For nearly a decade, taxpayers have been leaving Rhode Island. With cities and towns facing wave after wave of difficult decisions, a change of policy course is critical. Between 2003 and 2010, the net migration out of the state has left Rhode Island with 24,455 fewer income-tax-paying households with a total of $1.2 billion of annual income.
When the RI Center for Freedom & Prosperity released its “Report Card on Rhode Island ‘Competitiveness,'” in February, Rhode Islanders had reason to believe that the General Assembly would do something to address the state’s most pressing issue: jobs. The last time the unemployment rate was below 11% was in June 2009.
Since February, almost two thousand more Rhode Islanders are out of work, and even more than that gave up and left the labor force. Perhaps the worst news, though, is that the legislature and its enacted budget did nothing to improve the economic climate of the state and arguably made things worse.
The Report Card
The “Report Card on Competitiveness” ranked Rhode Island nationally and regionally in ten categories: tax burden, business climate, spending & debt, employment & income, K-12 education, energy, infrastructure, public sector, health care, and living & retiring in RI. For half of those categories, Rhode Island received Fs, meaning that the state ranks very poorly in New England and in the United States.
In no category was Rhode Island’s grade higher than D+, which the state achieved only in K-12 education.
Areas Outside the Economy
Because the report card addresses a variety of aspects of life in Rhode Island, it would be possible for the General Assembly to make improvements in one category at the expense of another. A worsening score in the energy category, for example, might correspond with improvements in overall business climate. With its scores so consistently low, however, Rhode Island has no areas of strength to compromise for the sake of improving weaknesses.
The two notable areas in which lawmakers would likely assert positive action, during this legislative session, are education and infrastructure.
With respect to education, the budget made three substantial changes that legislative leaders present as improvements:
- Combining the Board of Regents for elementary and secondary education with the Board of Governors for higher education and creating a “chancellor” position overseeing all public education in the state.
- Accelerating the incremental implementation of the state’s new funding formula.
- Creating an Information Technology Investment Fund to consolidate IT improvements and provide a dedicated funding stream from land sales (excluding land freed up along I-195).
Despite grand assertions made by House Finance Chairman Helio Melo (D, East Providence) during the budget debate, however, bureaucratic restructuring is not obviously a route toward improved results. Indeed, if a combined board of education creates the opportunity to stifle the forces of reform, it could be a step backwards for the state.
As for the funding formula, while it may represent a more equitable means of allocating resources where they are most needed, the change represents little more than a reshuffling of dollars. Moreover, money is arguably not the critical area in need of reconsideration.
Even the one provision that looks likely to provide true advancement of the state’s education system, investment in IT, is not clearly a net improvement. The IT Investment Fund will receive land-sale proceeds, but the budget gets the ball rolling with an authorization for $45.3 million in new borrowing.
Debt plagues the state’s infrastructure advancements, as well. Between T.F. Green Airport and central landfill improvements, the General Assembly authorized an additional $214 million in debt. That is in addition to $209 million of bond authorizations that will appear on the ballot in November.
Rhode Island is already 47th in the nation and fifth (of six) in New England for state and local debt per capita, according to the report card. During the House budget debate, Melo informed the representatives that state government’s total debt currently stands at $1.7 billion, requiring annual debt service of $299 million.
This could be the year that the state breaks $2 billion in total direct debt owed. (Additional obligations, such as pensions and other post-employment benefits [OPEB] are exponentially larger.)
Asphyxiating the Private Sector
Perhaps the most notable example of infrastructure improvement at the expense of other areas of competitive weakness is the authorization of tolls on the Sakonnet River and Jamestown Verrazano Bridges.
It is true that Rhode Island’s bridges are the most deficient in the nation, but tolls are not a clear answer for two reasons. First, Rhode Island is also worst in the nation for highway cost effectiveness, meaning that a focus on funding will contribute to, rather than alleviate, the problem. Second, the tolls will place an exorbitant burden on a region that’s already suffering.
An analysis by the Ocean State Current found that the island and lower bay communities dominated the lists of population and employment loss, over the last decade. Juxtaposing those trends with median income suggests that the people who’ve been struggling the most are those least able to afford hundreds or thousands of dollars in new transportation expenses.
The imposition of regional tolls is not the only area in which the General Assembly constricted Rhode Island’s private sector. Under the guise of cleaning up licensing laws, the budget added an estimated $1.8 million to the direct cost of doing business in the state. Whether it’s $25 license renewal fees for hairdressers and manicurists, a $550 fee for in-state wholesalers of frozen desserts, or a $1,090 re-examination fee for physicians, the burden falls most heavily on individuals and small-business owners who are simply trying to participate in the Rhode Island economy.
The same is true of the $11 million in new sales taxes being levied against taxicab drivers, pet groomers, and high-end clothiers, among others. Last year, hairdressers across the state successfully lobbied to avoid taxes on the services that they provide. This legislative session, the restaurants successfully quashed Governor Lincoln Chafee’s move to impose a dramatic increase of the meals tax.
It appears that the state government is intent on probing the various segments of Rhode Island’s economy to find areas of lobbying weakness. Industries able to mount strong public defenses will be spared while others won’t. The first test is taxes; the second is fees.
It is true that the General Assembly’s budget for fiscal year 2013 (FY13) represents a slight decrease from its revised budget for FY12 — down to $8.10 billion from $8.12 billion. However, the budget that the General Assembly enacted one year ago was supposed to hold FY12 spending at $7.70 billion. In FY11, the final number was $7.72 billion.
