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Mass vs. RI: Sales Tax Wars

Wednesday, February 13, 2013


With Massachusetts considering lowering its sales tax, must Rhode Island follow suit to stay competitive?

There’s a war brewing over revenue between Rhode Island and Massachusetts and, no, it has nothing to do with new casinos and/or table games at Twin River.

Almost a month to the day after Massachusetts Governor Deval Patrick called for the Bay State to cut its sales tax from 6.25 percent to 4.5 percent, Rhode Island lawmakers have responded with a pitch of their own: to completely remove the sales tax on items purchased in the Ocean State.

In an effort to “start the dialogue” on the gradual reduction or repeal of a tax that he says put he and other business owners at a “competitive disadvantage”, Representative Jan Malik ‘s idea is to eliminate Rhode Island’s sales tax completely beginning October 1.

The hope, Malik says, is that such a move would entice Rhode Island shoppers to keep their business in the state instead of hoping across the border or buying online and, if approved, Malik believes the potential loss in revenue would be more than made up by an increase in economic activity driven by lower prices.

If nothing else, he says, it would keep Rhode Island competitive with its neighboring states and stop what he estimates to be a million dollar loss to Massachusetts and Connecticut each year.

A New Approach

While the move by Patrick has increased discussion about Rhode Island’s sales tax rate, Malik’s idea for the legislation actually began last year when he was approached by Mike Stenhouse from the RI Center for Freedom and Prosperity.

Malik, who was first elected to office in 1996, told Stenhouse he would consider proposing the repeal of the sales tax if he won re-election, which he did with a victory over Republican challenger Peter Davis Costa in November, and says his time at the General Assembly has given him some perspective as why the move was needed in Rhode Island.

“There are three top revenue generators in the state of Rhode Island,” he said. “No. 1 is income tax, No. 2 is sales tax, and No. 3 is the lottery. Well, two out of those three we have looked at. We changed the income tax, have lowered it and have tried to raise it. Last year with the casinos, we had put a casino bill to try to be competitive with Massachusetts and the only time we ever look at the sales tax is basically to broaden it, not to lower it.”

Malik, the owner of a liquor store in Warren, said the General Assembly’s decision last year to actually increase the items covered by the sales tax—to include, for the first time, clothing, taxi cab drivers and dog groomers—only drove the need to reduce the tax rate further.

And as a local business owner in a small town a stone’s throw away from Massachusetts—Malik owns a liquor store in Warren—the state Rep. says Rhode Island’s current rate only hurts his business’ ability to compete.

 “The state doesn’t have to think they have to respond but we as business owners do because you can’t have government ask us to collect a tax that’s higher than Massachusetts or Connecticut,” he said. “Don’t you think it’s kind of crazy? I’m forced to collect a sales tax that puts me at a seven-percent disadvantage and I send it up to the state each month and all of a sudden I look at my sales for the month and I’m down another four percent or three percent? It’s crazy.”

The Massachusetts Problem

While Massachusetts’ current rate of 6.25 percent might not make a large difference on most everyday items—the current difference is only 75 cents on every $100 spent—Malik says a move by the Bay State to 4.5 percent would be “devastating” for border communities and residents who may commute between the two states on a regular basis.

Malik points to Massachusetts liquor stores that regularly have customers in their parking lots with Rhode Island license plates as one example.

House Minority Leader Brian Newberry, a co-signor of Malik’s legislation, agrees and says he, too, takes advantage of the state’s “small geography” when deciding where to purchase items.

“I think we need to look at lowering it at a minimum or at a bare-minimum keeping it at the same range or well within our neighboring states,” he said. “If you talk to anybody who lives in a border town, they’ll tell you that they try to avoid sales taxes in Rhode Island as much as they possibly can. I literally just got gas in Massachusetts an hour ago and I did it before I drove back into Rhode Island because I knew it was cheaper. That’s a big part of the problem.”

A Boost for RI?

The overall economic impact of a lower sales tax is a much-debated point but experts agree it would likely play a role in Rhode Island's border towns.

Some political experts, meanwhile, feel a push by the Ocean State to lower, or repeal, its sales tax would be felt instantly and provide a quick shot to a still-recovering economy.

“The immediate economic impact would be to boost retail sales, especially on the East Bay border with Massachusetts and the I-95 Corridor,” said Mark Zaccaria, chairman of the Rhode Island Republican Party. “The discretion to purchase in Rhode Island vs. Massachusetts or Connecticut is very easy to exercise and the impact would be felt on big ticket items first. The secondary impact is, apparently, counter-intuitive to the Legislature here: It would Increase Revenues to the RI General Treasury.”

