Media Release: Win-Win Policy Solutions for RI in 2013
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.
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:
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:
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.
Rhode Island’s unemployment rate renewed its incremental decline, to 10.2% in December, although the rate of its employment increase continued at the more-moderated results seen in November. In the two months prior to the election, Rhode Island’s employment growth was unusually strong.
The first chart below shows that both labor force and employment continued to move upward in December. The second chart shows that the Ocean State still has a long way to go to reach its January 2007 level of employment, and is still well behind Massachusetts and Connecticut, despite several months of employment bleeding in Connecticut.
Nationwide, Rhode Island is now tied for the worst unemployment rate in the country, with Nevada having made up its huge gap with Rhode Island.
The tax centerpiece of the governor’s new budget is to reduce the corporate tax rate to 7% from 9% over the next 3 years, with the hope of creating a stronger economy and putting more Rhode Islanders back to work.
Indeed lowering taxes in general will boost economic activity. And yes, this business tax reduction would give our state the lowest corporate tax rate in New England. All good.
But just how much of an impact will the governor’s proposed tax cut have on the state economy? Especially when compared with the sales tax proposal our Center has recommended?
Utilizing, RI-STAMP, a complex state tax modeling algorithm commissioned by our Center and customized for Rhode Island, the three year projections from these two tax proposals can be compared:
|2016 Projected Changes
||Corp Tax (9.0% to 7.0%)||Sales Tax (7.0% to 0.0%)*|
|Private sector jobs||144
|Corp tax receipts ($million)||-$56.04
|Sales tax receipts ($million)||$0.92
|Income tax receipts ($million)||$2.8
|Other tax & fee receipts ($million)||$1.01
|Total state receipts ($million)||-$51.3
|Local receipts ($million)||$4.26
* Corporate tax data derives from the 2013 iteration of RI-STAMP, whereas sales tax data derives from the 2012 iteration; 2013 data for the sales tax should be available later in the week.
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
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.
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:
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.
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.
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.
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.”
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.
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:
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:
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:
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:
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.
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.
For the final month of the year, the “headline” unemployment number, which is the percentage of people in the labor force who say they are actively seeking work, held at 7.8%. Two frequently highlighted considerations are that, one, certain demographic groups are way above that percentage and, two, the rate would be significantly higher if the American labor force hadn’t slowed its pace. If the labor force of the last five years had continued to grow at the rate of the prior five years, the unemployment rate would be 8.6%.
Each of the following charts shows the monthly number of Americans who say that they are currently employed. The bluer the line, the older the data; the redder the line, the newer the data. The dashed line is 2012. The first chart shows the data seasonally adjusted, which is the more common way of reporting the numbers; the second chart shows them without the adjustment.
The seasonally adjusted story of 2012 is utter stagnation with a big, unusual upswing from August to October. Without the seasonal adjustment, the story is a typical increase in employment for the first half of the year and late-summer down-slide followed by an unusually large and consistent spike in October, the month before the election.
Regarding the seasonally adjusted chart, the end of year change in past numbers — which a BLS spokesman tells me happens every year, always addressing the previous five years — reduced the big autumn jump by 9.3%. That is, the seasonal adjustment for the months leading up to September raised the line up, while the peak in October shifted down and the next month, November, increased a bit. (For some reason, September’s number didn’t change at all.)
So, in the “raw” unadjusted numbers, we see a strange jump, which the seasonal adjustment de-emphasized, and the revised numbers de-emphasized it further. But if you’re thinking that it would be interesting to see how all these lines develop over the coming year, you’re out of luck. This is from the BLS news release, this morning (emphasis added):
Effective with the release of The Employment Situation for January 2013, scheduled for February 1, 2013, new population controls will be used in the monthly household survey estimation process. These new controls reflect the annual updating of intercensal population estimates by the U.S. Census Bureau. Historical data will not be revised to incorporate the new controls; consequently, household survey data for January 2013 will not be directly comparable with that for December 2012 or earlier periods. A table showing the effects of the new controls on the major labor force series will be included in the January 2013 release.
It will certainly be interesting to see which way the new methodology shifts the numbers.