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.

The Path to a Constitutional Convention

[button url=”http://www.rifreedom.org/wp-content/uploads/ricfp-pathtoconcon-080614.pdf” target=”_blank” size=”medium” style=”royalblue” ]Full Analysis[/button]

“Shall there be a convention to amend or revise the Constitution?”

The Rhode Island constitution requires the Secretary of State to place such a question on the ballot every 10 years. In 2004, this ballot initiative was narrowly defeated, 52:48 percent.   In 1984, Ocean State voters did approve a convention. This year, the RI Center for Freedom & Prosperity expects a similar ballot question — to convene a statewide constitutional convention — to be approved by Ocean State voters in the upcoming 2014 November elections.

If the question is approved by voters in 2014, the rules that will govern the constitutional convention (more simply referred to as the “ConCon”) will be determined by the state’s General Assembly in 2015, beginning with how delegates will be elected — at least one for each of the 75 House districts — in a specially scheduled general election. The convention will then convene for a specified length of time, with various constitutional amendment measures to be considered and approved by delegates. Finally, all ConCon-approved amendment measures will be put forth for approval from voters as future ballot initiatives.

Read full analysis (PDF).

 

Six BIG Questions No One is Asking in the 2014 Campaign

What do the candidates for governor say?

Or other statewide and General Assembly candidates? Why are they and the media avoiding the BIG questions?

[button url=”http://www.rifreedom.org/2014/07/2014-campaign-six-big-issues-no-one-is-talking-about/” target=”_self” size=”medium” style=”royalblue” ] 6 BIG Questions [/button]

2014 Campaign: Six BIG Issues No One is Talking About

6 Big Questions Not Being Asked of the Gubernatorial Candidates

With the 2014 Rhode Island gubernatorial campaign now shifting into high gear, the Rhode Island Center for Freedom and Prosperity encourages the media, advocacy groups, and citizens to ensure that certain major policy issues are publicly addressed by the full slate of gubernatorial and other statewide and General Assembly candidates.

big-questionsEach of the issues below has the potential to significantly alter the future of our state, and to date, little, if any debate has taken place, with most candidates talking vaguely about their own plans for broadly related issues. The specific positions of each candidate on these issues and questions would provide clearer insight into each of their individual governing philosophies.

The Center believes that candidates should be forced out of their comfort zones and inform voters of their specific positions on each of these important statewide issues:

1. Constitutional Convention: on the ballot this year will be a referendum for voters to decide if the State should convene a constitutional convention. Advocates believe that a convention is necessary due to the lack of action by the General Assembly in addressing Rhode Island’s most pressing issues and its continued favoritism to special-interest groups.

  • Are you in support of a Constitutional Convention for Rhode Island?
  • What specific issues would you like to see addressed if a convention were to be approved by voters?
  • As governor, if the convention is approved, how would you help ensure that the Convention is conducted a non “politics as usual” manner?
    • Would you encourage the election of delegates in a nonpartisan manner?
    • How do you feel about sitting lawmakers’ being eligible to run as delegates?

2. HealthSource RI: once federal funding runs out in FY2016, what position will the candidates take regarding use of state funds or assessments to Ocean State taxpayers or policyholders?

  • Do you support paying $23 million per year for ongoing operations? Or should we transfer the exchange to the federal government?
  • Major insurance premium increases were again approved for 2015, despite HealthSourceRI claims that it would decrease costs. Is this a concern to you?
  • Do you support consolidating all public and private healthcare in the state under HealthSource RI? (Per H7819, which was heard in House Finance in June 2014)
  • Are you aware of and do you support paying $10-15 million per year for the related Unified Health Infrastructure Project (UHIP)?
    • Do you support using financial information collected from individuals applying for health insurance via HealthSource RI to automatically enroll them in other statewide public assistance programs?
      • Given the projected $50 million per year increase in the state share of Medicaid costs, can the state afford similar additional increases in other public assistance programs?

3. Educational Choice: While each candidate has put forth some general thoughts on education, no significant reforms have been suggested. A movement is underway in Rhode Island to empower parents with expanded choices for their children’s education, choices that may include some form of scholarship voucher so that no child is condemned to remain in a failed government school.

  • Do you support providing expanded educational choice for families? Why or why not?
  • Do you specifically support some form of educational voucher?
  • Do you support expansion of charter schools? Or expansion of the state’s existing Corporate Tax Credit Scholarship program?

4. Sales Tax Reform: Speaker Mattiello has publicly stated that he will take a look at sales tax reform in 2015. The RI Center for Freedom & Prosperity claims that major reforms in this area would produce a game-changing, massive jobs boost for the state’s economy, much more than any other tax reform idea. Given the chronic unemployment problems we face in Rhode Island …

  • As Governor, will you support significant sales tax reform?
  • Do you believe any major jobs creation policy idea would be worth pursuing if it was not revenue-neutral?

