The quid-pro-quo cycle of Cronyism

Center for Freedom Calls for End to Corporate Welfare in RI

38 Studios–Type Cronyism Is Not Capitalism

Introduction

Put simply, crony capitalism is the transfer of public money to businesses and organizations through the peddling of influence. Cronyism gives free markets a bad name, since it can be difficult to determine whether true competition exists or the game has been rigged.

A more appropriate term might be “venture socialism” or the more familiar “corporate welfare.” Whatever its name, the concept involves a less efficient economy — making us all poorer and reducing economic opportunity for our citizens.

Download a PDF of the Policy Brief here.

Unfortunately, cronyism has defenders on both sides of the political aisle because its proponents are on the receiving end of the short-term benefits.  Politicians reward their “friends” with all kinds of publicly provided treasures, from subsidies to exemptions from regulations to loopholes in the tax code. In 2008, we witnessed hundreds of billions of dollars spent on the bailout of major Wall Street firms. A more-recent example of a half-billion dollar investment gone bad has given a name to politically correct green industry schemes: Solyndra.

Given its insulated political culture, Rhode Island is certainly not exempt from cronyist deals and boondoggles. Beginning in the 1990s, corporate giants CVS Caremark and Fidelity Investments have received a bevy of tax breaks and subsidies to build or expand national or regional headquarters.

During the last decade, debates raged about the $300-million-plus ratepayer-funded Deepwater Wind project, a Twin River casino bailout, and the $75 million loan guarantee to Curt Schilling’s 38 Studios. In the past week, Schilling’s video game company has offered a uniquely clear example of the risk that targeted public investments will never produce a positive return on investment for taxpayers.

Taxpayer or ratepayer dollars should not be randomly put at risk to finance politically connected corporate interests. It’s time to replace corporate welfare programs with a broad-based growth program.  It’s time to end the handouts and create a pro-job, pro-business structural environment for economic growth in Rhode Island.

Policy Recommendations

As just one step in reducing the size and scope of government in the Ocean State, the RI Center for Freedom & Prosperity recommends that the State of Rhode Island:

  1. End the practice of corporate welfare in the General Assembly
  2.  Defund the Economic Development Corp. (EDC), preventing it from spending or putting at risk any taxpayer dollars

One of the great mistakes to which policymakers often fall victim is judging public policy programs by their intent rather than their results. Such an approach minimizes the consideration that serious unintended consequences ought to carry in subsequent policy decisions.

Rhode Island should roll back many of its so-called economic development incentive programs, whether in the form of subsidies on the expenditures side of the ledger or loopholes on the tax side.  Any economic development program that cannot be objectively shown to create jobs that generate more in-state revenue than they cost should be repealed.

The savings from the ended programs should be used to enact across-the-board improvements of state competitiveness by reducing the Rhode Island’s stratospheric tax rates to more-competitive figures. For instance, Rhode Island’s corporate income tax rate and sales tax rate are the highest in New England, putting the state at a serious economic disadvantage.

Furthermore, ending the practice of cronyism will reduce the special interest and corporate lobbying that pervades Smith Hill and will send a message that taxpayer dollars can no longer be traded for political support and campaign contributions.

Background/Overview

A key critique of market capitalism often revolves around the undue relationship between powerful corporations and the government, resulting in policies, legislation, and regulations that appear to benefit the well-connected at the expense of the public.  This critique — though often labeled an inherent failure of capitalism — is a function of an outsized government.

The relationship is intuitive: A government with more power over the economy creates more opportunities and greater rewards for lobbying. In turn, influence over an entity with the power to regulate, tax, and police brings access to competitive weapons not available in a free market.

Indeed, the lion’s share of blame for the current economic crisis can be laid at the feet of connected business interests’ feeding on the fruits of the public commons while pushing the risk onto the public.  National examples are most prominent in our minds.

When the housing bubble popped in 2008, Washington-connected Wall Street firms won taxpayer bailouts and bonus checks while the working Americans who paid the bill received pink slips and empty promises. And by most measures, those same firms are now more profitable than ever; industry data shows that President Barack Obama’s first two and a half years in office have been more profitable for Wall Street than George W. Bush’s entire eight years in office.

This is not simply a crisis of bad banks run amok, but an unsettling symptom of cronyism. Cronyism, by its very definition, implies a situation in which the system (i.e., the government and the institutions it establishes), rather than the choices of consumers, picks the winners and losers.