In other words, new revenue and debt is translating directly into government expenditures, with a two-year jump of approximately $400 million.
The growth in full-time equivalent (FTE) employees that the budget authorizes is another indication. During the second term of Governor Donald Carcieri, the number of authorized FTEs declined 2,077, from 16,417 in 2006 to 14,341 in 2010 (numbers differ due to rounding). Consequently, the ratio of public workers to private-sector workers brought Rhode Island its only grade above a C on the Center’s report card: an A-.
With the FY13 budget, the total FTEs authorized has returned to 15,026, making up approximately one-third of the reduction. At the same time, the state’s economy has continued to erode, so the number of FTEs per 100 employed Rhode Islanders has returned to its pre-reduction level. There is a clear disconnect between the public and private sectors.
A specific example may be found in seemingly innocuous government restructuring. In order to process the millions of dollars in federal stimulus money earmarked for Rhode Island, Governor Carcieri created an Office of Economic Recovery and Reinvestment (OERR), currently with a staff of seven. For FY13, OERR will be transformed into the permanent, state-funded Office of Management and Budget, with an initial staff of eleven.
Yet another example of government’s preservation of its own interests at the expense of the overall economy can be found in article 22, which allocated $2.6 million as a partial bailout of the locally administered Central Falls pension plan. During the restructuring of the city’s finances through the receivership and bankruptcy processes, police and fire retirees experienced benefit reductions up to 55%. With state funds, the maximum reduction will now be 25% through FY16, for most retirees.
In effect, a year and a half of revenue from increased professional licensing fees are going to mitigate the harm that Central Falls’ mismanagement did to its personnel. Alternately, the Central Falls bailout could have been funded through the elimination of the OERR now that federal stimulus dollars are drying up.
Competitiveness Is About Priorities and Decisions
On the night it was unveiled, House Minority Leader Brian Newberry (R, Burillville, North Smithfield) referred to the General Assembly’s revision as a “status quo budget.” But the status quo for the state of Rhode Island is characterized by economic decline, and continuing on that path is a choice.
Between the February release of the Center’s report card and the final passage of the budget, the General Assembly chose to bolster government at the expense of private citizens struggling to build a life in one of the harshest economic environments in the United States. Between now and the legislators’ return to their chambers, the next round of choices will be voters’.
2013 Budget Fails to be Bold
I don’t know about you, but the spectacle of General Assembly members congratulating each other for passing a self-proclaimed “bold” 2013 Budget for Rhode Island and outwardly celebrating by pointing out the tax hikes that they didn’t impose on our citizens and businesses might make you think that our state’s economy is “just fine”.
The measure of a good budget should not be mild improvements to a bad budget proposed by the governor. A few legislators, who understood the shortcomings and economic harm the budget would inflict on some, saw their common sense amendments systematically shot down, one after another.
The whole charade is disturbing to me and should be troubling to all citizens; it is indicative of the tax and spend culture that has become so firmly ensconced on Smith Hill
For example, with regard to the new tax on taxi services, consider cab drivers, who, on average, earn pay near the poverty level. All they want is the freedom to earn a living of their choice. Instead, because of the new sales tax on their industry, they will now see their business, their tips and their profits reduced; they will have to jump through hoops to collect and remit the sales tax to the government; and they will suffer the professional ignominy of having their service trade singled-out as one that must help fund the state’s voracious spending habit. Do you think that today … taxi drivers feel that they are in full control of their own lives?
The Political Class calls this tax an “investment” that is necessary for what they deem are more important programs. Most of us just call it more “wasteful spending” to feed their never-ending appetite for government dependency.
How long will it be before they come after your business sector? After all, in the past few years, a number of industries have been threatened with new tax increases, and regrettably, not all were able to escape the assault.
When I speak with pro business groups, even they consider it a “victory” when certain industries, who have good lobbyists, somehow managed to elude taxation – at least for now. What is the matter with our state? These are not victories. These are symptoms of a culture of failure. What Rhode Island needs is a new “winning” culture.
What our state needs is a new, pro business tax policy that will lead to economic growth and more jobs. The 2013 budget fails in this regard.
What our state needs is to upgrade our standing in all those national categories where we rank last or near the bottom. The 2013 budget fails in this regard.
What our state needs is real relief for the massive pension and health benefits liabilities facing our cities and towns. The 2013 budget also fails in this regard.
What our state needs is freedom of choice for disadvantaged students and families who are condemned to a failed school. The 2013 budget fails in this regard, as well.
And yet, they celebrate. And no one else steps forward to lead.
I am left wonder how many Rhode Islanders are wondering themselves about who’s running their lives. Do we each really still own that sacred freedom? Or is the State now our boss? One that dictates and manages more and more parts of our individual lives by herding us into more and more collective, politically-created buckets?
Do not be fooled by all the self-aggrandized back-slapping. Unless you can afford a strong lobbying group, they are likely scheming to manage you and your business next.
38 Studios–Type Cronyism Is Not Capitalism
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.
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.
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:
- End the practice of corporate welfare in the General Assembly
- 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.
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.
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.
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.
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 (%)
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 (%)
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.
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?
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.
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.
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.
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.
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.
Woonsocket Call: http://www.woonsocketcall.com/node/4887
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.
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.
When your government taxes people to the point where they are forced to emigrate to other state, our economic liberties are encroached.