Governor Raimondo has initially committed to signing-on to a regional carbon tax scheme on gasoline known as the TCI Tax that will increase gasoline prices.

Policy Brief: The TCI Tax

Raimondo Administration Should Not Impose a New ‘Stealth’ Gasoline Tax
and Should Refuse to Sign-on to the Transportation & Climate Initiative (TCI)

Summary: The Governor of Rhode Island has initially committed to signing-on to a regional carbon tax scheme on gasoline, advanced by climate alarmists, that will significantly increase regular and diesel gasoline prices at the pump. 

This policy brief discusses the many reasons why our state should not join the Transportation & Climate Initiative (TCI) compact, including:

  • In Rhode Island, with its already dismal business climate and exodus of people to lower-cost states, families and businesses cannot afford a significant new gas tax
  • The failure of a similar regional scheme on electricity, the Regional Greenhouse Gas Initiative, has driven up consumer costs; has resulted in no added greenhouse gas reductions; and has caused economic harm. There is every reason to believe TCI will also produce a negative cost vs. benefit result. 
  • The Governor should not try to bypass the Constitutional authority of the General Assembly by unilaterally seeking to impose this new gas tax
  • Rhode Island could gain a significant competitive advantage in the region by refusing to sign-on to the TCI tax scheme by being able to offer lower-priced gasoline products
  • There are many less disruptive and more efficient ways to reduce greenhouse gas emissions
  • State and national legal challenges may result, along a number of potential Constitutional angles

Background: Prices for gasoline for Rhode Island motorists could soon rise dramatically if the Raimondo administration undercuts the authority of the General Assembly and moves forward with its plan to sign-on to a new stealth carbon-tax scheme – TCI  … a move that would necessarily increase costs on families and business, and that also could lead to legal challenges.

The Transportation & Climate Initiative (TCI) would essentially duplicate the existing electricity “cap and trade” tax, RGGI, in the gasoline industry, artificially raising per-gallon fuel costs. The twelve states in the Regional Greenhouse Gas Initiative (RGGI, pronounced “reggie”), including Rhode Island, are gearing up to sign-on to a final memorandum of understanding (MOU) in the spring of 2020, which would effectively lead to a new tax on regular and diesel fuel that some experts estimate could end up being as much as an additional 24 cents per gallon.

The initial MOU is expected to be published on December 17, 2019, providing some details on the design of the TCI gas tax scheme. Then, following a 2-3 month public input period, a final MOU will be published and each state will then decide whether or not to participate.

The Governor has not made it clear, as of early December 2019, if she plans to commit the Ocean State to the TCI gas tax solely by the stroke of her pen, or if she plans to seek legislative approval. 

With the states of Vermont and New Hampshire already signaling initial opposition to this new tax, and instead of subjecting Ocean State motorists to increased fuel costs, Rhode Island should refuse to sign on to this extreme-environmentalist agenda. In opting out, Rhode Island might actually gain a regional competitive advantage.

RGGI is a mandatory market-based program in the northeastern United States designed to reduce greenhouse gas emissions. RGGI is a cooperative effort among the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, and Virginia to cap and reduce carbon dioxide (CO2) emissions from the power sector. RGGI compliance obligations apply to fossil-fueled power plants 25MW and larger within the region.

Under the RGGI multistate compact, larger power plants are forced to purchase “allowances” to produce electricity. In turn, these power producers pass on these costs to ratepayers. Most of the revenue collected from these quarterly energy auctions are then re-distributed to participating state governments, which are then supposed to use the funds to hand out subsidies to local “green” project developers, among other programs.

Already dealing with a destructive Ocean State exodus, in which too many families, retirees, investors, and small business owners are fleeing to lower-cost states, implementation of TCI would make Rhode Island an even less friendly place to raise a family and operate a business. 

TCI = TAX. TCI is a new gasoline tax, regardless of how politicians and unelected bureaucrats might otherwise try to categorize it. When the state government mandates the collection of new moneys and then becomes the eventual recipient of most of those moneys, even if it authorizes a third-party to collect those funds, it can only be categorized as a tax. 

And while it appears that the Raimondo administration is not seeking to bypass the sole authority of the General Assembly when it comes to taxing power, as neither the Governor nor the RI Office of Energy Resources has the authority to unilaterally increase taxes, the Center calls on her to make clear her suggested process. 