While Rhode Island’s economic climate is demonstrably bad for business (Rhode Island ranks 45th in the Fraser Institute’s Economic Freedom of North America 2011 index), a number of tax credits, incentive packages, and corporate welfare programs benefit a few chosen firms while the rest are forced to languish within a suffocating structural environment.

Targeted incentives are sometimes viewed as legitimate instruments for economic development, but a genuine program for broader growth would allow the state to close many of these loopholes in favor of broader reforms that ease the economic burden across the board.

The Research

Every day, taxpayer money is being funneled to organizations and enterprises that someone in government has decided are worthy of patronage, whether they need it or not.  Worse, this kind of cronyism is not merely limited to a series of one-off deals, but is systematized on every level in the form of grants, tax credits, sweetheart loans, loan guarantees, and other preferential treatment.

According to GoodJobsFirst.org, a left-leaning economic development accountability resource, Rhode Island taxpayers paid out almost $50 million in related costs for fiscal year 2010, including:

  • Corporate income tax rate reduction for job creation
  • Enterprise zone tax credits
  • Job training tax credit
  • Manufacturing and high-performance manufacturing investment tax credit
  • Motion picture production tax credit

Worse, disclosure and reporting on these programs are well below what anyone would expect in return for $50 million.  In a series of transparency benchmarks measuring program outcomes, data availability, and accessibility, the average Rhode Island program produced a woeful score of only 36 out of a possible 100 points.

These are only a few of the higher-priced programs.  At present, a startling number of programs are on the books to divert taxpayer money to targeted businesses and industries, accounting for tens of millions in additional handouts with little or no objective standards or accountability. Some of the others include:

  • Distressed Areas Economic Revitalization Act and Enterprise Zone Program
  • Jobs Development Act
  • Rhode Island Public Rail Corporation
  • Child Day Care Facilities in Industrial Parks Grant Program
  • Jobs Training Tax Credit Act
  • Urban Infrastructure Commission
  • Mill Building and Economic Revitalization Program and Tax Credits
  • Jobs Growth Act
  • Petroleum stockpiling program
  • Small Business Advocacy Council
  • and many, many more.

While each carries a plausible justification and positive intended outcome (who could be against child care?), they are all simply variations on the crony-capitalism theme.

Discussion

John Stossel, the libertarian journalist of 20/20 fame and program host on Fox Business News, penned a provocative and compelling piece for Reason magazine in March 2004 titled “Confessions of a Welfare Queen.” Rather than documenting now-familiar stories of individual welfare abuse, as the allusion to Ronald Reagan’s famous “welfare queen” quip suggests, Stossel turned his sights on the multilayered fabric of lavish subsidies for the rich and cronyism.

From bizarre payouts to beachfront homeowners to abuses of eminent domain to unfair subsidies for agro-corporations, Stossel explains how these programs are not examples of market failure, but simply the symptoms of the increasing investiture of power into government, especially over ever-greater swaths of the economy.

Americans who decry cronyism as a betrayal of the social contract are correct: The iron triangle linking lobbyist-rich companies and organizations, campaign contributions, and government policy is a burden on our economy and a drag on our democracy. Too often missed, however, is that regulatory solutions just hand over new car keys and more drinkable money to the hooligans who repeatedly steer the economy into a ditch.

The only solution that can work is to limit the government’s ability to mismanage taxpayer funds; that means cutting back on the size, scope, and domain of government. The most vocal opponents of ending cronyism are, predictably, those who benefit most from the system. They, along with well-meaning but misguided allies, will generally contend that targeted systems of tax breaks and incentive programs are useful for directing policy mechanisms toward specific, concerted ends and that Rhode Island needs these incentive programs to be nationally competitive.

Two fallacious premises support these arguments: first, that public policy instruments are the best available means of achieving common ends and, second, that a labyrinth of programs is a suitable way to attract and develop economic activity. These fallacies, in tandem with the frenetic and sound-bite oriented nature of contemporary media, contribute to the idea that most problems have public sector solutions. This is particularly common in the realm of economics, precisely the area over which a market capitalist system would give the government the least control.

Again and again purported plans for “economic development” have been used to justify programs and incentives that ultimately do little to boost economic growth.  But because spending and special-project support create the illusion of forward movement, beneficiaries can brand the efforts as “doing something.”  What corporate welfare actually does, however, is to tip the scales toward the already rich at the direct expense of the poor and middle class.

Ultimately, government remains wedded to the language and practice of inputs — what it gives and does — because it has very little competence generating or measuring outcomes.  Advocates tend to point to inputs as measures of success — the dollars spent, the teachers hired, the police stations built. Then they trumpet or downplay economic trends, educational accomplishment, and as suits their needs.

