Center Rates Fung Sales Tax Reduction Plan

October 14, 2014 – Providence, RI: The Rhode Island Center for Freedom & Prosperity released today a scoring-summary of the sales tax reduction plan offered by gubernatorial candidate, Allan Fung, who proposes to gradually reduce the state’s sales tax rate to 5.5% over the next four years from its current level of 7%.

According to the Center’s economic modeling program, RI-STAMP, the Fung plan would produce the following ‘dynamic’ results for the Ocean State job market and for state and municipal budgets. As compared with current baseline projections over the next four years …

A 6.25% sales tax rate in year-1 would produce 2043 new private sector jobs; would require $19.9 million in state budget savings; and would add almost $17 million statewide in new municipal revenues

A 6.00% sales tax rate in year-2 would produce  2663 new private sector jobs; would require $28.3 million in state budget savings; and would add almost $23 million statewide in new municipal revenues

A 5.75% sales tax rate in year-3 would produce 3250 new private sector jobs; would require $36.5 million in state budget savings; and would add over $29 million statewide in new municipal revenues

A 5.50% sales tax rate in year-4 would produce 3804 new private sector jobs; would require $46.3 million in state budget savings; and would add almost $36 million statewide in new municipal revenues

completesolutionFor years, the Center has been advocating for an immediate repeal of the sales tax, or a major reduction to 3%, as the most cost-effective way to produce tens of thousands of new jobs and to provide a major boost to Rhode Island’s stagnant economy. According to the Center’s RI-STAMP projections …

A 0.0% sales tax rate would produce 25,426 new private jobs; would require about $313 million in state budget savings; and would add about $150 million statewide in new municipal revenues.

A 3.0% sales tax rate would produce 13,424 new private jobs; would require about $47 million in state budget savings; and would add about $119 million statewide in new municipal revenues.

A detailed analysis of multiple sales tax reduction scenarios, with corresponding RI-STAMP projections, can be found here.

Commentary: 2-out-of-3 Ain’t Good Enough

By Mike Stenhouse, CEO

The 2015 state budget is now public. Corporate tax and estate tax cuts are in. Help for the middle class is out. In fact, the average worker is being asked to pay for reforms that benefit more well-off constituencies.  Why? It’s not just a matter of fairness; it’s a question of economic stability.

Rhode Island’s poor economic performance and dismal jobs outlook can largely be attributed to high levels of taxation and regulation across all points of Rhode Island’s economic lifestyle.

TaxEconomicCycle

An analogy can be made between a prosperous state economy and a three-legged stool, where each leg plays an equally important role in keeping balance and maintaining strength, as part of the normal economic cycle through which most individuals progress:

  • First leg – workers – where individuals produce the products and services essential for a growth economy; where valuable professional experience can gained; and where individual wealth can accumulated and spent in the local economy;
  • Second leg – business sector – corporations and entrepreneurs  who, as managers or small business owners, guide the free-market to generate profits that further fuel the overall economy; and where, simultaneously, further personal wealth and experience can be accrued and spent;
  • Third leg – investors – where wealth is put at risk via equity investment back into the business sector, further boosting the economy and creating jobs, and which provides additional opportunity to grow individual wealth; where philanthropy funds local charities; where wealth is spent on a large scale, often in retirement, and, finally; where wealth is passed down to family heirs in the hope of maintaining ongoing investment and philanthropy in the state.

All three economic roles, or legs of the stool, are equally important and are inter-dependent on each other. The free-enterprise system allows individuals move from role one to another as they choose, as they acquire capacity, or as other circumstances dictate.

A balanced, growth economy must have strength in each of its three legs: a partnership of sorts. If any one leg is out of balance or weak, likewise, the other legs – and the overall economy – will also suffer. It is this tri-lateral partnership that creates a vibrant free-market economy and a stable tax “base”, strong enough to support public assistance programs and foundational services such as education and infrastructure.

However, in recent decades in Rhode Island, excessive government interference has systematically weakened all three legs of our economic stool, limiting  the capacity of individuals to move from one role to another; and at all three roles, driving many out of our state.

With high sales and property taxes in a high cost of living state, and with limited opportunity for upward mobility because of a weak jobs market, Rhode Island is a barely affordable home for many workers in low and middle income families, who have little chance of saving money and accumulating initial wealth. Yet no relief is planned in 2015 for the average worker.

