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.
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.
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.
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:
- Hundreds of millions of dollars would be put back into the state economy.
- Tens of thousands of jobs would be created.
- Municipalities would collectively realize a windfall of tens or hundreds of millions of dollars.
- Gross domestic (state) product would increase by billions of dollars.
- State population, and the state tax base, would increase by thousands of people.
- 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.
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:
- 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.
- 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.
- 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.
- 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.
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.
Imagine tens of thousands more people employed in Rhode Island.
Imagine new retail and construction jobs to support an economic growth spurt.
Based on a 2012 policy recommendation by our Center, some members in our General Assembly actually think we can make these things happen in our state.
Yet, as we close out the year with reports of even more dismal national rankings for our Ocean State, the Political Class is looking to kill this policy idea from our Center that some believe could make those imaginations happen in 2013; an idea that is clearly ‘out of the box’; but sadly, an idea that those who defend the status quo cannot even begin to comprehend.
Rhode Island desperately needs a number of game-changing policy reforms to gain a competitive advantage over our neighboring states and to provide much needed economic opportunities for workers; the elimination or phase-out of the state sales tax is a policy reform idea that offers the most immediate jobs dividend.
In June our Center published a report detailing the positive jobs and economic benefits Rhode Island would realize if we were to reduce or eliminate the state sales tax. Just this week, a front-page story in the Providence Journal discussed how some members in the House are considering this strategy, making reference to our Center’s report.
But – per a recent ProJo article about related legislation – to hear members of the Political Class reject this notion out-of-hand is an indictment of their lack of leadership and imagination. How can we afford not to have this important debate?
Our Center produces credible information and it’s unfortunate that we have to find a way around so many with closed minds. Our Center is an idea factory … and one such idea was put forth in our Zero.Zero report; a well-researched study that projected the benefits of sales tax reductions: A report that reviewed how this policy has been successful in other states; a policy that is consistent with a free-market economic philosophy. Yet the Political Class still cannot comprehend … and they choose to stick their collective heads in the sand and say “it isn’t so”.
The problem is that they are fixated on “balancing the budget” … a budget that has clearly failed our state. Balancing the budget – especially this budget – is not an economic policy and it should not be the Holy Grail for our public officials … making our state more competitive and creating jobs should be the goal!
The budget, then, should be crafted to support that more worthy goal; a budget that will likely be significantly smaller so that we can reduce taxes on citizens and businesses in order to create a positive business climate … scandalous!
But those without imagination; those who are not prepared to lead; and those who are afraid of upsetting the apple-cart find it all too easy to hide behind the limitations of our existing job-killing budget, to impose a few new taxes on someone else to raise a few more dollars, and then wash their hands and say “we did good”.
This failure of leadership and this culture of failure is what we voters have continually put in place over the recent decades … so that now, any bold, new idea is systematically rejected by the establishment.
This will happen with our innovative sales tax idea unless you, and thousands of citizens like you, are willing to stand-up, speak-out and demand that our state rigorously debate the pros and cons of a policy concept that could reduce our state’s chronically high unemployment rate by about one-third!
Forward this email, make your calls, talk to your family and friends … but do not complain about our state if you are not willing to stand up to the Political Class. They will listen if you and I speak loud and often enough!
In 2013, I look forward to working with anyone with an open mind to advance the bold policy reforms that our state so badly needs.
by Mike Stenhouse, CEO
Related Media: Report Finds RI Government Workers Out-Earn Private Sector (GoLocalProv), Guest opinion: Public employees would benefit from pro-growth policies (The Herald News), Tie the Public to the Private (GoLocalProv), Mike Stenhouse on the Helen Glover show (920 WHJJ); RI Owes $81 Million in Unused Sick, Vacation Time (GoLocalProv)
State and local government workers enjoy significantly higher compensation levels than their private sector counterparts, according to data compiled for Rhode Island as part of a national study conducted by economists William Even, of Miami University, and David Macpherson, of Trinity University.