5. RhodeMapRI: is a major economic development plan for the state, quietly advanced by the Chafee administration and signed-on to by multiple municipalities and other organizations, that has largely flown under public and media scrutiny. This self-described “sustainable living” plan is funded by the federal department of Housing and Urban Development (HUD) and is largely based on an environmentalist and economic justice agenda, that may even include future racial quotas for communities.

  • Are you aware of and do you generally support the RhodeMapRI plan?
  • Do you believe that unelected federal bureaucrats should be dictating the future economic development of our state?
  • Or should any plan for Rhode Island be developed by our own elected officials?

In other cities and counties across the nation where similar plans have been implemented, such as Westchester County, NY, residents have complained about a loss of individual property rights, loss of sovereignty of locally elected government, and unequal property taxes levies.

  • Do you share these concerns or do you believe they justify the larger goals of the plan?

6. Unionization of Independent Business Owners: in June of this year, the U.S. Supreme Court’s ruling on the Harris v Quinn case led most legal experts to believe that the ruling has a direct impact on last year’s successful effort to unionize home childcare workers in Rhode Island. The 2013 law and subsequent election that would force the payment of union dues or fair-share fees is now likely unconstitutional for such non full-time state employees.

  • As governor, what will you do regarding ongoing negotiations with the SEIU?
  • What will you do to return workplace freedom to this group of childcare workers?
  • What is your position on the unions’ stated intention to unionize other private workers — as quasi public employees — in other industries?

OpEd: Repeal or Roll-back Anti-growth Laws

OpEd by Mike Stenhouse, CEO, as it was published in the Providence Journal, 1/12/14

As the 2014 legislative session begins, the leaders of Rhode Island’s political class have signaled that they will not let themselves consider any big ideas to boost our state’s stagnant economy or to improve our dismal jobs outlook.

There has been much speculation about what issues the General Assembly will take up. Unfortunately, if recent history is our guide, legislators will do more harm than good, as they see it as the government’s duty to help those who they perceive are in need — those who are harmed by the very policies their predecessors have implemented over the years.

Click here for ProJo link, to view/post public comments

Indeed, public policy in the Ocean State is tearing families apart. We all know of a recent graduate, often one of our own children, who has left town to look for work in a more fertile state; one of our parents who has retired to a lower cost-of-living state; a prominent business or community leader who has fled to avoid taxes on his or her heirs; or a business owner or entire family that has simply uprooted and moved to regions that offer more opportunity.

The government of Rhode Island has implemented dozens of taxes and regulations that have proven harmful to economic growth and job creation. In far too many categories, Rhode Island ranks at or near the bottom — a last-place team.

Yet political leaders act as if they’re not allowed to do anything about it, rather than seeing the status quo as the enemy of our future.

Instead of creating new Band-Aid fix bills, maybe lawmakers should eliminate some of the statutes that have harmed our chances for prosperity in the first place. The most productive path for legislators in 2014 may be to wipe out destructive policies.

Perhaps the General Assembly should be judged this year not by how many new policies it creates, but by how many existing, anti-growth policies it repeals or rolls back.

For starters, we could repeal or roll back the state’s regressive sales tax; or the requirement that families have no choice on what schools best educate their children; or punitive estate taxes that drive wealthy people to other states; or restrictions on out-of-state companies to sell health insurance in Rhode Island; or the minimum franchise tax, which stifles entrepreneurship; or corporate welfare, to level the playing field; or even renewable energy mandates that drive up costs for every family and business. All of these policies have created a drag on our economy, reducing opportunities for those who wish to succeed.

We continue to inflict legislative wounds on ourselves. We are suffering death by a thousand cuts. Isn’t it time we reversed course and healed some of these wounds?

To do this, we would also have to roll back spending levels, the holy grail of the political class; spending levels that fabricated the very same onerous taxes and fees that are the root cause of our economic woes. This seems beyond the imagination of the political class. Yet, this is allowed. Other states are doing it. We are allowed to change course and create a brighter future for ourselves.

Rhode Island is not defined by its government or a budget number at the bottom of a spreadsheet. Rather, Rhode Island is about the hopes and dreams of real people and real families. We should no longer be held hostage by a failed budget. Should our lives and chances for prosperity be restricted by a number? Or, rather, should the budget be crafted to serve our needs? Which should be the higher priority: the well-being of real people or an arbitrary revenue figure? In Rhode Island, we have it precisely backwards.

If we can roll back certain taxes and spending levels, and if the political class can prioritize the well-being of its residents over its fixation on revenues, tens of thousands of new jobs could soon be created, along with a lower cost of living and renewed opportunities for all Ocean State families and businesses.

