sales tax hike of $175 million is projected to produce severe unintended consequences for theOceanState:

  • Only a $55 million gain in net state revenues (vs the $175 million gain anticipated)
  • A loss in Gross State Product o $932 million
  • A loss of $22 million in municipal revenues
  • A loss of $64 million in investment in our state
  • A loss of 2,224 jobs

 Because a sales tax increase would make Rhode Island even less competitive with its regional neighbors and nationally overall, consumer and entrepreneurial behavior would be significantly altered, resulting in lower economic activity and actually worsening the state’s economic plight. Municipalities, all too often overlooked, will also suffer from this unintended consequence.

Balancing the budget is the wrong goal; and tax increases are precisely the wrong solution!

Conversely, if the Ocean State was to cut its sales tax to 5%, a very different scenario is projected to occur, because our state would suddenly become a more attractive place to purchase goods and services, meaning economic activity would increase.

The static projection of a 2% sales tax cut would put the loss in state revenues, at 2/7 of the current revenue, or about $282.75 million in lower revenues to the state. But again, this static calculation ignores the true dynamic economic impact of tax reductions. RI-STAMP projects the following positive consequences from this tax decrease:

  • Only a $74 million loss in net state revenues (vs the $283 million loss anticipated)
  • A gain in Gross State Product o $1.9 Billion
  • A gain of $44 million in municipal revenues
  • A gain of $121 million in investment in our state
  • A gain of 4,327 jobs

Just from this single tax reform, economic forces, which have been restrained by a burdensome tax structure, will be unleashed in the Ocean State. If the state can find $56 million in cuts, the Rhode Island economy will be vastly enhanced, resulting in more jobs and more local revenues … and we will balance a lower budget!

The Governor’s office recently stated that it plans to address the upcoming budget deficit by cutting spending and raising taxes. As demonstrated above, this path produces negative consequences.

If instead, we look to address the larger economic picture and look to produce more jobs and a brighter economic future for our citizens …

… cutting taxes and cutting spending will produce a more vigorous economy!

Additionally, from a regional and psychological perspective, instead of suffering the ignominy of charging highest sales tax in New England, Rhode Island would benefit by boasting the second lowest sales tax.

Reality Supports Theory

Some may argue that an economic modeling program is just theory and that the actual world may present a very different reality. However, right here in our own New England back-yard, there is specific empirical evidence that fully supports the core premise of the RI-STAMP projections regarding the effects of sales tax policy.

It is well-known that cross-border shopping exists to the great benefit of the zero sales tax state of New Hampshire, with many Rhode Islanders frequently putting in ‘orders’ with family members and friends crossing through the Granite State to pick up liquor and other items for them … duty free!

In Vermont, a recent study showed that its border counties are losing up to $540 Million in retail sales per year to New Hampshire . In Maine, a similar study showed that its border counties are likewise losing $2.2 Billion, in addition to thousands of retail jobs .

With the close proximity of Rhode Island to many Massachusetts and Connecticut residents, it is clear that Rhode Island can win the southern New England sales tax competition; that our economy can benefit from cross-border shopping and see a pronounced increase in economic activity and jobs for our state and our cities & towns.

WHAT IS RI-STAMP?

Developed by the Beacon Hill Institute at Suffolk University, RI-STAMP is a customized, comprehensive model of the RI state economy, designed to capture the principal effects of city tax changes on that economy. In general STAMP is a five-year dynamic computable general equilibrium (CGE) tax model. As such, it provides a mathematical description of the economic relationships among producers, households, government and the rest of the world. It is general in the sense that it takes all the important markets and flows into account. It is an equilibrium model because it assumes that demand equals supply in every market (goods and services, labor and capital); this is achieved by allowing prices to adjust within the model (i.e., prices are endogenous). The model is computable because it can be used to generate numeric solutions to concrete policy and tax changes, with the help of a computer. And it is a tax model because it pays particular attention to identifying the role played by different taxes.

Download the complete Policy Brief here; includes comparative table and reference end notes.

Media Coverage:

1/30/2012: Americans For Tax Reform , ATR: Opposed to Rhode Island Sales Tax Increase

1/23/2012: GoLocalProv.org, NEW: Conservative Think Tank Rips Chafee on Taxes

Little State, Big Spending

In yet more news to file under thank-god-for-pension-reform-but, the Providence Business News reports that while Rhode Island public sector spending is surprisingly lower than the U.S. average, medicare costs are significantly above national averages.