With the highest corporate tax in New England and one of the worst business environments among all states, along with a dwindling consumer base, it has become very difficult for businesses and entrepreneurs to prosper in the Ocean state. Limited corporate tax relief is designated in the 2015 budget for the business sector.

For wealth that is accumulated despite these roadblocks, our state has further imposed a dis-incentive for many families to keep that wealth in Rhode Island, by charging one of the nation’s most punitive estate, or death, taxes …  tending to drive high-income individuals out of our state. Some relief is also planned for wealthy investors  in 2015.

Yet, while it is a positive sign that some reform is planned to fortify the two roles that generally involve higher income individuals, why are we ignoring relief for the middle class? To make matters even worse, the new gas taxes and fees on real estate transactions, vehicle inspections, and traffic court appearances, along with the new the ‘use tax’ on income, will be a direct hit on middle and low income families.

This puts the proposed 2015 budget completely out of balance.

There is, however, a policy idea on the table that would restore that balance by aiding those with lower incomes. Our Center’s sales tax reform idea, that cuts the rate to 3%, can also fortify the worker leg, leading to more family savings and creating thousands of vital, new job opportunities. If we also implement a major sales tax cut, strengthening this leg as well, this would spur consumer demand, increasing corporate profits and wealth creation in the other two legs. This is a balanced, win-win solution.  Instead, Rhode Islanders are yet again looking at an unbalanced, win-lose approach.

Rhode Islanders want a government that works for everyone, not just for the well-off. We can do this by cutting corporate, estate, AND sales taxes.

The former rock star, Meatloaf, may have crooned that “two-out-of-three ain’t bad”. But when it comes to fortifying all three economic roles that are equally essential in turning around a struggling state like Rhode Island … two-out-of-three ain’t good enough!

Mike Stenhouse holds an economics degree from Harvard University. 

TaxEconomicCycle

Without Sales Tax Reform, 2-out-of-3 Ain’t Good Enough

RI’s 2015 includes corporate and estate tax reforms for big biz and the wealthy, but provides no relief for average family or worker. Read this unique commentary that takes a holistic look at the 3 phases of the economic cycle.

[button url=”http://www.rifreedom.org/?p=11208″ target=”_self” size=”medium” style=”royalblue” ] Commentary: 3 Legs of a Stool[/button]

Statement on 3% Sales Tax Hearings

May 8, 2014 — OFFICIAL STATEMENT re. the May 7 House Finance Committee hearing on H8039 to lower the state sales tax to 3%. 

The Center’s testimony regarding a proposed sales tax cut to 3%, yesterday, appeared to generate interest from of a number of House Finance Committee members with the presentation of its “complete solution“, including a fiscal note about the anticipated dynamic revenue increases, which would lower the net impact on the state budget to as little as $47 million, in exchange for a potential increase in jobs of over 13,000. The Center then also showed how to find budget savings for this remainder (Spotlight on $pending report) without cutting any essential programs or services.

It appears that, legislatively, sales tax cuts are being considered along with corporate tax and estate tax cuts in 2014. While the Center supports all three reforms, research indicates that sales tax cuts will produce the largest economic boost and create significantly more jobs, at a lower cost per job, than any other tax reform.

The Center is puzzled by the position taken by the RI Hospitality Association, which testified against the 3% bill. It is almost certain that such reform would significantly increase consumer demand throughout the industry (diners, overnight guests, vendor services), perhaps as much as 20%, create more jobs, and lower the cost of conducting business for each of the Association’s member organizations. In 2012 RIHA actively mobilized support to stop a proposed 2% percentage-point increase in industry sales taxes, yet now is working against a sales tax cut of twice that size. The Center questions if RIHA members are aware of or support this position?

Testimony was also heard on bill to decrease the sales tax to 6% on a reduced number of industry sectors. Again, while a small step in the right direction, this reform would produce only one-sixth as many jobs, at just less than half the cost to the state budget, as compared with the 3% plan.

completesolution-explanation

Managing a Phase-In of Major Sales Tax Reform

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

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

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

ricfp-salestax-genrev-3percentplan-web

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

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

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

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

ricfp-salestax-phasedplan-web

 

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

A 3% State Sales Tax: Updated 2014 Projections

Based on an updated 2014 version of the Center’s RI-STAMP economic modeling tool, new jobs and revenue projections are projected for a proposed across-the-board cut to the state sales tax to 3%, from its current 7% level.

