Rhode Island property taxes would be 25% lower if not for the excessive costs imposed on families & businesses by collectively bargained public unions.

CENTER’S NEW REPORT: Public Unions Cost Rhode Islanders $888 Million Per Year

Property Taxes on Families & Businesses Driven Up By 25%

“Firefighter Overtime” and “Evergreen” Bills Would Give Unions a More Unfair Negotiating Advantage

Providence, RI– With two-thirds of the statewide burden heaped on local taxpayers, Rhode Island property taxes would be 25% lower were it not for the ‘excessive’ costs imposed on families and businesses for collectively bargained government services, according to a major report released today by the Rhode Island Center for Freedom & Prosperity.

Public Union Excesses, the largest research report ever produced by the Center, details how Ocean State taxpayers are dishing out an extra $888 million per year in providing up to a 27% total compensation premium for government workers as compared with their private sector counterparts; findings that are consistent with previous national studies, including a report by the Center in 2012.

Rhode Island residents could save 25% on their local property taxes, while state taxpayers could realize even further savings if public services in the Ocean State were provided at competitive market rates.

“Our state cannot survive morally or economically with this obvious imbalance. At $888 for each Rhode Islander, a family of four is paying over $3500 annually for these excessive compensation deals,” emphasized the Center’s CEO, Mike Stenhouse. “We must find a better balance between how much union members are paid and how much taxpayers can afford.”

The 48-page report, which utilized regression analysis calculations that controlled for experience and educational levels, was researched and co-authored by adjunct scholar to the Center, Dennis P. Sheehan, who is Professor Emeritus at the Penn State University Smeal College of Business, and who taught Finance at Penn State, Purdue University, the University of Chicago, and the University of Rochester. The report was co-authored by the Center’s research director, Justin Katz, who is one of the state’s leading analyst of the state’s jobs market and overall economy. 

Among the primary drivers of excessive public union employee total compensation, up to 27% higher than for comparable services in the private sector, are:

  • The 9th most favorable pro-union laws in the nation
  • A 4-6% base “wage premium”
  • Overly generous pension and healthcare benefits
  • Systematic overtime abuse
  • Numerous collectively-bargained cash-back schemes

The “firefighter overtime” mandate bill that passed the House in April and the “evergreen contract” legislation that passed the House in May would each create new state laws granting additional unfair leverage to local union negotiators.

The Public Union Excesses report discusses in some detail how its findings are supported by prior national studies and also includes a line-by-line budget analysis of the median Rhode Island town of Portsmouth. 

One chart in particular from Portsmouth demonstrates the lost opportunity cost, whereby excessive total compensation payments mean less money to spend on other important projects. For example, the $590 million aggregate annual municipal savings could easily pay for all necessary school building repairs and upgrades in just three to four years, estimated to be at over $2 billion, statewide.

Portsmouth Total Compensation Excess Estimates Portion of Budget, FY16

 The “remaining budget” is what the town currently has to spend a er compensation.  The low-end estimate is most likely to be excess and therefore available for other purposes, while the high-end estimate is least likely to be excess and therefore needed for compensation.

“Treating the 10% of unionized government employees more like the 90% of the rest of us are treated …  is not only more fair but also builds trust that government is looking-out after everyone the same,” concluded Stenhouse.

The full report also includes tables with town-by-town estimates of the excessive total compensation costs of government workers at the municipal level, in school districts, and in independent fire districts. 

Many state and municipal leaders also provided statements that say the reports’ statistically-determined findings match up well with their actual local budget analysis:

Mike Riley, municipal pension expert on Providence’s $110 million annual total compensation excess: “This massive over-payment in the budget directly hinders the City’s capacity to properly fund its critically under-funded pension plan.”

Ken Block, WatchdogRI.com, regarding the nation’s highest-cost for firefighter services in RI: “It is time to bring local municipal labor contracting into the light. A lack of transparency helps labor and elected officials hide the true cost of municipal labor contracts.”

Rob Cote, Warwick watchdog on his city’s estimated $54 million annual excessive overpyament: “… the actual numbers taken from official Warwick budget documents substantiate the analysis in the Center’s report …”

Stuart Peterson, former School District Finance Committee Chair, on East Greenwich’s $9.5 million excess: “The report’s findings are certainly in line with what we have seen in East Greenwich for the last 30 years. Our residents have seen (property) tax increases three times that of inflation, and up to four times that of median household income wage growth.”