Tax breaks and incentives may seem like positives from the input side, but their non-anecdotal outcomes show them to be generally a waste of money.

Conclusion

It’s hard to argue against economic development.  Who doesn’t want the economy to “develop”? But the sad truth is that sending public money to politically-connected organizations, interest groups, and companies on the basis of poorly measured and ill-defined goals is more of a handout than a strategy.  If Rhode Island is serious about promoting economic growth, this kind of piecemeal approach should be seen as expensive and insufficient.

Instead of using targeted tax breaks, incentive grants, and other wizards’ tools to trade away taxpayer funds, Rhode Island should focus on creating a growth-oriented structural environment.  That means replacing isolated pockets of preferential treatment with an across-the-board slate of policies to support growth:

  • Reduced tax rates
  • A more nimble and versatile education system to produce a highly trained workforce
  • Eliminated regulations, streamlined when they are absolutely necessary

Any economic development program that cannot be objectively shown to create jobs and generate more in-state revenue than they cost should be repealed. The savings should be allocated to more general improvements, especially lowering taxes.

Rhode Island’s corporate tax rate remains the highest in New England and is tied for third highest in the country, after Washington, D.C. and Illinois.

Rank in New England

Corporate Tax Rate (%)

Rhode Island

1

9.0

Maine

2

3.5–8.93

New Hampshire

3

8.5

Vermont

4

6.5–8.5

Massachusetts

5

8.25

Connecticut

6

7.5

 

Another area in which Rhode Island is uncompetitive is its state sales tax, which is the highest in the region and tied for second in the country. A study to be released shortly by the RI Center for Freedom & Prosperity will demonstrate that eliminating the sales tax would have the highest “bang for buck” of any reform, creating tens of thousands of jobs and paying for over half of its cost with the increased tax receipts of a larger economy.

Rank in New England

State Sales Tax Rate (%)

Rhode Island

1

7

Connecticut

2

6.35

Massachusetts

3

6.25

Vermont

4

6

Maine

5

5

New Hampshire

6

0

 

These are just a few of the low-threshold starting points for reform. If Rhode Island seeks to distinguish itself as a pro-growth state, it should depart from crony capitalism and unleash the true capitalistic forces in the state.  Fortunately, much of the government cost of the necessary policy changes can be borne by elimination of the special deals and crony-capitalism style programs that infest our state with false promises of a better tomorrow.

To the population more broadly — to the people of Rhode Island — there will be no cost, but rather the benefits of a thriving economy.

Would you tax Big Papi off the Red Sox?

Would you tax Big Papi right off the Red Sox?

Quick Links: Ernst & Young report – taxing the rich will cost jobs

Those who support the onerous tax structure that has ruined our state’s economy have wheeled out a new poll that shows public support of increased taxes on the rich … out of fairness, of course. Our Center has already shown how this tax increase would cost even more jobs for RI and further hamper our already struggling economy.  So let’s try another angle …

Imagine the Red Sox as a last place team having already lost many of its superstars to free-agency. Now imagine that the Red Sox decide to levy a tax on its superstar players like David Ortiz (Big Papi). After all, it’s not fair that Ortiz should get all those at-bats where he can hit home runs, RBIs, and otherwise produce results for the team. No, instead, Big Papi should give 9.9% of his at-bats to players on the bench, who don’t get to play as much. That would only be fair, right?

But consider if it would help or hurt the Red Sox if one of their top producers didn’t get as many at-bats, and instead, those at-bats went to a lower producing teammate? How would Red Sox Nation feel about that?

Then imagine it’s the end of the year, and Ortiz is a free-agent. Is he more likely to re-sign with the Red Sox, who will tax his at-bats by almost 10%, or might he decide to sign with the Yankees who will not tax him at all? Would the Red Sox, with their “at-bats tax”, be able to attract other free-agents to replace him? Again, how would this help the Red Sox?

The same questions can be asked about our state’s “rich”: How is it good for Rhode Island if we limit the capacity of our top producers to invest in our economy? How is it good for us if we make it less attractive for our top businesses and individuals to remain in or move to our state?

Just like the Red Sox, Rhode Island should embrace and encourage our best performers, not give them reason to reduce productivity …  or even leave outright.

In sports, teams actually give bonuses to incentivize performance. In Rhode Island, those who defend the status quo want to to do the opposite. Imagine yourself as a “fan” of Rhode Island … how would you choose to treat our own Big Papis?

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