“Think about where you spend your money on a daily basis: the gas station, coffee shops, dry cleaners, meals out with your family,” Rhode Island Tea Party President Susan Wynne said. “Envision what it would be like to look at your receipt and know that the government hasn’t taken seven-eight percent more to pay for their out-of-control spending. Imagine the effect on Rhode Island families who would get to keep more of their hard earned dollars. Imagine the optimism it would create.”

Others aren’t entirely convinced the impact felt by lowering the state’s sales tax would be as immediate or large as some would hope.

“Although it would be “cool” to get rid of the sales tax there is no evidence that this action, by itself, would create jobs and attract businesses to Rhode Island,” said Dr. Edward Mazze, Distinguished University Professor of Business Administration at the University of Rhode Island. “I see no chance of this passing the legislature. On the other hand, the state has to be able to compete with neighboring states and it is a good idea to have competitive sales tax rates.”

A Hole to Fill

The problem with Malik’s legislation on the whole is that the overall repeal of the state’s sales tax would eliminate approximately $887 million of revenue annually and, at least at first, would be difficult for Rhode Island to make up with other tax increases or spending cuts elsewhere in the budget.

"I think the elimination of the sales tax is a great idea," said Warwick Mayor Scott Avedisian. "It will be important, however, that there is a plan in place to make up that lost revenue without adversely impacting Rhode Islanders."
According to House Communications Director Larry Berman, this is also the biggest concern of House Speaker Gordon Fox.

“The House Finance Committee will hold a hearing on Representative Malik’s proposal and there will be ample opportunity for testimony to be taken from the public,” he said. “Speaker Fox welcomes this discussion, while also monitoring the sales tax debate in neighboring Massachusetts. The overriding question remains: how do you replace more than $900 million that the sales tax is expected to generate in next year’s budget?”

Malik believes that the move would create upwards of “20,000 jobs” and potentially lower property taxes in cities or towns, further stimulating economic development, but Newberry is convinced that the inability to plug that large a hole that quickly will doom the outright repeal of the sales tax.

Instead, he says, the state should gradually reduce it.

“It would take a little time. I don’t think there’s any such thing as a quick fix change to the tax code that will stimulate or hurt the economy,” he said. “The effects of tax changes take place over time, good or bad. One of the reasons why I’d like to see it eliminated is if you eliminate the tax, you would also eliminate all the compliance costs for businesses associated with it. That’s why conceptually I’d like to see it eliminated but realistically it can’t happen right away.”

Starting the Conversation

Malik believes his bill has enough support to bring the debate over a lower sales tax to the State House very soon.

Newberry says the reason he supports Malik’s legislation is to get the conversation about the state’s sales tax going at the state level.

“You can’t cut anything in the state budget enough to make up for the impact of eliminating the sales tax entirely,” he said. “It’s really not possible, not in a one-year span but what you can do is begin to phase the tax out. If we institute a policy to phase it out over a period of years and then instituted in phased in cuts over that time, potentially with an increase in other taxes to potentially offset some of it, as long as the whole package was a net tax cut, that’s something I could conceptually support but the devil is always in the details on this.”

If Massachusetts enacts Patrick’s plan to push forward with its cut, however, that could turn up the heat on the potential discussions.

“I always assumed that once Governor Patrick introduced his budget, Rhode Island would have to respond in some way to his economic initiatives,” Mazze said.

Still, the URI professor said, Patrick’s plan takes a more “balanced approach” to solving the problem and, because of that, Malik’s legislation to outright repeal the sales tax is likely going to have a hard time gaining any real momentum.

“I believe our legislative response will be minimal since we do not have any solid information to make drastic changes in sales taxes,” he said. “Many of our legislators would rather fight the battle for economic development on taxes alone while many businesses do not consider taxes as the key element in making location and growth decisions. Governor Patrick did not propose eliminating the sales tax. He took a more balanced approach to economic development.”

Malik believes Rhode Island’s eyes need to be focused solely on how Massachusett’s sales tax battle is decided.

“If Governor Patrick pulls a rabbit out of his hat to lower his sales tax, I think it’s going to have tremendous traction at the State House,” Malik said.

In the meantime, the Representative believes he has enough support for his legislation right now to at least create a discussion the state has avoided for years.

“Well, put it this way, I had 32 legislators sign on to this piece of legislation,” he said. “And it’s basically the people that are on the border of Massachusetts. You know how it is, you know how the State House works, it’s getting coalitions together to benefit the people you represent so I’m hoping this will have some sort of traction."


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