Even and Macpherson apply the most complete controls for such variables as education, experience, and broad job category and the most accurate accounting of benefits to date. They find that state and local government workers across the country receive a “premium” above their private-sector neighbors, but Rhode Island amplifies the difference:
- Rhode Island: 26.5% higher total compensation
- New England: 18.8% higher total compensation
- United States: 14.9% higher total compensation
Furthermore, a preliminary review of the effects of Rhode Island’s pension reform suggests that the changes to their retirement benefits did not appreciably reduce government workers’ advantage, only reducing the premium for government work to 26.24%.
Looking at base pay alone shows that job security and better benefits in government do not correspond with lower salaries, at least in Rhode Island and New England, where state and local workers receive:
- Rhode Island: 10.4% higher base pay
- New England: 2.8% higher base pay
- United States: 1.5% lower base pay
Averaging all jobs at every level, total public-sector pay and benefits in Rhode Island are competitive with Massachusetts and Connecticut, but private-sector workers earn nearly 25% less than their peers across state borders. Consequently, comparing averages within Rhode Island yields the following results:
- Total compensation: 20% higher for government workers
- Pay (base salary): 4% higher for government workers
- Benefits: 58% higher for government workers
- Hours worked: 5% less for government workers
- Value of paid time off: 5% higher for government workers
Compared with the New England region, Rhode Island’s government employees are unique in having a higher average base salary than the private sector as well as a higher value for paid time off. They also enjoy a total compensation premium well above the regional average, even as they work the fewest total hours.
If there is to be any hope of keeping current compensation levels and benefit promises to government workers, the state must experience an immediate boom in the private-sector economy. Without rapid economic growth and a boost to their prosperity, taxpayers’ tolerance and capacity to pay for government beyond their means will continue to wane.
Rhode Island’s state and local government employees receive higher compensation than their private-sector neighbors by every measure, according a study comparing public-sector and private-sector compensation that the RI Center for Freedom & Prosperity requested from economists William Even, of Miami University, and David Macpherson, of Trinity University.
Chart 1 shows the average real earnings and benefits (in 2010 dollars) for state and local workers versus private-sector Rhode Islanders. Benefits take into account pensions, health insurance (including post-employment/retiree), other insurance, legally required benefits, like Social Security payments, and paid time off. The total compensation for the average public-sector employee in Rhode Island was $100,217, which was more than 20% higher than the private-sector average of $83,419.
Rhode Island is inarguably in a high-cost, public-labor-friendly region, but even so, it is unique within New England. Chart 2 shows that Rhode Island is the only New England state in which the average wage earnings (base salary) of all state and local workers, on its own, was greater than that for all private-sector workers.
The most conspicuous reason for Rhode Island’s poor showing, here, is the huge gap between its economy and that of the two states that envelop it. While the Ocean State’s public sector is competitive with Connecticut and Massachusetts (with earnings only $4,294, or 6.6%, below the region-leading Bay State), its private sector has a $15,398 (23.3%) deficit.
Even when benefits are factored in, the private sectors in Massachusetts and Connecticut outstrip government employees. In contrast, Table 1 shows that Rhode Island adds a relatively large amount of compensation via benefits in its public sector and a relatively low amount in its private sector.
Another significant perk to working in Rhode Island’s public sector is time off. According to the data collected by Even and Macpherson, Rhode Island is the only New England state in which the value of the public sector’s paid time off ($7,208) is greater than the private sector’s ($6,857). (These numbers are included in the total for benefits.)
And while government workers in all New England states put in fewer hours than their private-sector neighbors, Rhode Island’s public employees put in the fewest. Moreover, only in Vermont is the gap between the sectors larger. (Note: Annual hours are calculated from weekly-hour responses on employee surveys.
A common objection to such comparisons of average pay is that the types of jobs available within the public sector lend themselves to more-highly educated employees. Therefore, the argument goes, it is entirely appropriate for them to make more than the average of all private-sector jobs, because they skew toward the higher end of the workforce.
To investigate this explanation, Even and Macpherson performed a regression analysis for Rhode Island, the New England Census division, and the United States in order to compare similarly situated employees. Chart 3 shows a summary of the results.