The 2014 projections, based on updated Rhode Island data, show very similar results to the 2013 projections: over 13,000 jobs and over $450 million in new state revenues. plus over $100 million in new municipal revenues are projected to be created from the massive dynamic economic impact that would result; leaving the state with less than $50 million in budget savings to be identified.

The 2014 projections also include:

  • Multi-year projections for the 3% scenario
  • Near-term jobs and revenue projections for modified 1% sales tax scenario (proposed by 3rd party and also under consideration in 2014)

[button url=”http://www.rifreedom.org/wp-content/uploads/3percentSTAMP-2014-projections.pdf” target=”_blank” size=”medium” style=”royalblue” ]2014 Projections for a 3% Sales Tax[/button]

To see the complete 3% sales tax solution, go to our Sales Tax home page at RIFreedom.org/SalesTax .

 

 

 

Fiscal Analysis: Math of a 3.0% sales tax is budget friendly

No Budget Cliff:

A legitimate concern for lawmakers when considering sales tax reform, is avoiding severe revenue shortfalls and managing the state’s monthly cash flow. In considering dropping the RI Sales Tax to 3.0%, creating up to 13,000 jobs and over $100 million in new annual revenues for cities and towns, due to growth in the retail shopping sector and related economic activities, it is important to describe how state revenues – in all categories – would be impacted.

Fiscal Projections:

In fiscal year 2015, it is estimated that the state of Rhode Island will take in sales tax revenue of about $938 million.

A static calculation assumes that no increased economic activity will occur as a result of the decreased sales tax rate, and that a reduction in the sales tax from 7% to 3% would result i a loss of  4/7 of the originally projected revenue, or a loss $536 million.

A dynamic calculation attempts to project the effect of increased activity that is expected to occur (in the first full fiscal year after implementation) and projects a net budget loss of only $47 million, as follows:

-$433 million in sales tax receipts: -$536 million straight-line calculation plus $83 million from new transactions.  It is an economic truth that that increased retail activity would result from the lower consumer costs, producing increased transactions and, therefore, sales tax receipts higher than the static calculation, decreasing the net revenue loss in this category.

+$226 million in income tax receipts: With more economic activity, more taxable income will be paid to RI workers, from a) more people hired, b) more hours for existing workers, and c) higher salaries and pass-through-profits for existing employees or business owners.

+$42 million in cigarette tax receipts: With more people shopping in RI, more cigarettes will be purchased in the state.

+$3 million in alcohol tax receipts: With more people shopping in RI, more alcohol will be purchased in the state.

+$27 million in corporate tax receipts: Increased consumer activity will attract new corporations to the state and would likely lead to higher profits from existing corporations.

+104 million in other taxes and sources of revenue: With greater overall economic activity and population growth, and more money to spend by consumers, it can be expected that the state would realize increased receipts from gasoline, vehicle fees, estate, racing and athletic, bank deposits, tangible assets, realty transfer, health care providers fees, and public utilities taxes, as well as increases in court, university tuition, lottery, and other departmental receipts.

NET STATE BUDGET IMPACT: -$47 million

MUNICIPAL IMPACT: +119 million collectively; every city and town is expected to see increased revenue gains, due almost entirely to higher commercial property tax revenues, as a result of new and expanded business formation.

Budget Planning Process:

A number of tools exist for lawmakers to mitigate the budget impact of major sales tax reform. Even if the projected $48 million deficit is overly optimistic, prioritization of spending leaves ample room.

1)      NON-ESSENTIAL SPENDING of over $225 million in non-critical programs were identified in the Center’s Spotlight On $pending report. Lawmakers can choose to prioritize spending so as to create the best opportunity to create jobs and can look at low-hanging fruit in the budget, such as:

  • $23.4 million to return HealthSourceRI to the federal government
  • $12 million 38 Studios annual bond payment
  • $13 million in projected savings from reduced social services demand

2)      ANNUAL BUDGET RECONCILIATION PROCESS, which routinely adjusts the budget in response to changes in revenue that often far exceed the projected sales tax revenue changes.