Medicaid-related vendor payments accounted for more than 20 percent of state and local government spending in Rhode Island from 1999 to 2009, significantly more than the rest of the country, according to a new report from the Rhode Island Public Expenditure Council.

“The report from the budget watchdog group found public-sector spending – by both state and municipal government – in the Ocean State rose 68.9 percent over the 10-year period to $8.9 billion per year, a smaller increase than the 77 percent jump nationally.”

While the somewhat slower growth than the national average is welcome, it’s hardly good news. It goes without saying that there aren’t 68.9 percent more Rhode Islanders today compared to ten years ago, and it’s probably fair to say that the Ocean State isn’t 68.9 percent — or half of that? — better or more efficient than it was in 2001. So what justifies the public sector explosion?

And the faster-than-national-average expansion of Medicaid-related payments is definitely a worrying sign. Controlling Medicare and Medicaid cost growth is a major issue nationally anyway, so for Rhode Island to be spending a significantly greater proportion of public funding than the rest of the country – especially in light of the flexibility that was supposed to come with the first in the nation Medicaid global waiver and block grant – indicates that the system here is particularly broken.

Pension reform was a major and necessary step, but it’s becoming clearer day by day that there’s still so much more to be done. Rhode Island may have averted one major crisis in the making, but it doesn’t mean that we’re anywhere out of the woods. Beyond Pensions, Rhode Island still must grapple with its systemic uncompetitiveness.

 

Pension Reform Bait-and-Switch to Block Broader Reform

An observer of Rhode Island’s political scene needn’t be excessively cynical to be a bit disconcerted by the unity of purpose displayed toward the end of the General Assembly’s special session on pension reform.  Leading Democrats, including some who double as labor union leaders, were onboard.  The union-backed Independent governor, Lincoln Chafee, was onboard.  From the opposing camp, various good government groups were onboard, almost in unity.

Even the ostensibly neutral media joined the parade.  After an overwhelming vote passed the legislation, the Providence Journal editorial board dubbed the achievement as “Rhode Island rescued.”  An analysis by WPRI’s Ted Nesi called the bill, “an extraordinary — and unlikely — achievement for the three leaders most responsible for shepherding it through.”

Two questions arise from this sea of consensus:  Is it really plausible that the combination of budgetary crisis and strong leadership changed the legislature’s stripes so dramatically as to make it a national example of forward-thinking government?  And should we worry that the issue’s momentum carried forward catches and promises that will ultimately harm the state?

An initial answer comes in the form of the last-minute amendment creating a 5.5% “assessment” (aka “tax”) on privatized workers.

A Long-Running Union/Assembly Goal

Back in 2007, as June 15 turned into June 16, Rep. Charlene Lima (D, Cranston) slipped a midnight amendment into the budget bill that would pass before the sun came up.  The amendment created RI General Law 42-148, “Privatization of State Services,” which requires an elaborate review and appeals process before the state can use private contractors for services previously performed by unionized public employees.

The legislation made its appearance in the midst of efforts by Governor Donald Carcieri to address the state’s structural deficits through such privatization, and within a week, his efforts ended.  As Carcieri spokesman Jeff Neal put it, “Bringing competition to the delivery of state services is one of the key ways Rhode Island will be able to fix its budget problems.  Unfortunately, it appears that solution is off the table now.”  The final nail came a year later, when the state Supreme Court declined to review the constitutionality of the law.

In essence, the legislation required a cost-comparison analysis that would pit the private contractor’s bid (plus all remaining inside and transition costs) against an optimistic “new cost estimate” from union workers, “reflecting any innovations that they could incorporate into the work performance standards.”  (Not that the law required them ever to implement the innovations.)  In order to win the contest, the outside vendor would have to offer “substantial” savings; in her initial legislation, Lima used the margin of 10%.  State workers and their unions could then use an appeals process to delay the contract award for months.