We must free ourselves from burdensome taxes and a culture of dependency, and be unleashed to improve our own lives and prosperity.

As an analogy, we don’t have to look any further than the 2012 Boston Red Sox, which, as a last-place team, fired its manager, traded away expensive, non-productive players, and brought in fresh talent. The Sox reinvented themselves, and became World Champions just one season later.

Rhode Island faces a similar situation: We must demand new leadership, repeal non-productive policies, and right-size spending. We can do this. It is allowed!

Zero.Zero 2013

ELIMINATE THE STATE SALES TAX TO CREATE JOBS: The RI Center for Freedom & Prosperity proposes the elimination of Rhode Island’s sales tax as a means of high-impact economic development. Our RI-STAMP economic model suggests that the loss in state revenue would not be as large as static projections might suggest and would be well worth the boon to Rhode Islanders across the state.

Center Estimates Waste & Fraud in Rhode Island be as High as $185 Million

The release by the Chafee Administration of a redacted report on waste and fraud in Rhode Island’s human services programs failed to provide the total taxpayer dollars discovered by Ken Block’s Simpatico software firm that were spent on illegal or other inappropriate activity; instead the report was limited to examples of impropriety and generalities of findings within the state’s Medicaid and food-stamp program.

Based on a brief analysis of related national findings and anticipated state budgets, the RI Center for Freedom & Prosperity estimates that up to $185 million dollars may be currently wasted in the Ocean State. With planned Medicaid expansion, this total could approach a whopping $221 million in future years, almost three times the amount of the 38-Studios debacle … every year.

The biggest portion of the fraud likely comes from Medicaid abuse. Common estimates of such waste and fraud nationally assume that 10% of related spending applies. In our updated report on the Zero.Zero sales tax initiative, the RI Center for Freedom & Prosperity referred to a U.S. House of Representatives Committee on Oversight and Government Reform document that uses that number.

Estimates from the federal Department of Health and Human Services, however, put current “improper payments” at 7.1%, with 6.4% as the target.

The governor’s budget document for fiscal year 2014 revises the current estimate of what the state will spend this year on “medical assistance” (i.e., Medicaid) to $1.616 billion, going up to $1.743 billion next year. Using the 2013 estimate puts the range for waste, fraud, and abuse for Medicaid alone at between $114.7 million and $161.6 million.

The other large portion of wasteful government spending in the report pertains to the food stamp program – also known as the “Supplemental Nutrition Assistance Program” (SNAP) – which uses electronic benefit transfer (EBT) cards to distribute the funds.

As predicted by a post in The Ocean State Current prior to the report’s release by the Chafee administration, and based on report on government waste that U.S. Senator Tom Coburn (R, OK) published in October, dead people in Rhode Island often receive food-stamp benefits.

Coburn’s report actually provides a low-end, for our purposes, estimating around 3% in “improper payments” nationwide. The more official number from the Department of Agriculture is 3.8%, however the Associated Press reported that Rhode Island’s “error rate” for the food stamp program in 2012 was 7.69%.

Governor Chafee’s revised expenditure for SNAP in 2013 is $298.2 million, recommended to hold steady through 2014. That puts the range for food stamp waste, fraud, and abuse between $11.3 million and $22.9 million.

In summary, our Center estimates that the total amount of criminal and abusive activity in Rhode Island’s current human services programs is in the range of $126 million to $184.5 million.

However the story does not end with today’s figures. With the Governor, Lieutenant Governor, and the Secretary of Health and Human Services opting to support expansion of Medicaid, as provided under the Affordable Care Act, the RI Center for Freedom & Prosperity expects that an additional $36.5 million of taxpayer money will be abused as part of the anticipated $365 million in new Medicaid spending in future years.

This could bring the total amount of waste and fraud up to $221 million per year.

Media Release: Win-Win Policy Solutions for RI in 2013

Win-Win Policy Recommendations to keep families at home in RI!

FOR IMMEDIATE RELEASE  

January 23, 2013

After statewide political leaders failed to put forward any bold new policy reforms to grow the Ocean State’s struggling economy, the RI Center for Freedom & Prosperity published today its Legislative Solutions for 2013, a set of seven “win-win” policy solutions aimed at keeping families together in their Rhode Island homes.

With the worst jobs outlook in the entire nation, as one of the highest cost of living states, and suffering from a severe population and out-migration crisis, public policy in Rhode Island is tearing families apart by driving away loved family members.

With the goal of restoring competitiveness to the state, the Center’s proposed solutions will drive down the cost of living and conducting business in the state and will provide expanded options to parents of disadvantaged students.