3)      THIRD-QUARTER IMPLEMENTATION of sales tax reform, beginning the lower rate in the middle of the fiscal year on January 1, 2015 would essentially spread the budget impact over two budget cycles, requiring less savings in 2015 and enabling more flexibility for the 2016 budget.

Monthly Cash Flow:

From the figures above, the dynamic increases in receipts in many categories would occur almost immediately, as more shoppers flow into the state, buying a wide array of products, and more workers are hired. This means that annual, even monthly, gross receipts to the state are not likely to be severely interrupted at any significant level.

To see the complete 3% sales tax solution, go to our Sales Tax home page at RIFreedom.org/SalesTax .

completesolution

The Complete 3% Sales Tax Solution

Major sales tax reform for RI has evolved from just a good idea into a complete solution.

Lawmakers can now consider: the need for reform, the right policy reform idea, evidence from other states, public support, fiscal notes, budgets savings, and budget management

[button url=”http://www.rifreedom.org/salestax” target=”_self” size=”medium” style=”royalblue” ]3% Sales Tax Solution[/button]

 

Governor’s Corporate Tax Cut Plan Not a Game Changer

Based on analysis by the Rhode Island Center for Freedom & Prosperity, Governor Chafee’s proposed reduction in the corporate tax rate from 9% to 6%, if implemented as a stand-alone policy, would have a very modest positive impact on the Rhode Island economy, despite having a more notable effect on the state’s national rankings*. When this tax reform is then offset by an increase in a national internet tax, the results are likely to become negligible or even negative.

At face value, according the Center’s RI-STAMP tax modeling tool, the proposed corporate tax cut would result in a loss of $72 million in general revenues and produce only 240 private sector jobs. With the stated objective of paying for the corporate tax cut with revenues from a new internet sales tax**, which could mean up to an additional $70 million tax on Rhode Island shoppers, the combined effect means the state could actually lose jobs and still see a substantial revenue loss.

“The internet tax – a new tax on top of already burdensome tax levels in the Ocean State – is a highly regressive tax that will hit virtually all Rhode Islanders directly in their pockets, and is likely to reduce economic activity far more than a corporate tax cut might increase it. Do we want to simply improve our state ranking or do we want to provide real jobs for our residents,” questioned Mike Stenhouse, CEO for the Center. “This habit of taking a step forward only when we also take a step backward gets us nowhere. To produce game changing results for our state, revenue-neutral ideas will not get the job done; significant revenue and spending cuts must be implemented.”

The Center’s sales tax reform recommendations, conversely, could produce tens of thousands of new jobs with a lower budget impact.

* http://www.providencejournal.com/breaking-news/content/20140205-chafee-plan-to-reduce-states-corporate-tax-rate-gets-mixed-response.ece

** The RI-STAMP modeling tool does not directly allow for calculation of a national internet sales tax, therefor specific revenue and jobs projections were not included in this portion of the post. With the best simulation we could conduct, RI-STAMP projected a combined effect of these two tax reforms to produce a net loss of $56 million in state revenues and a loss of 879 private sector jobs. For reasons described below, our Center does not anticipate the negative effects to reach these levels, although it is highly probably that the positive effects of a reduction in the corporate tax could be more than offset by the negative effect of the new internet sales tax.

The high-end figure of $70 million in ‘new’ internet sales tax revenues for the state was used and, given that that money has to come from somewhere, that figure was “added” as an additional tax burden to the general state sales tax category in the RI-STAMP modeling tool. It was further assumed that the Internet sales taxes paid by Rhode Islanders to out-of-state retailers and those sales taxes paid by out-of-state shoppers to Rhode Island retailers would level out; meaning that the new revenues to the state would in essence be paid by Rhode Islanders. Also, given that a national internet sales tax would not provide Rhode Island with a competitive advantage or disadvantage, the negative impact on its economy would likely be less than the STAMP projection, which is designed to be  comparative modeling tool.

Stenhouse Sales Tax Commission Testimony (1/23/14)

January 23, 2014

TO:                 Joint Sales Tax Study Commission #6

FROM:           Mike Stenhouse, CEO

SUBJECT:      Prepared Testimony Remarks

Good evening. I’d like to first thank the Commission members for their hard work and open minds when it comes to creating jobs and renewed opportunities for Rhode Island families via a new growth economy.