The percentage shown is the premium for working in the public sector — that is, the percentage advantage in compensation from working in the public sector, taking into account employee characteristics (such as education and experience) as well as broad job category (such as management versus office and administrative support). (See Table 2.)
On salary alone, state and local employees enjoy a 10.4% premium in Rhode Island, even when controlling for other variables like education, experience, and broad job category. For New England overall, the premium is 2.8%. Nationwide, the public-sector actually has a salary penalty of 1.5% below the private sector.
Adding in the total value of benefits (before pension reform), Rhode Island’s state and local workers receive a premium of 26.5% over their similarly situated private-sector counterparts. That compares with 18.8% for New England as a whole and 14.9% nationwide.
A significant consideration that Even and Macpherson were unable to quantify due to a lack of data is job security. Given higher rates of unionization and the ability to affect their employers through political activities, government workers are generally understood to face less volatility than do private-sector employees. In theory, economists could apply a monetary value to that intangible benefit, but such an investigation would be beyond the scope of this study.
Pensions & Pension Reform
One important adjustment that Even and Macpherson have made to the raw compensation data is to determine the current value of pension benefits using a 4% discount rate. In a defined-benefit system, actuaries value the guaranteed level of income that employees will receive during retirement by assuming that investments will produce a certain return.
Rhode Island currently assumes a 7.5% return. Prior to the adjustment that spurred the 2011 pension reform at the state level, the assumption was 8.25%. Because this study uses data from 2010, that is the starting point for this data. By comparison, the average private-sector assumption is 6%.
In all cases, therefore, Even and Macpherson had to mark up benefit values to account for the likelihood that investment profits will fall short of predictions. It may seem counterintuitive that a benefit is worth more when invested money receives less profit. However, in the case of guaranteed pensions, the benefit is defined in the future, not the present.
Therefore, lower profits from investments would require greater payments by the employer, making the benefit of greater value to the employee now. In effect, the employer is promising a greater return to the worker than he or she would be able to achieve by investing on his or her own.
Because pensions make up 10-20% of the typical government employee’s total compensation, compared with 4-6% in the private sector, large reforms can greatly affect the premium that public-sector workers receive over the private market-place. For this study to be complete, therefore, some accounting of the effect of the Ocean State’s pension reform on the value of state employees’ benefit packages had to be included.
However, the imposing complexity of pension calculations is such that an accurate estimate of the reform’s effects would be well beyond Even and Macpherson’s scope. In particular, during the transition from the defined benefits pension to the newly developed hybrid plan, each individual employee’s benefit will be different, and results vary from job to job and across state and local governments. It will be a matter of years before accurate data is available.
Consequently, the public-sector premium given above can be considered the outcome if the lawsuit currently pending on behalf of the relevant labor unions succeeds in overturning the reform. For some sense of the result if the state prevails in its defense of the reform, the Center for Freedom & Prosperity asked Even and Macpherson to provide a rough calculation.
It’s important to note, here, that the pension data throughout this study assumes that all municipal employees are receiving the same weighted average contribution as those in the state’s two largest plans — state workers and teachers — with and without 2011’s reform.
Be that as it may, the effect of the reform on this study was relatively minor. The guaranteed payments provided through the defined-benefit portion of the state’s new hybrid pension system have gone down. But the state has increased the percentage of payroll that it must contribute each year, to make up for the 5% of their pay that employees are putting toward their defined-contribution plans. The state has added a 1%-of-payroll contribution to those plans, as well.
Consequently, the annual value of government employees’ pension benefit has only decreased from $10,692 to an estimated $10,476. In terms of the “premium” that state and local workers receive over similarly situated private-sector Rhode Islanders, the percentage advantage has decreased from 26.49% to 26.24%.
Living Beyond Our Means
When a family comes to a decision about purchasing any product or service, it doesn’t merely accept the seller’s sense of what’s reasonable. In addition to the market rate, consumers must take into account the quality of the thing they’re buying as well as their own ability to afford it.