“We have heard from the Governor, the House, the Senate, and others, yet no one is proposing any serious reforms”, said Mike Stenhouse, CEO for the Center. “The Political Class restricts itself with undue concern about how to fund such an obviously failed budget; a budget that has resulted in persistent misery and unemployment; a budget that has grown significantly faster than it need have. Can anyone seriously question whether or not this is a budget that deserves to be blown up? It’s time for a new game plan and to start playing to win around here”, he continued.

As the state with the highest level of ‘redistribution of income’, the Center asserts that Rhode Island is the most anti free-market state in the entire country. The dismal national rankings most Rhode Islanders have sadly become all too familiar with are a direct result of this futile approach.

“And all we hear from the progressive wing is even more of the same tired, unsubstantiated dribble about taxing the rich. Can’t we all see that it is indeed their approach that is now a well substantiated failure”, inquired Stenhouse. “That the left’s win-lose and lose-lose polices that seek to subsidize some, at the expense of others, is actually hurting all of us? We need to decrease the cost of living for low and middle income families and provide them with renewed job opportunities; and, yes, we also need to keep wealthy individuals here at home in Rhode Island.”

With these needs in mind, the RI Center for Freedom & Prosperity recommends the following win-win legislative items for 2013:

  • Repeal of the “Sales Tax”: would add tens of thousands of new private sector jobs and boost the state economy.
  • Repeal of the “Minimum Corporate Tax”: would remove barriers to new business start-ups and encourage entrepreneurism.
  • Repeal of the state “Estate Tax”: will help keep Rhode Island as home to business owners and wealthy citizens.
  • Expand “School Choice” Options: empower parents to decide which schools are in their children’s best interests.
  • Super Majority Tax Act: would require a two-thirds majority to pass any future tax increases.
  • “Pension Transparency” Act: ensure accurate accounting and reporting practices so that retirees and taxpayers know where they stand.
  • “Electricity Freedom” Act: repeal costly renewable portfolio mandates so that energy costs can be reduced for households and businesses.

The RI Center for Freedom & Prosperity previously published a long term legislative plan for the state, a Prosperity Agenda for Rhode Island, from which most its 2013 recommendations are derived.

 

The full report, with additional data, tables, analysis, and methodology can be found at:

http://www.rifreedom.org/2013/01/win-win-legislative-solutions-for-ri-in-2013/

The Rhode Island Center for Freedom and Prosperity, a non-partisan public policy think tank, is the state’s leading free-enterprise advocacy organization. With a credo that freedom is indispensable to citizens’ well-being and prosperity, the Center’s mission is to stimulate a rigorous exchange of ideas with the goal of restoring competitiveness to Rhode Island through the advancement of market-based reform solutions.

 

Media Contact:

Mike Stenhouse: 401.429.6115info@rifreedom.org

Win-Win Legislative Solutions for RI in 2013

Keeping Families at Home in Rhode Island

 

Families are being torn apart in the Ocean State, both geographically and financially.

With the worst jobs outlook in the entire nation, as one of the highest cost of living states, and suffering from a severe population and out-migration crisis, public policy in Rhode Island is driving away loved family members.

With our children having to flee the state to find a decent job; with our retired parents flocking to other states to begin a new chapter of their lives without us; and with many of our own friends and siblings having to uproot their families in search of a better future in a different part of the country … it is time for a winning game plan for Rhode Island.

As the state with the highest level of ‘redistribution of income’, the Center asserts that Rhode Island is the most anti free-market state in the country. The poor national rankings we are now sadly all too familiar with are a direct result of this failed class warfare approach.

Only a vibrant and thriving Rhode Island with a brighter future can provide the financial security and peace of mind that we all need to keep our families together in our Ocean State homes.

To make that happen, it’s time to quit tinkering around the edges and get serious about bold public policy reforms; it’s time for a cultural return to free-market principles and positive solutions that benefit all families, all individuals, and all businesses … and to reject the progressive agenda that is destroying our state.

Win-Win Solutions

All too often, public policy in Rhode Island has been implemented for political purposes, without regard to the unintended consequences for the general public or the economy.

For every spending program or regulation designed to support or protect a specified group of people, some business sector or some other group of people will usually suffer from the corresponding new taxes or hurdles to success: Not to mention the disincentive to work or to conduct business in a responsible manner that overly generous social services and corporate welfare programs have created.

Collectively, the long term negative effect of hundreds of such pieces of anti free-market legislation has been devastating to the state we call home.

This pattern of win-lose legislation, or even lose-lose legislation, must be reversed. We can do better. Instead we need to look toward win-win solutions that benefit the economy and general public as a whole and that provide incentives for individuals and businesses to utilize their natural drive and innovation to thrive on their own.

Flawed Political Approach Leads to a Failed Budget

The political budget approach that our state leaders have adopted over recent decades has failed to serve the best interests of those of us who call Rhode Island ‘home’.