Today, Chairman Malik asked this Commission to consider how to manage the budget implications of potential sales tax reform in Rhode Island. So today, we’re going to talk about revenues and spending. However in light of the earlier, it may be appropriate to review why we’re here.

In fact, perhaps the Governor framed the debate best by suggesting in his recent State of the State address, in effect, that government should play an aggressive role in shaping people’s lives. As we discussed at the last hearing, our sales tax issue all boils down to a larger, philosophical approach as to the proper level of government intervention in our personal lives and in the conduct our business. Indeed, this sales tax issue in Rhode Island has evolved to become part of a larger national debate about “income inequality”.

If we as a state believe that the status quo is hunky-dory for our state, and that generous government services that incentivize people to live a life of dependence is good, then yes, you’ll be inclined to think that more of the same philosophies, policies, and modeling tools utilized, to fall to where we are now, should be what we continue to utilize in the future. The state’s REMI tool falls in this category.

If you believe like we do, that the status quo is the enemy of our future, that every person should have the opportunity to become self-sufficient and thrive, then you’ll be inclined to look for a new approach, and new solutions. Our Center’s RI-STAMP tool represents that new way of thinking.

The old way or a new way? … that is the question. Preserving the current system, or helping our state’s residents?

The testimony you just heard regarding the state’s tax modeling tool, REMI, should not cause you to take your eye off the ball. The question at hand is not which modeling tool is better; rather, the critical question is whether or not the state’s recent economic troubles and its own modeling tool are credible enough reasons to dissuade you from considering the bold NEW reform our Center is recommending and that virtually every witness you heard from supports.

It should be clear to everyone that what we’re doing now – the old way – is NOT working. And virtually everybody outside of the system understands that. The handout we provided to you summarizes the testimony you heard from our prior six hearings. For those of you watching at home, this handout can be viewed on our website – RIFreedom.org – I believe it’s the second item down, called “Testimony Highlights.”

We all heard overwhelming testimony in support of reform from dozens of real residents and real business owners. The only pushback you’ve heard, are from those connected with the                                                                                      system. Again I ask, is good government about preserving the system or helping people?

Taking a step back. Over the past year, as our Center has been raising awareness about the many benefits of repealing the sales tax, I have, admittedly been astounded by the lack of concern about how those benefits might improve the lives of real people. The first reaction, and the disqualifying consideration, right off the bat, for many, is … well how do we make up all the revenues? To the political class – “revenues” are more important than creating opportunities for our fellow Ocean Staters. Our Centers believes otherwise … do you?

When it comes to the impact on the state’s budget regarding sales tax reform, or any tax reform for that matter, I am here to proffer that current levels of spending are hurting our state. To move forward with major tax reform, we must first accept that “revenue-neutral” policies – or limiting ourselves to simply reshuffling the chairs on the deck – are not likely to produce anywhere near the desired economic and jobs boost our state so clearly needs. If, after years of increasing revenues and spending – via taxation – to levels that have caused wreckage to our economy … if, we want to reverse course and actually do something productive that creates economic growth, then it only makes sense that we also must reverse course when it comes to levels of government spending.

If we want economic growth and more shoppers and businesses in this state … as you heard from witness after witness before this very Commission… we must have lower levels taxation, and give them a reason to come to RI. To lower tax levels to be attractive in this regard, we must necessarily lower levels of state spending. We can do this. It is in within the power of this Commission to recommend this. It is in the power of the General Assembly to implement your recommendations … it is allowed!

Across the nation in 2013, economic growth became a top priority for dozens of states; in fact, in 2013, 18 states actually cut taxes! They were allowed to … and they did. In Wisconsin, Governor Walker has proposed $800 million in tax cuts.

A few years ago, Rhode Island, along with Michigan and Indiana, was among the three worst states, nationally, when it came to recovering total jobs, as compared with pre-recession levels. Two states decided to take bold action to change that bold dynamic … yet one state did virtually nothing. Want to guess what state that was? Michigan and Indiana became Right To Work states. Separately, even a perennial high tax state such as NY is now actively promoting tax-free zones to attract and expand businesses. Rhode Island’s opportunity to remain competitive, in its own way, is significant sales tax reform. Will we do it?

Yet there are many for whom the preservation of the size government spending is a more important consideration. Indeed, it is the overall mission of our Center to provide a very different perspective, to think outside that box, and to inject new ideas into the public policy debate, to challenge that status quo thinking.

