Dan Lawlor: Sales Tax of Doom
Saturday, September 01, 2012
"No slick lawyer or income tax expert can get you out of a sales tax." - Will Rogers
of all, I made a mistake in earlier piece on tax policy. Kudos to numerous commentators for pointing this out (some nicer than others): in 1997, the top income earners had a 27.5% income tax rate on their federal tax liability, as Mike Napolitano specifically pointed out, a "piggy back tax,” not 27.5% on their income wages.
I misunderstood the tax liability. Thank you for holding me accountable and fact-checking.
In any event, the truth of the trend still stands - the income tax rates are lower now than they were in the mid-1990s, but our jobless situation is worse. Of course, it is not a direct cause and effect, there are many factors involved. However, if the purpose of lowering taxes on high income earners was to spur job creation (an idea we've practiced since 1997), than it doesn't seem to be working.
One tax reduction that just might spur job creation is reducing our sales tax, which is the highest in New England.
In March 2011, Ted Nesi of WPRI did a great piece comparing the sales taxes of Massachusetts and Rhode Island. He points out that never in our history has Rhode Island's sales tax ever been lower than the sales tax in Massachusetts.
Clearly, an easy competitive advantage could be achieved simply by dropping our sales tax rate to 5%, if not pulling a New Hampshire, and eliminating it entirely over several years. Some of the revenue shortfall (critical to consider when looking at the fiscal challenges of our cities and the homeless) could be made up by increasing income taxes on those who make more than $300,000, and by better accountability and oversight over spending in state departments, perhaps through an Inspector General or expanded Audit Bureau.
I find it curious which taxes our legislature is willing to cut or streamline, and which taxes our legislature is happy to hold steady or increase.
What is a sales tax?
Linda Brinson writes, "A sales tax is classified as a consumption tax. An income tax goes after the money you earn; a consumption tax targets only the money you spend."
The purpose of sales taxes in the US is to generate revenue for our elected governments to provide services. In the modern US, sales taxes began in the South in response to budget desperation during the Great Depression, subsequently spreading North and West. Mississippi and Kentucky created the first modern sales taxes in 1930 - though Kentucky repealed its tax in 1936, before re-establishing it in 1960.
Rhode Island and Connecticut were the first New England states to adopt a sales tax, in 1947. Maine adopted a sales tax in 1951. Massachusetts adopted a sales tax in 1966. Vermont adopted its sales tax in 1969. New Hampshire, to this day, has no sales tax.
Many people call sales taxes a "regressive" tax - they take proportionally more money away from working people than from the wealthy. In the early 1960s, the RI AFL-CIO opposed expanding the sales tax.
Sales taxes have their fans. Depression-era comedian Will Rogers reportedly said the sales tax, "is the only fair and just tax. Have no tax on necessary foods, and moderate priced necessary clothes, but put a tax on every other thing you buy or use. Then the rich fellow who buys more and uses more certainly has no way of getting out of paying his share."
I don't mean to disagree with the one and only Will Rogers, but in our context, having a higher sales tax than all our neighbors doesn't seem to make sense. If we want to allow for small businesses to have more profit, and the broadest number of residents to have a bit more disposable income, finding a way to reduce the sales tax would seem an easy solution.
New England Sales Taxes
For comparisons sake, let's take a peak at today's sales tax rates among the other New England states and our small state cousin, Delaware.
Rhode Island has a 7% sales tax (up to 8% on restaurant meals). There were two failed proposals this past session: to raise the meal sales tax to 10%, and to lower the general sales tax to 6% while adding a 1% sales tax on many goods and services not taxed now.
Massachusetts has a 6.25% sales tax. Connecticut's sales tax is 6.35%. New Hampshire has 0% sales tax, but charges 9% tax on meals at restaurants. In Vermont, the general sales tax is 6%, and, similar to New Hampshire, up to 9% on food. Delaware has no sales or meals tax.
While today the differences are small, (not counting transportation) it is still more expensive to purchase some particular goods in Warwick or Pawtucket than Attleboro or Brockton because of the sales tax levels.
No Sales Tax
Several states have no sales tax. Ranging from Alaska (with a 7% jobless rate as of May 2012) and Montana (6.3% jobless), to Oregon (8.4% jobless) and Delaware (6.8% jobless). All have a lower jobless rate than us.
Delaware's neighbors, Maryland and New Jersey, have sales taxes of 6% and 7% respectively. Maryland has a jobless rate of 6.8% (so clearly, just eliminating it isn't a train to boundless prosperity) and New Jersey has a jobless rate of 9.2% (and the Garden State does in fact have the higher sales tax of the three).
Little Rhody, as we know, has a 7-8% sales tax, with 10.8% jobless.
Recent RI Governors and General Assembly leaders have made a priority of reducing income taxes. The successful Lincoln Almond touted among his major accomplishments a 10% reduction in income tax liabilities. We all know Carcieri, Fox and Paiva-Weed promoted another round of income tax reductions (as well as 38 Studios). Sales taxes remain high, affect all Rhode Islanders spending, and drive some people to shop in Massachusetts or Connecticut.
If we want real job growth, one tool could be to reduce our sales tax at least somewhat, and attract shoppers from Massachusetts and Connecticut, both states which have lower sales taxes and higher minimum wages.
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