A politically motivated welfare state & insider driven agenda implemented by the state’s Political Class has created a wide-range of self-inflicted economic and educational ailments that have caused Rhode Island families to give up hope in their home state.

Our state budget – a tangled mass of taxes, fees, regulations, and spending – has been driven by a flawed class warfare approach. Over the past dozen years, spending to support this philosophy has grown approximately 25% faster than the combined growth of inflation and population in Rhode Island.

This anti-free market budget approach has been an economic disaster for our state, resulting in:

  • The worst business climate in the entire nation
  • The worst jobs outlook in the entire nation
  • The worst population growth trend in the entire nation
  • Rampant fraud and waste in our social services programs
  • The $75 million 38-Studios debacle
  • Pension crisis at the state and municipal levels
  • State budget deficits for as far as the eye can see

These ailments are clearly the result of a failed budget and a failed culture of government. The RI Center for Freedom & Prosperity rejects the strategy of the Political Class to search for never-ending new revenues to support spending for such a dismal collection of public policies. The “balance this budget” mentality is precisely the opposite of the strategy  ur leaders should use.

Imagine the Boston Red Sox as a last place team; and then imagine that the team makes no plans to significantly restructure the roster in order to improve its competitiveness next season … but instead ownership proudly proclaims that they instead have a plan to balance their books! How far would that get them with Red Sox Nation? But yet, RI voterss do not demand more from our elected officials.

Win-Win Policy Solutions for 2013

To initiate a cultural move away from the win-lose, revenue driven budget approach that has so completely failed Rhode Island, the RI Center for Freedom & Prosperity recommends that a series of concrete, initial legislative steps be considered in 2013 in order to turn our state back toward a free-market economy and renewed economic growth.

Instead of a budget-centric approach, the Center recommends a growth-centric approach; with the goal of seeking to dramatically improve our state’s competitive standing in multiple areas that will provide a much needed, game-changing boost to our stagnant economy …

… with the budget then being adjusted to achieve these win-win objectives!

With jobs, economic growth, and faith in the industriousness of Rhode Islanders in mind, and with the goal of keeping families intact in our home state, the RI Center for Freedom & Prosperity recommends the following win-win legislative items be considered during the 2013 General Assembly session:

  • Repeal of the state “Sales Tax”: would add tens of thousands of new private sector jobs and provide a major economic boost to the Rhode Island economy by making our state a destination location for local and itinerant shoppers and would put almost $1 billion of our own money back in the hands of local shoppers.
  • Repeal of the “Minimum Corporate Tax”: would stop the current $500 per year minimum ‘fee’ from being a major disincentive for entrepreneurs to start up new ventures or to continue with young businesses. Rhode Island ranks poorly when it comes to new business start-ups.
  • Repeal of the state “Estate Tax”: will help keep Rhode Island as home to business owners and wealthy citizens and would strengthen our state’s overall tax base. Local charities and businesses will also benefit from their donations and spending.
  • Expand “School Choice” Options: would empower parents to decide which schools are in their children’s best interests so that no student is condemned to a failed school because of their zip code. Scholarships or an expanded tax credit program are recommended.
  • Super Majority Tax Act: would require a two-thirds majority in the General Assembly to pass any future tax and licensing fee impositions. If we begin down the path of lower taxes, this will help ensure that our state remains on that course.
  • Pension Transparency Act: would ensure that retirees and taxpayers know where they stand. This act would require state and local governments to provide more realistic projections of unfunded liabilities for both pension and other post-employment benefits (OPEB) based on both market-rate assumptions and the Government Accounting Standards Board (GASB).
  • Electricity Freedom Act: would ensure that energy costs can be reduced for households and businesses, and to promote a better jobs environment.  Our Center recommends repeal of costly state renewable energy mandates that require electric utility companies to provide a certain percentage of their electricity supplies from renewable sources according to a specified time schedule.
  • “Health Care Sharing Ministries” Protections (study to be released shortly): would provide real options for the tens of thousands of state residents who will fall through the cracks of the recently enacted national health care law, the state should enact:
    • ‘Safe Harbor’ legislation that confirms that health care sharing ministries are not insurance under Rhode Island’s law, and that they are exempt from all regulation that applies to insurance companies.
    • A ‘Freedom of Choice in Health Care Act’ would protect the rights of patients to pay for their medical services, either directly to their provider or via health care sharing ministries, and would prohibit penalties that otherwise would be levied on patients for failing to purchase health insurance.

While there are dozens of other policies that should be repealed, reformed, or newly enacted, our Center’s 2013 Legislative Agenda is an achievable set of common-sense initiatives that can start turning our state back toward a path of prosperity.

