Sales Tax Reform

A 3.0% Sales Tax: A Superior Economic Stimulus Than Car Tax Repeal or Free College Tuition

FOR IMMEDIATE RELEASE: March 20, 2017

Plans by Speaker and Governor Could Cost Jobs and Municipal Revenue Losses
Sales Tax Cuts Would Increase Jobs and Could Pay for Car Tax Reforms

Providence, RI – The nonpartisan Rhode Island Center for Freedom & Prosperity today published detailed economic modeling projections and analysis, demonstrating that a cut in the state sales tax to 3.0% would produce far more statewide and municipal economic benefit than would repeal of the car tax, as proposed by the Speaker of the House, or would free college tuition, as proposed by the Governor.

Among the takeaways of the analysis, which projected the impact of both the car tax and sales tax reform ideas, shows that a 3.0% sales tax would:

  • Keep significantly more money in the pockets of Rhode Island families and businesses ($585 million vs $215 million)
  • Produce thousands of new jobs, as opposed to potential job losses with car tax or tuition spending
  • Require lower budget cuts and/or corresponding tax increases than would car tax reform
  • Create a major revenue windfall for municipalities that could go a long way toward funding local “self” phase-out of the car tax, where car tax repeal (depending on how it is paid for) could result in lower municipal revenues
  • Would allow every Rhode Island family to save for any college education

“We appreciate that the Speaker and Governor both want see more Rhode Island families keep more of their hard-earned money. However, if we want to maximize the positive economic benefit for the people, we must conduct the proper due diligence and research to determine which course of action is most beneficial,” advised Mike Stenhouse, CEO for the Center. “Today, the Center offers well-researched projections from a credible economic modeling tool to add a third concept into this important debate. Any objective analysis of this data shows that sales tax cuts are the superior approach.”

The complete analysis, which can be found on the Center’s website, includes discussion of:

  • Why bold tax reform is needed
  • Budget reconciliation options
  • State spending chart
  • General findings
  • Two tables with multiple and detailed projections of private employment impact and of various “state” and “municipal” revenues

In 2012 and 2013, the Center proposed two major options for sales tax reform, as the most effective and highest value method for creating jobs and boosting the state’s stagnant economy: full repeal of the sales tax; or cutting the sales tax to 3.0%. Links to this expansive past research can be found at RIFreedom.org/SalesTax.

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3.0% Sales Tax: Superior Reform than Car Tax Repeal or Free College Tuition?

Car Tax, Free Tuition Programs Could Mean Loss of Jobs and Lower Municipal Revenues

3.0% Sales Tax Adds Thousands of Jobs, Increases Local Revenues

OVERVIEW:

As taxpayers continue to be asked to fund generous corporate subsidy programs, lawmakers are now dueling over two new spending ideas – reimbursing localities to phase-out the car tax and public funding for free college tuition – each of which would likely further raise taxes and fees on Rhode Islanders.

But would these programs make Rhode Island a better state? Or would the more innovative and bold policy concept of cutting the state sales tax help families become more self-sufficient?

Neither the Speaker nor the Governor have offered research or economic projections on the impact of their respective ideas. The Center, conversely, offers well-researched projections from a credible economic modeling tool.

As will be clearly demonstrated, the Center’s previously proposed 3.0% sales tax reform would help working Rhode Islanders and businesses much more than would car tax repeal or free college tuition. A cut in the state sales tax rate to 3.0% from 7% would :

  • Keep significantly more money in the pockets of Rhode Island families and businesses
  • Produce thousands of new jobs, as opposed to potential job losses with car tax or tuition spending
  • Require lower budget cuts and/or corresponding tax increases than would car tax reform
  • Create a major revenue windfall for municipalities that could go a long way toward funding local “self” phase-out of the car tax, where car tax repeal could result in lower municipal revenues
  • Would allow every Rhode Island family to save for any college education

Funding? Elimination of corporate welfare subsidies and free college tuition funds could go a long way towards paying for the $82.3 million required to dynamically fund a 3.0% sales tax … vs the $229.7 required to dynamically fund car tax repeal.

Regressive? While many view the current car tax play as regressive, a revenue-neutral car tax repeal plan would be further so in that low-income individuals who do not own a car, or who own a car valued under existing exemption thresholds, would be indirectly funding property tax relief for wealthier people. A 3.0% sales tax would disproportionately help low-income families. Similarly the college tuition and corporate welfare plans require lower income families and businesses to pay for benefits that will go, in part, to the more wealthy.