However, those who defend the status quo see our Center as being disruptive to a political process that has an insatiable appetite for more of our money. We believe a healthy democracy necessarily means rigorous debate. If our Center’s advocacy is seen as disruptive, then so be it … we just see it as a debate. We believe our state needs a new public policy culture. But the status quo is firmly entrenched in our state.

And so far in 2014, we have heard nothing but the same old ‘reshuffling of the chairs on the deck’ from our political leaders.

And what is the status quo that they’re defending? Revenues – on a piece of paper. It seems it’s always about spending. Instead of looking to enhance the well-being of Ocean Staters, our government looks at us as nothing more than ATM machines … to serve the government’s priorities. It is this policy culture that must be changed. It is allowed, and today, you have the power to suggest a bold new step for our state.

Rhode Island is not defined by the amount of money that can be extracted from its residents and businesses, nor by a number at the bottom of a spreadsheet. Rhode Island is not about the size of its government. Rhode Island is about the hopes and dreams of its people – real families who are looking improve their futures through increased opportunities for prosperity.

The status quo that we oppose is all about preserving the system. The reforms we advocate for are about real people –and  job opportunities – and about preserving Rhode Island as home to more and more families and businesses.

You may recall that in my first testimony to this committee in September that I showed you a few charts to keep in mind. Allow me to review:

  • This first chart is what the status quo system is about … ever increasing levels of spending, 25% higher than what inflation and our meager population growth would otherwise dictate.
  • This next chart depicts just one part of the unintended consequence of that approach – showing Rhode Islanders flocking out of our state to neighboring counties in MA and CT to escape to lower  tax burden states. Not because of weather.
  • An this final image portrays the real-life effect … fewer and fewer people at grandma’s dinner table.

A report in today’s ProJo showed that the Census Bureau determined that another 3,922 Rhode Islanders moved out of our state last year. Cutting the oppressive levels of state spending and taxation that caused this undesirable out-migration is possible. We are allowed to do it.

(NOTE: at this point, the testimony was interrupted and not allowed to be completed in its entirety. Only the non-italicized content below was later spoken to the Commission)

 Our Zero.Zero report and recommendation is clearly a departure from the current way of thinking. We intended it to serve that very purpose. And we used a tool, STAMP, that offers a different perspective on how to impact a state’s economy – has the current perspective worked?

 I’d like to repeat what I said at the last hearing: RI is the #1 state in the country when it comes to government spending in the form of “income redistribution”. In theory, if government spending is indeed a stimulus to a state’s economy, and if RI has been doing this at a higher level than most other states, then it would stand to reason that RI should have one of the nation’s best economies.

 Sadly, however, Rhode Island’s reality clearly suggests that this formula of high spending has not worked for our state. As Commission members, it’s up to you to decide whether or not continuing with this same approach will work best for our state’s future. Or whether a new course is warranted.

 It is the position of our Center that instead of making “government revenues” as the state’s number one priority, that we should consider the well-being and future of the taxpayers and residents of our state as paramount! How can we possibly justify limiting their dreams of a brighter future, solely in order to expand the system and the amount of money the state collects and spends?

 Let me share with you a vision we have that that new approach might create. Instead of the seeing the tail-lights of our loved one who are leaving our state, imagine the headlights of cars on I-95 jammed with the traffic of family members, entrepreneurs, investors, and shoppers streaming over the border into Rhode Island. Imagine the parking lots of RI retailers splattered with cars with MA or CT license plates, and, of the extra workers those retailers are able to hire.

 This is what our Center’s sales tax recommendations are all about, as well as putting money back in the pockets of every single individual and business in the state, and for creating thousands of new jobs so that they can have new opportunities and mobility to move up the income ladder and improve their lives.

 In December, a new study showed that while homelessness is decreasing nationally, it has actually increased in Rhode Island. Clearly, increased levels of spending have not worked for those families and individuals in our state.

 Our unemployment rate, though better overall, is not keeping pace with our New England neighbors or the rest of the nation? In fact, we are dead last. Is this acceptable? Is this government working for us?

In fact, even State Tax Administrator, David M. Sullivan, said in November in the ProJo that the recent liquor/wine tax cuts should help to spur sales and boost the state’s economy at an important time for retailers. Why would this effect not be the same across all industries if RI were to obtain a competitive sales tax advantage via its repeal?  