The RI Center for Freedom & Prosperity has also assembled a long term legislative plan for the state, the Prosperity Agenda for Rhode Island, from which most our 2013 recommendations derive.

 

A 0.0% sales tax would bring an economic boom to RI

Zero.Zero 2012

Related Links: view complete Zero.Zero brief as a PDF; view economic and revenue projections here; view Zero.Zero Executive Summary here; view Zero.Zero media release here; go to Zero.Zero home page; Report Card on RI Competitiveness

Background

In January of 2013,  Massachusett’s Governor, Deval Patrick, proposed cutting the Bay State sales tax from 6.5% to 4.5%. This could be a devastating blow to Rhode Island’s already fragile economy.

Competition among states is real, and it is clear that the Ocean State is losing its bid for people, money, businesses, and jobs. Public policy is not enacted in a vacuum; when a state makes changes to its policies — whether dealing with taxes or regulations — its overall image and competitiveness are affected.

In order to generate money to pay for Rhode Island’s growing appetite for public spending, the state has been forced to acquire new sources of revenue via tax and fee increases. This failed culture of trying to tax our way to a better future has steadily degraded the state’s ability to maintain and attract the critical human and capital resources required to grow its economy.

The RI Center for Freedom & Prosperity’s recently released Report Card on Rhode Island Competitiveness demonstrates how the state’s burdensome tax structure has weakened its competitive status versus other states in securing the necessary building blocks for a vibrant economy. The report card grades both the state’s overall tax burden and its business climate as Fs. In fact, 27 of 49 areas are graded F. With proposals to raise taxes even higher, fiscal irresponsibility and fears of a double-dip recession in the state persist.

Rhode Island needs a reboot. Our state must reverse course and embark on a different path that will restore prosperity, beginning with a firm statement of its future intentions. A new culture must take root — one that appreciates the power of unleashing, rather than restricting, the great potential of individuals and businesses.

Many states across the country have embarked on aggressive tax-reform paths designed to foster economic growth. States with no income tax outperform their high-tax counterparts across the board — in gross state product growth, population growth, job growth, and, perhaps shockingly, even tax-receipt growth. Over the last decade, on net, more than 4.2 million individuals have moved out of the ten states with the highest state and local tax burdens (measured as a percentage of personal income). Conversely, more than 2.8 million Americans migrated to the ten states with the lowest tax burdens.

Our New England sister, New Hampshire, has a significantly higher-performing economy as a result of its dramatically lower overall tax burden, providing the Ocean State with ample empirical evidence. If Rhode Island is to keep pace, it too must embrace market-driven policies that acknowledge the importance of incentives and disincentives as well as the reality of taxpayer mobility.

In short, Rhode Islanders must decide whether they want to stay on their current path and simply hope for change or should boldly shift gears and move toward a new path of fiscal sustainability.

Policy Proposition: Eliminate the State Sales Tax

In seeking the single most-effective tax reform providing the most-immediate impact to the most-pressing problem in the Ocean State — jobs — the Center for Freedom & Prosperity determined that the state sales tax would be an auspicious place to start. Mainly, the more mobile the factors being taxed, the larger and more immediate the response to tax rate changes. Consumer shopping habits are highly mobile, and cross-border shopping is especially convenient for Rhode Islanders and their neighbors.

While Rhode Island requires broad reform, making tax policy more efficient across multiple categories, our Center simulated and projected the economic effect if Rhode Island were to follow New Hampshire’s proven path and completely eliminate the state sales tax. With any significant reduction in the state sales tax, a few important benefits would arise for the Ocean State:

  1. Hundreds of millions of dollars would be put back into the state economy.
  2. Tens of thousands of jobs would be created.
  3. Municipalities would collectively realize a windfall of tens or hundreds of millions of dollars.
  4. Gross domestic (state) product would increase by billions of dollars.
  5. State population, and the state tax base, would increase by thousands of people.
  6. State revenue losses would be less than static expectations because of the positive and “dynamic” economic effects that would be realized.

In short, Rhode Islanders’ decision is whether or not increased jobs, increased GDP, economic growth, and increased revenue for our cities and towns are worth some reduction in state spending.

Analysis

Problems with the Retail Sales Tax

Unfortunately, there are so many problems with Rhode Island’s tax code that it is almost impossible to know where to begin correcting them. There are simply too many high taxes in the Ocean State.

As an overriding goal, Rhode Island needs to start pruning the tax tree, and the best starting point is the single tax that, in the aggregate, is the most damaging to Rhode Island’s overall economy: the retail sales tax. There are several reasons that the sales tax is especially troublesome.

1. The general assumption that broadening the sales tax base is always a good idea is flawed.

The retail sales tax in the United States arose in response to the economic damage created by the gross receipts tax (GRT), which was more prevalent a century ago. The tax base of the GRT is the total receipts of a business, which maximizes the economically destructive “tax pyramiding” through the entire production structure of the economy.