Fairness? The car tax plan would inequitably distribute money to localities, and would reward those cities and towns that imposed excessively high car tax rates.

Business Climate Benefit? The sales tax is a tax on business. Collectively businesses pay almost half-of all sales taxes. A 3.0% sales tax would reduce such costs across the board and improve our state’s last place business climate ranking. Car tax repeal would only impact those businesses that have company owned vehicles.

Municipal Dependency? The car tax repeal plan would make municipalities even more dependent on state aid via its associated reimbursement mechanism. Depending how the policy is implemented, municipalities may simply increase regular property taxes to compensate for the car tax no longer collected, avoiding the state tax cap. A 3.0% sales tax would give new revenues to cities and towns to able to phase-out the car tax on their own, especially when in combination with other “tools”  that could free them from state mandates and regulations.

Ease of Implementation? The car tax plan would require negotiation with low car tax municipalities, given the varying rates and exemption limits set by each municipality. Sales tax reform could be easily and uniformly implemented across the board.

BACKGROUND: Why bold reform is required

Rhode Island is losing the competition to retain and attract families who want to make our state their home-of-choice, where they can work hard, earn a respectable living, and support their families. But many Rhode Islanders feel left out. They are fed up with the status quo of ever-increased spending on special interest causes … and the perpetually high taxes and red-tape that are driving others out of town.

Our state’s stagnant population growth will likely result in the loss of one of our two precious U.S. Congressional seats after the 2020 census. This net-migration problem can be attributed to concerns about present and future financial security. Factors that contribute to this problem are obvious: In 2016 Rhode Island ranked as the worst state business climate in America and ranked just 48th on the national Family Prosperity Index (FPI) and on the Jobs & Opportunity Index (JOI)

People want restored hope that government is working for them and to feel that they have not been forgotten. To accomplish this, a bold reform idea is clearly required.

The RI Center for Freedom & Prosperity agrees with the Speaker of the House and with the Governor that Rhode Island families should keep more of their hard-earned income via tax reductions and that a college education should be more affordable. Car and property taxes, as well as college tuitions, are indeed high; they are an irritating or unbearable cost for most families. However, directly confronting those issues, may not be the most prosperous path forward.

The Center also believes that the state needs to  relieve burdens on employers, increase  our state’s consumer and tax base, and create more opportunities for meaningful work for those who want to improve their quality of life.

As such, not all tax and spending programs are created equally, as adjustments to certain taxes and fees will have greater impact on job creation and can be more of an economic stimulus than others. Given our state’s dismal national status, it is vital that Rhode Island takes bold and well-researched reforms to maximize the impact of every budget dollar.

Years ago the Center researched and proposed major cuts to – even repeal of – the state’s nationally high,  job-killing sales tax. A complex economic modeling tool that has been used by dozens of states and major municipalities, STAMP (State Tax Analysis Modeling Program), showed that for the Ocean State, sales tax reform, among all taxes and fees considered, would produce the greatest and most beneficial dynamic* economic impact.

However, neither the House leadership at that time, nor the special commission that was created to study sales tax cuts, were interested in re-configuring the state’s budget to accommodate for the major economic growth projected by STAMP.

But now today, with House leadership and the Governor apparently appreciating that tax and fee cuts would keep more money in the pockets of Ocean Staters, the Center suggests, once again, that reform to the sales tax would produce more benefit to families and businesses than would the Speaker’s or the Governor’s plan.

Not only would sales tax reform keep more money in the pockets of every Rhode Island family, it would reduce costs for every Rhode Island business. It would also spur increased consumerism by both in-state and out-of-state shoppers, and; most importantly … it would create thousands of good, new job opportunities.

The Center further researched which level of cut to the sales tax would produce the most benefit. It was clearly demonstrated that a cut in the sales tax to 3.0% would produce the best value for taxpayers and for the budget by creating a high number of jobs at the lowest budget-cost per job created.

*Based on 2014 figures from STAMP (State Tax Analysis & Modeling Program) developed by the Beacon Hill Institute. Dynamic scoring impact takes into account the “ripple” impact of tax reforms by projecting increases or decreases to other tax revenues and fees.

