NEW: RIPEC Report Urges Sales Tax Reform
Thursday, June 02, 2011
The governor’s proposal is designed to address three primary issues with the state’s current tax structure – changes in personal consumption, a narrow tax base, and cross-border competition – as well as to raise additional revenue to balance the state’s budget. Specifically, the proposal lowers the rate from 7.0 percent to 6.0 percent and broadens the base by taxing previously exempt items and adding a 1.0 percent tax for specific goods and services. Together, these changes are projected to increase sales tax revenues by approximately $165 million for FY 2012.
"Sound tax policy is the result of carefully crafted and thoughtful changes to tax systems with long-range goals in mind," RIPEC said in a statement. "Modifications to tax systems should not be made solely to increase revenue or to balance budgets. Rather, tax structures should be capable of growing with, or reflecting, changes in the economic makeup of a state; periodic review and adjustment of tax policy is necessary to ensure that taxes bear a relationship to a state’s economy."
"Rhode Island’s sales tax should be reformed," said RIPEC. "The state’s narrow base requires a high rate that not only increases the regressive aspects of the tax, but also puts the state’s businesses at a competitive disadvantage vis-à-vis their competitors in neighboring states. A broader base and lower rate will allow for a more stable revenue stream that is less susceptible to economic downturns, can potentially introduce greater equity into the tax system, and may allow businesses in the state to be more competitive."
In RIPEC’s view, the following five principles should be used when considering reforms to the sales tax in Rhode Island. A high-quality sales tax system should:
- Minimize distortion in economic decisions: changes to the tax system should minimally affect a taxpayer’s decision to engage in, or how they engage in, a transaction;
- Be equitable and treat similarly situated taxpayers similarly: tax systems should minimize regressivity, taking into account a taxpayer’s ability to pay, while treating similarly-situated taxpayers, producers and goods equally;
- Be simple to administer and to comply with in a cost-effective manner: any changes to the tax system should account for the increased administrative cost to the state and increased compliance costs for businesses;
- Be transparent and predictable for both retailers and consumers: tax systems should be structured so that both consumers and businesses are aware of what goods and services are taxed and at what rate; and
- Generate sufficient revenue in a reliable manner: changes should be made to the sales tax code in order to create a more stable, balanced system of revenue that adequately supports government services without causing an undue burden on taxpayers or businesses.
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