To fix this problem, exemptions were created to transform the GRT into a retail sales tax that more resembled a consumption tax. However, due to the problem of “dual use,” whereby a good or service can be used for either business or personal reasons, exemptions have proven to be a crude and often ineffective way to create a pure consumption tax. Simply eliminating exemptions, especially on services, would only serve to rebuild the GRT Frankenstein piece by piece.

A study by the Council on State Taxation explains, “The current state and local sales tax differs from a true or ideal retail sales tax. A true retail sales tax would impose a uniform tax only on consumption — all goods and services sold to households — but would not impose any tax on business purchases of intermediate goods and services. The current sales tax system imposes over $100 billion of taxes on business purchases of business inputs and investments. This type of tax has significant adverse state economic development implications.”

The study found that 49.2 percent of Rhode Island’s sales tax is paid by businesses — higher than the national average of 42.8 percent.

2. The sales tax is a tax on investment.

Since the retail sales tax can never be fully eliminated on business inputs, the sales tax is ultimately a tax on investment. It is especially detrimental to the manufacturing and construction industries when their materials costs are subject to the sales tax. That raises the cost not only to the final consumer, but also to the companies themselves, since their suppliers are subject to the same tax on their materials. The end result is less money available for future investments, compounding over time.

In fact, Dr. Mark Crain, using a rigorous econometric analysis, found that “states suffer a substantial penalty for levying a marginal sales tax rate that is high in relation to other states. Of course, the reverse also applies. Substantial economic benefits redound to states with relatively low marginal sales tax rates … intuitively, the impact of the sales tax is analogous to a general, broad-based increase in the cost of production.”

3. The sales tax promotes consumer mobility.

Another negative aspect of the sales tax is that consumers are mobile and can easily shop online or in lower-tax jurisdictions — especially in Rhode Island, which not only is the smallest geographic state in the country, but also has the highest sales tax in the region. As a result, cross-border and Internet shopping are undermining the viability of the sales tax.

Studies show that New Hampshire, which does not have a sales tax, economically benefits from cross-border shopping from neighboring Maine and Vermont. In Maine, retail sales could be as much as $2.2 billion higher per year along the border if Maine had the same level of retail sales as New Hampshire. In Vermont, retail sales could be as much as $540 million higher per year, with an additional 3,000 more retail jobs.

Dr. Roger E. Brinner and Dr. Joyce Brinner find that sales tax–induced cross-border shopping can have broad negative effects: “a 1% point increase in the sales tax rate can cut about 2.6% from state output growth over a decade … consumers choose their buying locations to find relative bargains; if they can escape a tax by hopping across a nearby border to buy goods with lower excise or sales taxes, they will do so. Many other studies have found strong evidence of cross-border retail impacts, and these simple regressions confirm the statewide damage than can be caused.”

For these reasons, elimination of Rhode Island’s sales tax can be supported as a solid public policy option. However, it is important to note (given that Rhode Island’s overall tax burden grade is an F) that there are other tax changes that must be considered as part of a larger tax reform policy for the Ocean State.

Positive Economic Impact

If the state retail sales tax were to be eliminated, the Ocean State would realize multiple economic benefits before the new economic equilibrium has been reached. As projected by RI-STAMP, our economic modeling tool, Rhode Island would see the following:

  • Over 21,000 new private sector jobs, reducing unemployment by over three points
  • Up to $160 million in additional annual tax revenue to cities and towns
  • An additional $1 billion available to spend in the state’s economy
  • An increase of over $500 million in tax receipts
  • Almost $500 million in new capital investment in the state

Is the Tax Cut Revenue Neutral?

Not quite. The state of Rhode Island would indeed see lower net receipts from elimination of or reductions in the state sales tax. However, net losses would not be as much as most would anticipate using a static (straight-line) calculation. There are three primary reasons that the dynamic effect would greatly mitigate actual revenue losses:

  • A lower retail sales tax would spur additional retail sales. With increased in-state and cross-border shopping as a result, the state would be taking a smaller sales tax slice, but from a bigger pie. Under a four-year phase-out of the sales tax, this new revenue would pay for about 20% of the anticipated sales tax losses in the first three years.
  • Increased receipts from other taxes. With the personal and business tax base expanded because of the new job creation, and with increased levels of economic activity in the state, receipts from other taxes and fees would pay for over 50% of the anticipated sales tax losses. Such receipts would come from projected increases in receipts from personal income taxes, corporate taxes, cigarette taxes, and others.
  • Administrative costs. The state bears the full cost of enforcing the sales tax. If the state sales tax is completely eliminated, several dozens of state jobs dealing with collection and enforcement of the sales tax could be eliminated each year during the phase-out period. With 207 full-time equivalents (FTEs) currently proposed for fiscal 2013 and a total budget of about $21.3 million, the state’s Division of Taxation may eventually be able to reduce its budget by approximately one-third. These personnel savings would compensate for an additional 5–6% of the revenue losses in the first three years. It is also anticipated that these jobs could be absorbed into the new growth economy.