BUDGET RECONCILIATION METHODS

There are two primary methods to accommodate the budget to account for the impact of any tax cut or new spending program:

  1. Revenue Neutral” approach by raising other taxes to make up for the anticipated lost revenues or higher spending
  2. Spending Cuts” to other budget items

Or, some combination of the two.

To date, neither the Speaker nor the Governor have identified how they will reconcile, or pay, for their respectively proposed programs.

Revenue Neutrality?

The Center maintains that Rhode Island spends too much taxpayer money for the state to quickly break-out of its economic stagnation. No matter how lawmakers slice and dice the many taxes and fees that are imposed on our citizenry, our high level of spending – and corresponding need for high taxation – creates a permanent negative drag on our state economy.

RI State Budget Versus Inflation and Population Growth and Personal Income Growth (2001 Baseline)

In the past two decades, Rhode Island’s spending trajectory has risen far faster than inflation, population growth, or personal income would otherwise dictate.

By comparison, New Hampshire, which consistently ranks near the top of most national rankings, spends almost 50% less per person than does Rhode Island.

In order for any public policy reform to achieve maximum economic impact, it is necessary that budget cuts – without offsetting tax increases – are used to pay for the reform. However, the reality and history of public policy in the Ocean State tells us that lawmakers will likely consider only “revenue-neutral” scenarios, where revenue losses due to cuts in one tax are offset by increased fees or taxes elsewhere. While this practice would minimize or – as we will show – potentially eliminate any economic benefits in some cases, a revenue-neutral policy is seen as the likely political solution … as economically-unsound as it may be.

To be clear, the Center contends, for a state struggling as much as is Rhode Island, that revenue neutrality should not be the goal of bold tax reform … and that both tax and budget cuts are required if we want to generate maximum stimulus to our state’s stagnant economy.

Found Revenues? It has also been suggested by both the Speaker and the Governor, that “newly found” revenues from debt restructuring, casinos, or other sources, might be used to fund their new proposed spending. It is the Center’s contention that such new revenues should be applied to help pay for sales tax cuts.

In order to set the outside parameters for economic impact, the Center created two tables? Each compares the long-term dynamic* scoring of the two tax reform concepts for Rhode Island: 1) phasing-out the car tax; and 2) phasing-down the sales tax to 3.0%:

  • TABLE-1 assumes “revenue neutrality,” with offsetting tax increases, to pay for each policy option
  • TABLE-2 assumes “spending cuts” to pay for each policy option

Any actual implementation of either of these programs would likely fall within these parameters.

Because the governor’s free college tuition plan and the state’s current corporate welfare strategy technically do not qualify as tax reforms, we are not able to effectively run them through the STAMP model. Their economic impact, based on the findings and theory of the model, is assumed and referred to separately.

FINDINGS

Taxpayer Savings and Increased Purchasing Power: The Speaker’s car tax plan would directly save taxpayers $215 million in property taxes, while a 3.0% sales tax would put $585 million back into the pockets of Rhode Island families and businesses, and eventually back into the economy. However, the net dynamic impact would be far less – or even entirely eliminated – if other taxes and fees are hiked under a revenue-neutral approach.

A 3.0% Sales Tax is is the most beneficial reform in terms of jobs, economic stimulus, business climate, and budget value … regardless of whether a revenue-neutral approach is adopted or not.

Car Tax Phase-Out Could Lead to LOSS of Jobs.  Car tax reform, on its own, is a minor economic stimulus at best, as it does little to improve the state’s dismal business climate.

A revenue-neutral car tax phase-out would necessarily increase statewide taxes and fees (relatively) – even while most car owners would pay lower local property taxes – and would lead to a net loss of jobs. This is because the negative economic impact of increased state-level taxes is significantly greater than the positive impact of lowered local taxes.

If a “spending cut” approach is taken, car tax repeal could spur the creation of a limited number of new statewide jobs, but at a significantly lower level, and with far more required budget cuts, than a 3.0% sales tax with spending cuts.

Free-College Tuition Could Also Lead to a LOSS of Jobs. Similarly, using the same STAMP theory, providing free-tuition  would also increase statewide taxes and fees (relatively) – even while some in-state families would have more disposable income due to lowered fees – and would lead to a net loss of jobs. Again, this is because the negative economic impact of broadly increased state-level taxes is greater than the positive impact of more disposable income for a more narrow base.

Under a ‘spending cut’ approach, free college tuition, as car tax repeal, might produce a limited number of new statewide jobs, but at a significantly higher cost per job, than a 3.0% sales tax with spending cuts.