Fast forward to November 2011.  As the pension reform legislation moved toward stunningly smooth passage, the following language slipped into the mix, amidst a variety of “technical amendments”:

42-149-3.1. Assessment on state expenditures for non-state employee services. – Whenever a department, commission, board, council, agency or public corporation incurs expenditures through contracts or agreements by which a nongovernmental person or entity agrees to provide services which are substantially similar to and in lieu of services hereto fore provided, in whole or in part, by regular employees of the department, commission, board, council, agency or public corporation covered by chapter 36-8, those expenditures shall be subject to an assessment equal to five and one-half percent (5.5%) of the cost of the service. That assessment shall be paid to the retirement system on a quarterly basis in accordance with subsection 36-10-2(e).

Government leaders are quite open about the intention behind the new statute.  House Speaker Gordon Fox (D, Providence) has acknowledged it as an effort to prevent future governors from returning to Carcieri’s methods.  Richard Licht, director of the Department of Administration for the current governor, told WRNI’s Ian Donnis that “the purpose of it” is to “curb the state’s use of outside employees.”

Whatever “substantial savings” might have meant under Lima’s legislation, they now must overcome an additional 5.5% handicap, and as the state’s structural deficits continue, government officials will be nudged even more strongly toward tax increases and/or service reductions.

A Tax for the Pension System

The secondary effect of the 5.5% provision is, obviously, to introduce another taxpayer stream of revenue for the pension system.  The amount that state entities spend on contract employees is not readily available, but Licht puts the annual revenue to the pension system at a projected $2 million (though he admits that no thorough analysis has been performed).

In the context of the pension reform, however, dollar amounts have typically been described in terms of the amortization period.  That is, in the 25 years that it is supposed to take for the pension system to be sufficiently funded, this last-minute money grab will amount to around $50 million paid from the state’s general revenue.

Or Something More Insidious?

Whatever the dollar amounts, a key difference between this latest scheme and the Lima amendment should not be overlooked.  The definitions section of the 2007 law defines “in-house” services as those involving “in-house state programs and employees.”  Section 3 of the law explicitly begins the review process “prior to the closure, consolidation or privatization of any state facility, function or program.”

The new law is not so carefully limited.  It describes the included services as those provided by employees covered by RI General Law 36-8, which establishes the state pension system.  That system is not limited to state workers.  Indeed, subsection 36-10-2(e), which the new law cites for the process of payment, refers to state contributions to teachers’ pensions, as well as state workers’ pensions.  Depending how enthusiastically the various parties wish to press their advantage, it may turn out that the 5.5% assessment applies to contractors hired to perform any service “similar to or in lieu of” any employee in the pension system, whether employed by the state, a school district, or a municipality.

The most financially and politically significant example that comes to mind is that of charter schools.  In general, teachers in such schools are required by state law to participate in the retirement system, but mayoral academies can opt out.  If they do so, will their budgets be subjected to the 5.5% assessment?  Given the fact that the last-minute amendment was not thoroughly vetted before submittal nor thoroughly debated before being voted into law, that may very well be the case.

Pension Reform as a Barrier to Broader Reform

I’ve been arguing against General Treasurer Gina Raimondo’s pension reform on the grounds that it (1) is insufficient by several orders of magnitude to solve the entire problem, and (2) puts future adjustments and reforms fully in the hands of the state Retirement Board, with seven of 15 members appointed directly by unions.  Even when agreeing, supporters of the legislation have proclaimed it as a huge step in the right direction.

The privatization tax may be an early indication that crisis and leadership only yielded a quarter step forward, soon to be followed by four steps back.  At the very least, the state has one less tool to rein in its structural deficits, and the restriction may apply to any other government entity in Rhode Island that participates in the pension system but wishes to explore privatization.

The scope may broaden even more (and more definitively) if reform of municipal pensions brings additional public employees within reach of General Law 36-8.  And reformers would do well also to ponder the relevance of this latest General Assembly bait-and-switch while advocating for another of their favorite notions:  consolidation.  Bringing local services under the purview of state employees will virtually ensure that they remain forever “in house.”

Beyond all of this speculation is the likelihood that the amendment was just the first surprise that helped buy such broad assent and smooth passage for the bill.  It isn’t cynical at all to observe that, whatever else it might be, Rhode Island’s entrenched establishment is sufficiently savvy to see when basic math threatens the application of reality to unrealistic benefits and to make the best of reforms… and with a vengeance.