Any attempt to increase taxes without supporting legislative action from the General Assembly may be unconstitutional. Whether lawmakers might have the courage to vote to impose massive new gasoline taxes on motorists in an election year remains to be seen, although it likely depends on how much attention the public pays to the issue.

The TCI gas tax is also a regressive tax that will disproportionately impact low-income families, who will struggle much more than the wealthy to pay the higher gasoline prices that will result at the pump. 

Either way, the Center recommends that the Governor should reject the initial TCI MOU and take Rhode Island off of the path that leads towards crippling new taxes on gasoline.  Given the failures of RGGI, discussed below, and this new threat to the energy security of Ocean State families and businesses, the Center recommends that Rhode Island should not join the TCI compact or any other energy-related multi-state cap-and-trade system.

RGGI Has Failed to Accomplish Its Goals. Rhode Island is one of 12 states in the RGGI and TCI cabal, now seeking to replicate California and Quebec by imposing a price on carbon fuels in the transportation sector. The other participating states are: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Vermont, and Virginia.

Ostensibly formed to reduce carbon-based emissions by limiting demand via increased costs and to fund local co-generation facilities, RGGI has not met its emission-reduction objectives. But it has dramatically increased the cost of electricity for ratepayers in its member states, with no corresponding benefit. 

These results are in direct conflict with the assurances with which Rhode Island originally entered the agreement.  One of the original states participating in the development of RGGI, the Ocean State did not sign on to the initial MOU in December 2005, not joining until 2007.  Announcing that decision in his state of the state address on January 30, 2007, Republican Governor Donald Carcieri insisted, “While I’m still concerned about how this agreement will impact the cost of energy here in Rhode Island, I have been assured that those costs can be offset by credits that we will receive from other states.”

Later that year, the state General Assembly passed the Implementation of the Regional Greenhouse Gas Initiative Act.  This legislation ensured Rhode Island’s participation in the RGGI initiative, with broad guidelines for the use of the money that the auctions would generate.

The governor’s assurances that his policies would not severely hurt Rhode Islanders have proven unreliable.  As he made his announcement, Rhode Island was enjoying the second-lowest cost per kiloWatthour for ultimate customers’ electricity in New England, at $13.08.  By January 2019, this average price had increased to $20.12, by far the highest in the region. This 54% increase compares with an 18% increase nationwide over the same period (to just $10.47 per kWh) and 17% in New England overall (to $18.22 per kWh).

Despite enduring an increased cost for energy, RGGI states have experienced “no added emissions reductions or associated health benefits from the RGGI program,” when compared with different states that have otherwise similar energy policies, according to David Stevenson, Director of the Center for Energy Competitiveness at the Caesar Rodney Institute in Delaware. Even so, Stevenson found evidence that RGGI hurt participating states’ economies:

… from 2007 to 2015, net weighted average nominal electricity prices rose 4.6 percent in RGGI states compared to 2.8 percent in comparison states. Linking real economic growth to RGGI alone is fraught with problems. Real economic growth rates in RGGI states between 2007 and 2015 varied widely from a negative 7.1 percent for Connecticut to a plus 11.9 percent for Massachusetts. Also average RGGI revenue amounted to only 0.01 percent of the combined average real GDP of the RGGI states, so one wouldn’t expect much impact. Ignoring those difficulties, real economic growth was 2.4 times faster in comparison states than in the RGGI states. High RGGI state electric rates led to a 34 percent reduction in energy-intensive industries and a 12 percent drop in the goods production sector, while comparison states saw only a 5 percent drop in energy-intensive industries and a 20 percent gain in goods production.

During those years, the U.S. Energy Information Administration found virtually no reduction in emissions in Rhode Island, specifically.  The latest year of data, 2016, does show a downward fluctuation in the Ocean State, but it was very nearly the national average for that year.

The TCI Scheme. The Transportation & Climate Initiative (TCI), by imposing a new stealth tax on fuel, could raise gasoline costs by as much as 24 cents per gallon over the near term, according to Stevenson. (Stevenson extrapolates this estimate from the RGGI’s own projection that prices for its allowances could increase by $24/ton by 2030.) TCI openly admits on its website that the increased gasoline ‘taxes’ are designed to make fuel so expensive that motorists will be financially forced to utilize more green modes of transportation, like walking and biking. 

The process for this expensive TCI tax program is already underway and could come to pass with minimal awareness of the businesses and residents who will be affected. 