Rhode Island’s Current Corporate Tax-Credit Economic Development Strategy is highly inefficient as it creates relatively few jobs at an extremely high cost per job to taxpayers. Using the same STAMP theory, the negative impact of requiring increased statewide taxes to pay for the credits is presumed to be greater than the positive impact of a few hundred more people working.

Further, this targeted ‘advanced industry’ approach does little if anything to improve the overall business climate, which is necessary if organic entrepreneurial growth is to occur on its own.

EXPLANATION OF S.T.A.M.P. PROJECTIONS (see Tables 1 & 2)

ECONOMIC EFFECTS

Private Employment (or Jobs). Both the Speaker and Governor claim that “jobs” is their top economic priority. Sales tax reform produces significantly more job-growth, regardless of revenue-neutrality, while car tax reform and, as explained above, free-college tuition could lead to a loss of jobs under a revenue-neutral approach.

Investment. The increase/decrease in capital invested in the state due to tax reforms. As with employment, sales tax reform always produces a positive investment, while revenue-neutral car tax and free-tuition programs could produce a negative impact and a reduced investment.

STATE REVENUES:

Sales Tax Revenue: Under a ‘revenue neutral car tax repeal scenario, to partially fund the state’s $215 million in “Transfer” (reimbursements) to municipalities, and in order set the worst-case economic impact parameter, we assume an increase in “Sales tax” revenues. However, because a sales tax hike will negatively impact commerce and the economy, it will dynamically result in less sales tax revenue than the straight-line (or static) calculation, therefore the “Policy target” for sales tax increases must be higher than the needed revenues.

Conversely, under either budget reconciliation method for a 3.0% sales tax phase-down plan, the straight-line (static) calculated sales tax “Policy target” revenue losses are greater than the actual (dynamic) “Sales tax” revenue loss, because the sales tax cuts will spur more sales tax transactions.

Under a ‘spending cut’ approach, car tax reform would produce a very limited increase in “Sales tax” revenues, because of greater disposable income across the state.

The difference between the static and dynamic sales tax revenue projections is portrayed as the “Dynamic difference”

Personal Income Tax Revenue: Similarly, increased “Personal income tax” revenues are also assumed to fund the rest of  revenue-neutral car tax plan. However, because negative dynamic impact will lessen such revenues, a higher income tax “Policy target” is required.

Under the 3.0% sales tax plan, because of the thousands of new jobs created, “Personal income tax” revenues are projected to dynamically rise by between $304 million to $468 million, regardless of which budget reconciliation process is utilized.

Corporate/Business Tax . As with sales and income taxes, the negative statewide impact of a  revenue-neutral car tax plan that includes other tax hikes, may produce lower “Corporate/business taxes”. Under all scenarios, a 3.0% sales tax will always produce positive and significantly higher “Corporate/business tax” revenues.

Cigarette Tax, Other Taxes & Other Sources.  As with the personal and income taxes, the negative statewide impact of a  revenue-neutral car tax plan, may reduce revenues from “Cigarette taxes”, “Other taxes” and “Other sources”. Under all scenarios, a 3.0% sales tax will produce positive and significantly more revenues in these areas.

MUNICIPAL REVENUES: Additional municipal benefits from sales tax cuts will result from the increased retail and overall economic activity .

Business Property Tax. The stimulus of sales tax cuts would see many existing businesses expand and many other new business established. Cities and towns will likely see an expansion of its local commercial property tax base and will result in increased “Business property tax” revenues. While municipalities must comply with a 4% annual tax-levy cap, this larger tax-base will allow localities to reduce property taxes in other areas, potentially including the car tax.

Conversely, under a revenue-neutral car tax repeal plan, municipalities could actually see reduced municipal “Business property tax” revenues, due to the more potent impact of statewide sales and income tax hikes as compared with local property tax cuts.

In fact, the potential new municipal revenues from a 3.0% sales tax – on their own – could fund over half of the cost of statewide car tax repeal.

Municipal Sales Tax, Other taxes and Other sources of revenues:  Similarly, under a car tax repeal plan, municipal revenues in other areas could increase or decrease in limited amounts. Conversely, under any 3.0% sales tax scenario, these revenue areas would increase, potentially in a significant way.

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)

2014 Projections for a 3% Sales Tax

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

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