Larry Fitzmorris, East Bay Taxpayers Association, on Portsmouth’s $10.2 millionexcess: “The millions of dollars of excessive costs identified in the report represents institutionalized spending borne by the taxpayers that is completely unnecessary.”

Rob Coulter, President Tiverton Town Council on its $7.4 million over-payment: “This high-quality study is incredibly insightful, and is sure to help us as we keep striving for the right balance of having a first-rate municipal workforce at a cost that is fair and affordable to our residents.”

Jobs & Opportunity Index (JOI), March 2019: In Need of a Turnaround… Soon

Although its rank did not change, March was not a good month for Rhode Island on the RI Center for Freedom & Prosperity’s Jobs & Opportunity Index (JOI). With four of the 12 datapoints’ changing, RI is still 47th in the country, but slippage in employment and income brings a warning sign of things that might be yet to come.

Employment was down another 521 people from the first-reported number for Feburary, and the labor force dropped 1,234. Jobs based within the state showed an increase of 300, but the prior number has since been revised up, so the official news is no change.

The Bureau of Economic Analysis (BEA) released quarterly data for personal income in each state, and Rhode Island is the only one to show a decrease from the first-reported number for the prior quarter. We should note, however, that the numbers from last quarter have been revised down enough that the decrease actually shows as an increase in the official data.

We should also note that Rhode Island remains the only state that is unable to report estimates for monthly enrollment in the federal SNAP program (foodstamps). Until this problem is repaired, we will simply hold Rhode Island’s enrollment at the last-reported level, which is from February 2017.

The first chart shows RI remaining last in New England on JOI, at 47th. In New England, New Hampshire leads the region, in 3rd place, nationally. Vermont fell a spot, to 12th place, while Maine held steady in 18th. Massachusetts and Connecticut also held their positions, at 36th and 42nd, respectively

Rhode Island Jobs March 2019 New England Race To National First Place

The second chart shows the gaps between RI and New England and the United States on JOI, and the third chart shows the gaps in the official unemployment rate. RI’s gap improved slightly in all cases.

Rhode Island Jobs March 2019 New England Scores on Jobs & Opportunity Index
Rhode Island Unemployment Rate, Jobs March 2019, New England Jobs & Opportunity Index

Results for the three underlying JOI factors were:

  • Job Outlook Factor (optimism that adequate work is available): RI remained 24th.
  • Freedom Factor (the level of work against reliance on welfare programs): RI remained 42nd.
  • Prosperity Factor (the financial motivation of income versus taxes): RI remained 47th.
Despite a booming national economy, Rhode Island's economic outlook dropped back into the bottom-10 among according to Rich States Poor States by ALEC.

Progressive Policies Sink Ocean State Back into the Bottom-10

Providence, RI– How much bad news can our state absorb before its political leaders change course, asks the Rhode Island Center for Freedom & Prosperity? Fittingly, it is on Tax Day that high taxes once again are cited for sinking the Ocean State.

Despite a booming national economy, many recently published metrics show Rhode Island is heading in the opposite direction, underscored by today’s announcement that the Ocean State’s “economic outlook” dropped three-slots and back into the bottom-10 among all states, according to the 12th edition of the Rich States Poor States publication, produced by ALEC (the American Legislative Exchange Council). 

“Our state is squandering its opportunity to remain competitive and to increase prosperity for its residents,” says Mike Stenhouse, CEO for the Center, who participated in a national conference call last week to preview today’s ALEC release. “This report reinforces all of the research and projections our Center has conducted in recent years. The upcoming a census will likely deliver the worst news for the Ocean State, which is losing the population battle. As this report again highlights, states with free economies and lower taxes are likely to see an increase in population, while the unfriendly economies with high tax and spend policies, like Rhode Island, are seeing a relative decrease.”

According to the Center, Rhode Island, is falling behind by standing still. While state politicians crow each year about not implementing broad new taxes, the unfortunate truth is that by nickle-and-diming residents and by not implementing aggressive reforms Rhode Island will continue to lose ground, nationally. As other states have moved to increase economic freedom for families and business, Rhode Island is losing ground by standing still: to reverse course, it must work quickly to reduce its onerous tax and regulatory burdens.