  • In 2018, the state of Rhode Island signed-on to a statement encouraging development of a low-carbon transportation proposal. 
    • Governor Raimondo concurrently issued a statement endorsing the TCI tax concept
  • On December 17, 2019, the TCI organization will release a draft MOU on how TCI will work, potentially including estimates of costs and predicted benefits for different policies. 
  • The public will have January and February to offer feedback.  
  • During the spring, TCI will publish a final MOU, potentially with amended program items, and Rhode Island’s executive branch, at the instruction of the governor, will make the decision about whether to sign on to the final TCI scheme. During this time, the governor may evaluate whether legislation is necessary or if she has the authority to unilaterally commit the state to the TCI gas tax compact.
  • The plan is for the program to begin the ‘stealth’-taxing of Rhode Island motorists by 2022.

According to John McClaughry, Vice President of the Ethan Allen Institute in Vermont:

The TCI is astoundingly, one might even say diabolically, complex. The details, not yet finalized, will emerge in a draft Memorandum  of Understanding (MOU) scheduled to appear in December. After public input, the MOU will go to Gov. (Gina Raimondo. Her) signature would put (Rhode Island) into the 12-state deal.

Then (those entities who supply) motor fuel to (Rhode Island) distributors, or the distributors themselves, will have to purchase “allowances”, the cost of which will be inconspicuously added into the price paid by consumers.

The TCI’s administrative unelected bureaucrats body will decide how many allowances must be issued to sufficiently drive up the price of motor fuel, thus reducing the amount of motor  fuel consumed …

What makes this scheme even more diabolical is that no lawmaker may have to vote on this new gasoline tax to be imposed on Rhode Island motorists, with the amount of the tax to be arbitrarily set by unelected climate-change activists. Single-handedly the governor may try to set policy that will further deteriorate Rhode Island’s already bottom-5-states business climate, increase taxes on motorists, and drive more Ocean Staters to other states. 

Given the high-cost vs. no-benefit record of failure of RGGI, there is little reason to think that TCI will create a positive cost vs. benefit return for Rhode Islanders.

Ocean State families and businesses are already paying higher RGGI electricity costs, apparently for no reason. The Center encourages the governor to face this reality, to place the welfare of her constituents above the demands of climate-change extremists, and to refuse to sign the either of the TCI MOUs. 

Take Action: Gasoline stakeholders, including citizens and businesses, are encouraged to submit comments – opposed to, or in favor of TCI – on TCI’s website.

Innovation in the Free-Market is More Effective. In contrast to the heavy-handed approach of government regulation and price mandates that disrupt the marketplace, as with both the RGGI and TCI schemes, the free-enterprise system has achieved far greater results when it comes to reducing greenhouse gas emissions.

A 2018 Forbes Magazine article detailed how America, because of innovative new energy technology from her private sector, is leading the world in reducing CO2 output, without being part of the international Paris Climate Accord (or imposing unreasonable carbon taxes or implementing a punishing cap and trade system). Conversely, countries like Germany, with its high renewable energy government mandates, have failed to see commensurate emissions reductions. Meanwhile, China continues to spew CO2 at an alarming and increasing rate. Many experts believe that continued investment in fossil fuel innovation may be the best path to a cleaner planet.  

In Rhode Island, companies and industries are voluntarily and successfully working with the RIDEM to reduce commercial motor vehicle emissions. For example, the RI Trucking Association (RITA), in its letter opposing TCI to the RI Office of Energy Resources, lists many of the strides its industry has achieved under current federal law to reduce vehicle emissions. The letter also cites potential “major disruptions to business and our state’s essential supply chain” if TCI’s extreme CO2 reduction goals were to be met.

The RITA letter cites concerns about maintaining a “readily available, affordable, and reliable fuel supply” as critical to the trucking industry to be able to continue delivering goods that people need in a manner that helps keep prices low. New TCI mandates could force truckers and other businesses to make costly investments in new equipment or to purchase high-priced fuel alternatives that is not always in sufficient supply.

Also, in its letter, as an alternative to TCI-induced price increases, RITA suggests a multi-faceted strategy that includes:

  • Financial incentives to assist companies with adoption of cleaner technologies
  • An all-of-the-above fuel approach, where traditional fossil fuels as well as biodiesel and renewable diesel are part of the mix
  • Bid preferences for state contracts for motor carriers who have taken steps to reduce CO2 emissions
  • Investment in transportation infrastructure that allow for the more efficient flow of goods on our roads and highways

If adopted, the strategies above would allow the market to self-reduce greenhouse gas emissions, without harsh new gas tax increases that would impact both commercial and civilian motorists. 