With deteriorating infrastructure, doubts about the quality of government services, and the high-profile specter of unfunded municipal and state retirement liabilities looming over the state during this current period of economic stagnation, the compensation of public-sector employees has become a subject of heated debate about fairness and affordability.
Rhode Island is the only state in New England in which public employees have higher base salaries than the private sector. At the same time, state and local workers in the Ocean State work the fewest hours in the region. When benefits are factored in, Rhode Island has the highest premium for public-sector workers over private-sector workers, even if pension reform survives the lawsuit that unions have filed to overthrow it.
Meanwhile, the state’s economy is reeling, with arguably the worst employment picture in the United States, certainly the region. With dwindling taxable incomes and general economic activity, the state and its cities and towns will not long be able to continue to squeeze more revenue from a population that is losing ground economically and seeing many of its productive residents and college graduates flee to states with healthier economies.
Adjustments around the edges that do not take on the significant public policy issues we face will not be sufficient to turn the state around. Without rapid economic growth and a boost to their prosperity, taxpayers’ tolerance and capacity to pay for government beyond their means will continue to wane. Painful struggles between powerful insiders and the average citizen will worsen. Even more taxpayers may decide that the battle is not worth the benefits of living within the Ocean State’s borders.
Economic Growth Benefits Public and Private Sectors
With all of the emphasis on improving economic development in Rhode Island, there have been two conspicuous omissions.
The first is the need for a complete change in the way that state and local governments treat taxpayers and businesses — as a matter of regulation, as a matter of spending, and as a matter of taxation.
The second, as emphasized in the data revealed in this study, is the fact that government workers should be out in front of the crowd advocating for change — not for tax-the-rich schemes that will never produce sufficient revenue, but for precisely the policies founded in economic liberty that will close the gap between private-sector Rhode Island’s earnings and those of its nearest neighbors.
If there is to be any hope of keeping current compensation levels and benefit promises to government workers, the state must experience an immediate boom in the private-sector economy.
Even the dramatic pension reform that sent unions to their lawyers and made state Treasurer Gina Raimondo a national policy star barely nudged Rhode Island’s public sector toward the national ratio of public-to-private workers. It hardly even brought the tiny Ocean State nearer to the average for the union-stronghold region of New England.
While additional compensation cuts and even deeper benefit reforms will be necessary in the public sector, the more significant factor in the public-private imbalance, locally, comes from the substandard economic conditions in which the Rhode Island taxpayer in the private sector is forced to survive. That is where dramatic improvement is most necessary, and most attainable, if public policy can be properly aligned.
Central Falls retirees discovered all too painfully that unsustainable compensation arrangements, whether salaries or benefits, are by no means guaranteed if obvious warning signs are not acted upon responsibly. The comparison of the public sector and the private sector in Rhode Island is one such sign of unsustainable compensation levels.
The people of Rhode Island depend upon government workers for the appropriate and necessary functions of government, but those workers depend upon the private sector to maintain a healthy economy and, in turn, sufficient government revenue. The top priority for employees on both sides of Rhode Island’s taxing and spending, therefore, should be reasonable reform that makes public-employee compensation sustain-able combined with the elimination of policies that restrain economic growth in the Ocean State.
Download the PDF version of this report for Even and Macpherson’s full methodology.
As printed in the Providence Journal Op Ed section, 11/15/2012
On Nov. 10, a single page of The Journal featured two articles that tell us all we need to know about Rhode Island’s misguided approach to economic development and our dismal economy. While Rhode Islanders struggle to control their families’ financial security, our state looks to seize control, period.
The first article (“State seeks growth ideas, data analysis”) reports that Governor Chafee will use tax dollars to pay private firms for ideas, due in about 90 days, on how to focus resources in specific areas that can be coordinated across multiple state agencies.
Every part of this approach is precisely opposite of what we should be doing.
Rhode Island has a bad economy because we have one of America’s worst climates for business; and we have a poor business climate because we have too many punishing taxes and regulations enacted by our own government.
As the governor sees it, the same government that created this bad business environment now wants to be entrusted to come up with a plan to fix it — coordinated across multiple agencies.