Other Benefits to the Economy and Implementation

Separate from the question of state revenue, the issue of sales tax compliance costs is a serious one for most businesses. Sales taxes are particularly onerous, since the taxability of goods and services can vary greatly — even within a single business establishment — and virtually all businesses would save administrative and/or service costs by not having to categorize, collect, track, and remit sales tax revenue to the state. These savings are not estimated in this report but represent a benefit in addition to those conveyed in the RI-STAMP projections.

The Center for Freedom & Prosperity makes no specific recommendation as to how to implement elimination of the state sales tax. (See Attachment A for a schedule of projected revenue and economic impact measurements.) Rather, the primary goal is to demonstrate that cutting taxes provides an alternative path when considering how to put Rhode Island’s economy back onto a solid competitive footing.

Actual implementation of this plan will depend largely on the political willpower of public officials and citizens, and their willingness to embrace a new culture that seeks to enhance the state’s competitiveness instead of seeking to perpetuate the status quo. Options for implementation include:

  1. Four-year phase out of the state sales tax. Pros to this approach include less-dramatic year-to-year revenue losses and associated budget cuts. Cons include “cold feet syndrome,” whereby legislators may reverse course at some point during the phase-out period (as they have done with the planned car tax phase-out, not to mention income tax reforms like the flat tax) and the opportunity for neighboring states to respond before the full effects of the sales tax elimination actually take place.
  2. Immediate elimination of the state sales tax. Pros to this approach include a more immediate economic impact and realization of new jobs, with less chance for competing states to react. Cons include the need for larger near-term budget cuts and the difficulty of projecting actual revenue one, two, and three years out.

Balancing the Budget

It is expected that the four-year phase-out would be the most politically viable option. With the sales tax elimination potentially paying for up to 75% of itself in the early years, the important question becomes how to budget for the loss of the remaining 25% in order to balance the state budget on an ongoing basis.

Some combination of the following budget items could make up for much of this difference:

  • Control budget growth. The least painful option would be to control budget growth during the phase-out years. As Figure 1 illustrates, a four-year phase-out of Rhode Island’s sales tax would be no more dramatic than the adjustments that the state government has been making to its enacted budgets year after year.

Figure 1. Sales Tax Phase Out Effect in Context of Historical Actual Adjustments to Enacted Budgets

  • Furthermore, the state’s budget has been growing so much more quickly than inflation and population changes alone would justify that the General Assembly’s proposed 2013 budget is 26.24% larger than it would be using a 2001 baseline. Figure 2 shows that even immediate full elimination of the sales tax would represent a relatively minor adjustment toward that level of spending, returning state government to a budget a little below its 2011 level. Once again, New Hampshire provides an example — that government growth can reverse — with actual policy changes implementing over $600 million in cuts to its 2013 budget.

Figure 2. Actual Budgets Versus Inflation and Population (2001 Baseline)

  • Eliminate corporate welfare. Eliminating approximately $50 million per year in systematized corporate handouts, in addition to slush funds like the $125 million in loan guarantees RIEDC was authorized to risk on special cronyism deals with connected companies, would also go a long way toward mitigating any remaining budget cuts that may be necessary to pay for elimination of the state sales tax.
  • Apply the FY12 $81.4 million budget surplus. If we are serious about revitalizing our state in the manner described in this brief, we must immediately prioritize spending and revenue toward this end. There is no time like the present. This $81.4 million would cover over one year of the budget cuts necessary to pay for elimination of the sales tax.
  • Reduction in government jobs. The administrative savings of 75 jobs, or about $7 million per year as described previously, can also help pay for some of the cost. As collection and enforcement of the current state sales tax will eventually no longer be needed, certain savings in this area can be realized.

Conclusion

Recent performance indexes make it clear that Rhode Island is on the wrong path, and only dramatic reform can produce dramatic results. While a broad package of tax and regulatory reform is required, the elimination of the state sales tax would mark a bold — yet viable — change of course.

When presented with the dire economic circumstances currently facing the Ocean State, all legitimate options to improve our state must be considered. While the elimination of a tax that provides approximately $1 billion in revenue to the state each year may seem extreme at first glance, legislators and the general public should seriously consider the facts, projections, and theories discussed in this report.

WHAT IS RI-STAMP?

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

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

RI-STAMP has been accurate in projecting the effects of recent changes to tax policy in Massachusetts and New York City, among other locales.