An Opportunity to Gain Competitive Advantage? While Rhode Island’s two larger neighbors, Massachusetts and Connecticut, are expected to join the TCI regional compact, our state should strongly consider the regional competitive benefits we might realize by standing pat. Our smaller northern neighbors, Vermont and New Hampshire, have signaled their initial opposition to this new tax, and are instead hoping to gain economic advantage by not signing-on to TCI.

While other states struggle in the future with the higher regular and diesel gasoline TCI taxes, along with the logistical nightmares of implementing and enforcing such a burdensome regulation, the Ocean State could profit  by attracting southern New England motorists to buy lower-priced gasoline at our own Rhode Island gas stations and convenience stores, in turn boosting economic output in our state.

It is not very often that Rhode Island can boast of a competitive advantage over its neighbor states, but strategically opting-out of imposing TCI gas taxes on its motorists, our Ocean State’s economy could realize a windfall profit. 

Constitutional Challenges Are Expected. Legal experts argue that the Rhode Island executive branch cannot unilaterally raise taxes without legislative approval. And while it appears the Governor understands this, she will most likely face a legal challenge if she tries to go it alone.

Regardless of the internal state process, the TCI itself will also be closely evaluated, nationally, against the courts’ interpretation of the Commerce Clause and whether or not the RGGI and TCI compacts interfere with interstate commerce, which is constitutionally relegated to the U.S. Congress, and whether or not TCI-induced gasoline price increases may cause harm to consumers in other states.

Further legal challenges could arise as to whether or not TCI, or even RGGI for that matter, meet the legally defined “Compact Clause” that allowed for states to enter into agreements, so long as such agreements do not encroach upon the “just supremacy” of the United States.

Conclusions and Recommendations. With virtually no net reductions in carbon emissions from its inclusion in RGGI, while electricity costs have risen significantly for Ocean State families and businesses, and combined with the likelihood of  legal challenges from private consumer and industry groups, the Rhode Island Center for Freedom & Prosperity does not expect better results from TCI. 

Further, the impact of such a far-reaching gasoline tax under the TCI scheme could be severe and must not be implemented without specific legislative approval following a rigorous and transparent public debate. In other potential TCI states, policymakers are acting in good faith and are indeed planning to seek legislative approval, whether such approval is Constitutionally required or not. Only via this Constitutional process can the political class be accountable to voters.

A transparent and thorough public and legislative debate must occur if such a major new gas tax is to be considered. It must not be implemented solely with the stroke of any lawmaker’s pen.

The Center therefore recommends:

  1. that without legislative consent, Governor Raimondo should further advance any aspect of the TCI scheme that could lead to the expansion of RGGI’s failed “cap and trade” system into the consumer and commercial gasoline products industry.
  2. that the General Assembly should seek a formal legal opinion as to whether or not the Governor has the right to unilaterally impose new TCI taxes on Ocean State motorists
  3. that if the Governor does sign the initial MOU, General Assembly leadership should not allow the Governor to strip them of their sole authority to levy any new statewide tax by signing the final MOU without legislative approval, and should submit its own legislation to approve or reject the Ocean State’s participation in the TCI regional compact
  4. that, given the proven failures of RGGI, legislation should be considered to withdraw Rhode Island from the RGGI compact, so as to ease the cost of electricity on our state’s families and businesses

The High Costs of Renewable Energy Mandates. In 2016, the Center published a major report detailing how energy mandates imposed by the Rhode Island government would harm the economy and perpetuate cronyism. In short, energy mandates, including schemes like the TCI, create a poor cost-benefit value for families and businesses in our state. 

The report, Renewable Energy in Rhode Island, is based on detailed research by a national energy expert, Dr. Timothy J. Considine. Subtitled Big Cost, Little Difference, the report’s major findings, if Rhode Island were to ramp up its renewable energy production to meet existing mandates, include:

  • Rhode Island has a relatively low carbon footprint, as 98% of its energy generation is based on natural gas production.
  • An artificial rise of 13-18% in electricity rates, leading to $600-800 million extracted from the private sector because of government mandated higher energy costs.
  • Four to six thousand jobs could be lost overall as a result of these consequences, despite the few hundred “green” jobs created, which will place further downward pressure on the state’s already dismal 48th ranking on the national Jobs and Opportunity Index
  • Major investment will be required to achieve a minor abatement in that carbon footprint, if the state is to meet its existing (and potentially increased) renewable

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.


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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.


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