But a redesigned Rhode Island Economic Development Corporation would not create private-sector jobs. Government is hardly the entity those in the business community would trust.
After the 38 Studios debacle, haven’t we learned that government should not be deciding which businesses or industries should receive special treatment?
When I hear “invest in specific areas,” I can only wonder what politically connected special interests will benefit. A strong business climate, one that reduces taxes and regulations for all, would benefit the entire business sector, not just a chosen few segments.
Our state wants to use federal funds to pay for good ideas about what’s wrong with our state and what to do about it. How typical: spend more taxpayer money on more government bureaucracy to waste more time, and maybe reaching conclusions we already know.
Government begets more government, and the beat goes on.
My group, the Rhode Island Center for Freedom & Prosperity, has researched and documented the major problems in the state, and we have recommended solutions that are working successfully in other states.
And we do this for free. We never accept taxpayer money. We just ask the political class to listen!
There is no need to wait 90 days. Should people who are struggling have to wait three more months for the state to begin to get a clue?
In this same Journal article, Governor Chafee was quoted as saying that we must take steps to improve the state’s economic climate. But in the second article (“R.I. could see $50-million surplus”) about what to do with a potential budget windfall, the governor contradicted his quote from the first article.
Instead of using the $50 million surplus to improve the business climate (by reducing taxes, maybe?), the governor intends to spend forward these windfall funds on next year’s budget deficit, which does nothing to improve the state’s economic climate.
Balancing a failed budget would not help grow our economy. But this is how bureaucrats think. Economic growth should be the goal, with the budget being adjusted accordingly. Any wonder why Governor Chafee recently received a “D” for his poor fiscal policy from the Cato Institute?
What both articles clearly demonstrate is that Ocean State residents can expect a government-centric, bureaucratic, budget-oriented approach toward economic development. The government approach that got us into this mess is now being promoted by our state leaders to get us out of it. The political class just doesn’t get it.
What Rhode Island needs to do is to unleash individuals and businesses by tearing down the legislative barriers that inhibit success. Let the free-enterprise system — the same system that President Obama called the greatest engine of prosperity the world has ever known — work on its own and thrive.
Unfortunately, those who defend the status quo do not want to hear it. They do not want a less-expansive government. That might lose them votes. And they will do almost anything to avoid dealing with the real public-policy issues that are at the core of our state’s problems.
The politicians provide lip service to make it look like they’re trying to do something. And they hope that we’ll all buy it.
I don’t buy it. Do you?
Mike Stenhouse is chief executive of the Rhode Island Center for Freedom & Prosperity, a conservative think tank.
Related Links: Oct 11 Press Conference Event & CEO Stenhouse Extended Remarks, Prosperity Agenda for RI,
Adherence to Free-Enterprise Principles can Revive the Ocean State’s Economy
The state of Rhode Island requires significant public policy reform to unleash a private-sector economic engine fueled by the creativity, investment, and energy of businesses and individuals. What is not needed are more of the same subjective and politicized tactics that benefit chosen business sectors, favored political constituencies, limited geographical regions, or specific business ventures.
Rhode Island does not have to reinvent the wheel. Three proven steps are required to embark on a new path to improve Rhode Island’s economic fortunes:
1. Embrace the free-enterprise system as the means to restore prosperity
2. Follow and learn from successful economic policies implemented in other states
3. Design and implement public policy reforms reflective of the above, applied evenly and universally
In seeking to provide assistance to too many people, in caving to special-interest-group concerns, and by doling out special favors to the well connected, the state of Rhode Island has created dozens upon dozens of legislative barriers to success. These barriers have restricted economic and individual opportunities and incentives, resulting in the worst business climate in the country, loss of out-migrating taxpayers, a slew of Fs and Ds on the state’s Competitiveness Report Card, and the most dismal jobs outlook of any state in the nation. Prosperity can only be achieved if those barriers are systematically torn down and we move decisively on a new economic path.
