All Cuts And No Revenues Define RI’s 3 Economic Plans

Thursday, March 28, 2013

Jonathan Jacobs, GoLocalProv Contributor

Rhode Island government has three tax-cutting measures on the table and all of them purport to stimulate the state’s slow-to-recover economy.

Each plan, whether blocking tax increases or directly cutting sources of tax revenue, are fueled by the idea of creating a long-term business-friendly environment. However, in the short term, the loss in immediate and essential revenue could prove a jagged pill to swallow for the state’s hardest hit sectors.

When it comes to economic turmoil, “Rhode Island is always first in and last out,” said Representative Jan Malik (D-Barrington-Warren), referring to the state's woefully slow recovery from the recession. Businesses are still downsizing and pulling out, and any economic growth is still hard-pressed to compensate for the overall rate of loss. Malik's plan is the first of three currently competing for favor, and support, in moving the economy forward.

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The Malik Plan

Representative Malik's bill, 2013-H 5365, calls for the end of the sales tax by October 1 of this year. Furthermore, as of October 1, the local meals and beverage tax will also be eliminated. Malik cites his own experience as the owner of a liquor store in Warren, where he says sales are down 20 percent since last year. He attributes that to the lack of liquor sales tax in neighboring Massachusetts and a lower sales tax overall. Malik acknowledges the nearly $900 million per year loss in general revenue that eliminating the sales tax would create; however, he believes there would be a longer term offset of the loss by the boost in retail and entertainment business to the state.

Malik said that his legislative proposal was designed to “get the conversation going.” Whether the tax is eliminated or reduced, he said, "it only has to go down 1% or 2% to compete with Massachusetts.” 

Senate President Teresa Paiva Weed's communications director Greg Pare, put the sales tax question into context by citing recent findings from the Senate's Moving the Needle report. “Of all the taxes measured within the Tax Foundation report, the only Rhode Island system that ranked within the top half of states was its sales tax," he quoted. "The state’s sales tax rate (7 percent) is tied for second highest in the nation, but this does not tell the whole story as many states levy city, county, and municipal rates on top of the state rate. When factoring in these local rates, which are not assessed in Rhode Island, Rhode Island’s total rate ranks 20th highest nationally. And when reviewing the overall sales tax system, particularly its comparatively small base of goods and services subject to the tax, the system is ranked 25th nationally.”

The Chafee Plan

The Governor's Fiscal Year 2014 tax plan is ambitious in terms of corporate tax reform. As a means by which to more effectively compete for business development in the region, Governor Chafee has proposed a reduction of the corporate tax rate from the current 9% to 8% in 2014 and floor at 7% by fiscal year 2016. In order to offset the revenue loss, Article 9 of his FY 14 budget includes a reduction in the Jobs Development Tax Credit. However, this only pays back some of the $90 million in revenue loss over five years.

Christine Hunsinger, Governor Chafee's Communications and Media Relations Director, said that Chafee stands strong on lowering the corporate tax. When asked about his position on Malik's proposal to lower or eliminate sales tax, Hunsinger said, “The Governor sees that the place where Rhode Island is out of proportion with the rest of the states is property tax and income tax. He wants a level playing field for Rhode Island taxpayers and sees the way to do this in lowering the corporate tax.”

When Malik was asked about the corporate tax reform proposed by Chafee he said, “I was happy when I first heard about it. On the other side, there's the exchange. CVS, for example. It solves one problem and creates another.”

The G.A. Leadership Plan vs. Rhode Islanders for Tax Equity

Rhode Islanders for Tax Equity (RITE), a coalition of labor organizations and progressive action groups, pushed a piece of legislation asking for an annual 2% raise in income tax for Rhode Islanders earning $250,000 a year or more, which is projected to raise $66 million in revenues. While the General Assembly committees have heard, are hearing and will hear dozens of bills relating to revenue, House Speaker Gordon Fox has been non-committal on this issue of increasing taxes on the rich. The Speaker has historically leaned in favor of maintaining the status quo regarding income tax. Senate President Teresa Paiva Weed came out against tax equity, saying the business community does not support it.

The Senate President's Communications Director, Greg Pare, has pointed to the recent "Moving The Needle" report produced by the Senate in conjunction with the Rhode Island Public Expenditure Council. “Among the recommendations of the Moving the Needle report ... was a re-examination of the corporate tax in conjunction with tax credits," Pare said. "The report also recommended that the Assembly resist increases in broad-based taxes and maintain the 2010 personal income tax reforms.”

Consistent with these recommendations, Pare said, "the Senate President has spoken about the need to reexamine the corporate tax in conjunction with tax expenditures as part of the ongoing budget process. She has also noted that the business community has spoken repeatedly about the need for consistency in the income tax structure.”

Chafee's office responded to questions about RITE's proposal by saying that the Governor supports increasing taxes on the rich on a national level, but the measure has demonstrated an adverse impact on a state level due to such close proximity with neighboring state's borders.

Malik, when asked the same question, said that he had never signed on in the past because the money was always earmarked. “We need to know where the money is going,” he said. “I signed on this time.”

The Bottom Line

With differing plans on the table, their common thread is cuts. The most recent unemployment numbers, 9.4% for the month of February, are lower that they have been since December of 2008. However this is still higher than the national average as well as the regional average. Following a winter storm season that left the state’s roads, businesses and overall infrastructure hurting for financial support, the immediate revenue reduction could make the short term recovery difficult. However, the plans have another common element in their desire for more long term thinking about changing and repairing the structural deficiencies that led Rhode Island into the economic mire from which it struggles to emerge.

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