 So I ask: What should we be more concerned about: keeping firmly to arbitrary government spending levels? Or providing real opportunities for families in need and putting them back at real family dining tables?

 If we want out-of-the-box solutions, then we must not box ourselves in by considering only revenue-neutral options.

 The future of Rhode Island families can no longer be held hostage by a bloated state budget. You heard testimony from a national tax expert who said that RI simply does not have the tax base to try to pay for all the services currently on our books. Yet we keep trying to serve more people and spending more and more.

 We believe that our state has been doing it precisely backwards. We have to grow our state’s tax base, by creating an environment where more people will choose to make RI their home, not further burden those who remain.

 In our view, the state budget should be reflective of the goals and aspirations we set for ourselves as proud and aspiring Rhode Islanders … it should not serve to limit those dreams. Our spending priorities must be aligned with advancing our overall well-being … not advancing government to our overall detriment … government spending must be “right-sized”.

 So I ask you to again consider the critical question … the old way or a new way? Should this Commission be dissuaded from supporting potential game-changing policy reforms, such as repealing the sales tax, simply because it’s different from our current failed approach? Or because it is not a revenue-neutral solution?

 In the end, it is up to you to recommend which course will best work for Rhode Island. It’s time to dare to buck the system and forge a new future for our state. It is allowed.

 With regard to specific recommendations from this Commission, our Center hopes that you will decide to take the boldest action by repealing the sales tax entirely, down to Zero.Zero %, and creating the most jobs. Note that we propose to implement this reform as of October 1, so as to spread out the budget impact over two years, and realize one quarter of sales tax revenues in the next fiscal year.

 Think of the low-income families who will keep more of their money in their own pockets and who might find new job opportunities because of the new growth economy.

 Think of the small business owners and restaurants who will no longer have to struggle to comply with the unfunded mandate that they collect taxes on behalf of the state, or spend thousands of dollars in time an legal fees when trying to settle a dispute with the state.

 Think of the cities and towns that will collectively realize over $100 million in new commercial property tax revenues.

 And, for those of you who will participate in this election year, think of how voters will reward you when you support an initiative that will save money for every single family and business in the state.

Something I neglected to mention last hearing and that I ask you to keep in mind, is that any sales tax reduction plan – that does not bring the rate all the way to 0.0% – does little, if anything, to lessen the business compliance costs of this unfunded mandate on retailers, restaurants, and other businesses that have a retail sales permit. Nor can any budget savings be realized through a reduction in the size of the government apparatus designed to audit and collect sales tax revenues.

Any sales tax rate above 0.0% would likely require just as much government infrastructure and just as many compliance burdens for businesses as the current 7% rate.

 A recent report cited Rhode Island as being out of compliance with its tax collection on the recently enacted sales tax on high-end clothing. Repealing the sales tax entirely eliminates these unnecessary complexities and costs of collection, and also puts all RI industries on a level playing field, and will end future nonsensical debates about which industries to tax and which to leave alone.

Our Center additionally suggests two other related recommendations be considered by this commission: first, that a comprehensive review of existing penalties and interest on back sales tax owed be conducted to determine if those statutes are making it overly difficult for businesses to remain open; second, that with sales tax reform that adjustments be made to the current 4% tax levy cap on cities towns so as to allow them to realize the organic revenue growth they will see from a lowered sales tax.

For the first time in decades, our state has the opportunity to take a major step in a new public policy direction, and send a signal to Rhode Islanders that their government places their well-being as top priority.

 In Rhode Island in 2014, this Sales Tax Repeal Study Commission represents the only hope to take to take a major step in a new direction. Rhode Island needs to keep pace with other states. Repealing or rolling-back the sales tax appears to be the only significant economic development policy idea on the table for the entire 2014 legislative session …not only is this something we are allowed to do, but that we must do

The budget can be amended to allow for this, if we have the foresight and take the proper steps to plan how to do it. In this regard, I’d like to introduce our Center’s research director, Justin Katz, who will take you through some of the budget considerations in our original report. Justin will also suggest revenue and spending guidelines that may be helpful to you in determining how the budget may be flexibly managed if significant sales tax reforms are implemented. Thank you.