That proven economic path is the free-enterprise system. Even President Obama calls it the ‘genius of America’, yet Rhode Island has sharply departed from its principles. Free-market concepts must be re-embraced and recognized as the economic engine that has proven to be the most effective machine ever devised to raise people out of economic misery and into a higher standard of living. This means our state must enact policies that lower taxes, reduce regulations, and cut spending. The benefit will be increased economic activity, more jobs, and positive state-to-state net migration. In contrast, government redistribution polices have failed the very citizens they intend to help.
Before we undertake the task of implementing specific policy reforms that dramatically roll back laws that hinder economic growth, a long-term commitment to economic freedom must be established. Removing certain barriers while erecting others will get us nowhere. Adherence to free-market principles is required. But, as a state, we must also be willing to work through our political and cultural differences.
Contrary to our popular notion of polarized politics, the free-enterprise system is not a political philosophy. It is a well-delineated economic philosophy predicated on a culture of success. As a people, we must overcome our disdain of the successful and resist the temptation for government to serve as referee in tilting calls to favor groups it perceives to be in need. This is not the proper role of our uniquely American form of government; it interferes with the efficient mechanics of the free-market system and it provides disincentives to achieve and prosper.
We must accept that a paycheck is better than a welfare check and recognize that a growing economy that provides job opportunities is far more desirable than a stagnant economy that breeds dependency on government services and impedes upward mobility. We cannot have it both ways. We must also understand that it is a morally preferable that free people should strive to be self-sufficient and maintain the rewards of their own hard work. Government policies should create incentives for the pursuit of individual happiness, not hinder that pursuit.
The main strategy to unleash Rhode Island’s economic revival should be to learn from and follow the successful policy reforms enacted in other states; namely, creating an attractive business climate, with free competition, so that all laborers, entrepreneurs, and businesses can have more opportunities to work, to innovate, to grow, and to prosper.
Our RI Center for Freedom & Prosperity has researched and developed an initial set of policy reforms that are consistent with these goals – our Prosperity Agenda for Rhode Island: a set of taxpayer-friendly, worker-friendly, and business-friendly reforms that reduce burdens on employers and provide more freedom of choice for individuals; proven reforms, successfully implemented in other states, that will start to move the Ocean State down a new path towards economic growth.
Cranston Herald: Study shows free-market enterprise is path to prosperity in RI
Up to $250 million per year can be saved in RI
All workers deserve fair compensation. However, it is not fair that taxpayers, struggling in a poor state economy, must also be forced to pay for excessively high compensation packages for unionized government workers. With reforms to collective bargaining, undue union influence and election cronyism can be reduced.
The ever-increasing total cost of employment for unionized government labor — annual compensation plus benefits — is a cost item we simply can no longer afford.
It’s time to face the facts: public-sector unions drain precious resources away from Rhode Island’s sick, elderly, youth, and poor.
Municipalities are understating the true cost of unfunded pension liabilities
Government employees need to properly plan for their retirements. Municipal officials need to have predictable budgets from which to provide quality education and city services. Taxpayers need to know that budget shortfalls will not raise their property taxes. Before local pension funding formulas can be effectively developed, it is essential that Accuracy in Pension Accounting be required of all municipalities.
The assumed rate of return that most government entities have traditionally used to estimate pension liabilities has been widely discredited as overly optimistic. A more conservative market rate, similar to what is used in the private sector, is generally seen as a more accurate measurement.
When a private company, like Enron, used improper accounting practices, the wrong-doers ended up in jail. When our local governments understate pension liabilities, retirement plans are put at risk, our schools suffer, local services are cut, and taxpayers pay more from their pockets.
At an October 2012 pension forum state and local officials openly admitted that it would be politically inconvenient to disclose the true scope of the problem to their constituencies.
This can all change with accurate accounting.
Minimum wage increases helping to sink teen employment in the Ocean State
As teens transition into adulthood and self-reliance, the likelihood of developing crucial career skills, of building their personal networks and résumés, and of earning valuable spending money is diminishing in Rhode Island. Moreover, a higher minimum wage is drag on jobs development for everyone looking for entry-level work.