However, there is no indication that any political leader in Rhode Island has the courage to steer the state’s ship in the right direction. Encumbered by blind-dedication to a bloated budget, which itself is the state’s primary problem (with all of its taxes, fees, and mandates), lawmakers have put forth no vision and are stuck in the rut of continuing the policies of stagnation. 

According to ALEC’s Rich States Poor States, top-10 states such as #5 Indiana and #6 North Carolina are the most dramatic examples of states moving up the rankings by reforming their tax codes, as just a few years ago each state was in ALEC’s mid-20s. Conversely, Kansas, which has raised taxes in recent years has fallen from the mid-teens to 27th. 

Among the major factors cited by ALEC in Rich States Poor States leading to Rhode Island’s poor rankings are: 

  • High property tax burdens (47th)
  • High estate taxes (50th)
  • High Debt (46th)
  • High minimum wage (41st)
  • Workers Compensation costs (43rd)
  • Lack of workplace freedom (50th)
  • Unsustainable pension liabilities 

“Because of federal tax reforms, millions of good-paying new jobs are being created and trillions of dollars are being repatriated to US. But given RI’s hostile business climate, we are less likely to see major new capital investment or rapid job gains in our state,” concluded Stenhouse.

Legislation to Avoid SALT Cap Named Bad Bill of the Week

Rhode Island lawmakers continue to stick their heads in the sand when it comes to the stagnant Rhode Island economy and weakening jobs market. Instead of directly addressing the core issues that are producing these negative outcomes, which run counter to positive national trends, the political class prefers to divert attention to band-aid policies that perpetuate the problem.

It is for this reason that H5576, the so-called Business Corporation Tax legislation, has been named the Bad Bill of the Week by the RI Center for Freedom & Prosperity. The legislation seeks to provide small business owners with a dubious option to avoid the $10,000 SALT (State And Local Tax) cap, defined in the 2017 federal tax reforms.

Even the highly respected and nonpartisan Tax Foundation in Washington, DC, wrote a post on the wrong-headedness of this legislation, which seeks to circumvent federal tax laws.

Ignoring the fact that state and local taxes are too high in Rhode Island, driving many people and businesses out of state, the legislation instead seeks to help small business owners by reducing the their federal tax burden; in essence, denying the federal government its lawful share of pass-through revenues that are usually associated with S-corporations, limited partnerships, and sole proprietorships.

State lawmakers should not seek to blame the federal government for the high state and local taxes that they, themselves, have imposed on the private sector. Further, the IRS has publicly signaled that it will not take kindly to state-based efforts to interfere with taxes owed to the federal government.

To encourage entrepreneurship, pass-through entities were created to relieve small business investors of the burden of double-taxation, both at the corporate level and then again upon distribution of profits at the individual level. Instead, profits under a pass-through structure flow entirely to its investors, to be taxed only once at the individual level – both federally and by states.

The 2017 Tax Cuts and Jobs Act limited the amount of SALT deductions allowed on federal tax returns. In high tax states, such as Rhode Island, this means that certain people may not be able to federally deduct all of the taxes they are charged by their state and localities.

The proposed legislation in Rhode Island would allow pass-through businesses to pay “state” taxes on its profits at the ‘entity’ level (instead of passed-through to individuals). This scheme would effectively transpose a potentially non-deductible SALT tax into a fully-deductible business expense. A revenue-neutral policy at the state level, this entity level tax scheme will almost certainly be challenged by the IRS in that it would reduce federal tax receipts.

The proposed legislation in Rhode Island would allow pass-through businesses to pay “state” taxes on its profits at the ‘entity’ level (instead of passed-through to individuals). This scheme would effectively transpose a potentially non-deductible SALT tax into a fully-deductible business expense. A revenue-neutral policy at the state level, this entity level tax scheme will almost certainly be challenged by the IRS in that it would reduce federal tax receipts.

This legislation is objectionable for two main reasons. First, the IRS is unlikely to allow this sleight-of-hand to circumvent existing tax law. Second, and more importantly, the legislation avoids the actual core problem – high state and local taxes in Rhode Island.

As long as lawmakers refuse to deal with the real problems that plague our state, Rhode Island’s economy and the standard of living for its residents will continue to lag behind the rest of the country.

As the Tax Foundation concludes, and as the Center has long maintained, “States would be better off using their creative energy to reform their tax codes and alleviate the overall burden on taxpayers.”