New Report Says Sales Tax Repeal Only a $105 Million Problem
Tuesday, February 26, 2013
That’s the fundamental question surrounding a proposal by Representative Jan Malik to repeal the state’s seven-percent tax, a tax that was designed to be temporary not only when it was introduced in the 1970s but also when it was increased to its current rate in the 1990s.
Opponents say Malik’s measure would cost the Ocean State an estimated $887 million in revenue each year and could never be implemented without a solution addressing that budget hole. Supports argue, however, that Rhode Island needs to stay competitive with neighboring Massachusetts, which itself is considering a shift to a 4.25 percent sales tax.
Now, a new report by the Rhode Island Center for Freedom and Prosperity (RICFP) could shake up the whole debate.
The 2013 Zero.Zero report, which the RICFP says provides updated economic and revenue projections from an economic modeling tool called the RI-STAMP, estimates that up to 25,000 jobs can be created in the Ocean State “as a result of the massive economic boom that would be created through elimination of the sales tax,” if Malik’s proposal were adopted.
Taking those figures into account, the RICFP says that the state would actually only need to find $105 million in cuts in the 2014 fiscal year to balance its budget and offers a list of ways in which the cuts could be made.
Are the numbers realistic? Could the sales tax proposal actually be within reach?
It depends who you ask.
What’s the Priority?
"Eliminating the sales tax would provide immediate benefit to all Rhode Islanders, especially lower income families,” said Mike Stenhouse, CEO of the RICFP. “And for businesses, this means more shoppers, higher revenues and profits, and lower compliance costs."
The RICFP says its numbers work “if creating tens of thousands of jobs becomes the top priority for the state,” but, in order to get to the point where the full repeal of the sales tax only leaves a hole of slightly more than $100 million, Rhode Island would need to apply last year’s budget surplus, freeze the 2014 budget at current levels and still go after increased revenue in other categories.
Stenhouse says it’s worth a look.
"How can we afford not to do this?" Stenhouse said. "If state leaders are serious about creating renewed opportunities and a brighter economic future that will help keep our families together and at home here in Rhode Island, we call on them to act upon their recent promises to make economic development the number one priority for our state."
The issue is, some doubt the numbers from this particular group add up.
“Is this worth pursuing? Potentially, yes,” said University of Rhode Island economist Dr. Leonard Lardaro. “However, the state of RI should have its own in-house capacity to generate meaningful estimates of the likely effects of the elimination of the sales tax. Obviously, it does not, so the empirical estimates of the group pushing for this take on a life as “the numbers,” which they might not deserve.”
Lardaro says a true analysis of the impact of Malik’s proposal requires more than a look at just potential.
“The issue here is not whether elimination of the sales tax will create jobs,” he said. “Instead, the focus should be on how many jobs will be created, along with the changes in economic activity that results – both positive and negative.”
The Long-Term Effect
According to the Tax Foundation, Rhode Island is tied with Indiana, Mississippi, New Jersey and Tennessee as one of the four states with the second-high sales tax rates in the country.
Just California, and it’s 7.5 percent rate, ranks higher.
But when factoring in that Rhode Island cities and towns don’t impose their own taxes, the Tax Foundation says, the state is actually in the middle of the road in terms of tax burden on its residents.
The RICFP’s proposal says the long-term effects of the move would far outweigh any short-term difficulties in implementing it from a budget perspective.
The report suggests that the state would make up “over 65 percent” of the lost revenue through higher income tax and other receipts “as a result of more people shopping, working and receiving higher wages in the state.”
In addition, the RICFP argues that the newly-created jobs would lead to savings in “public assistance outlays” as more of the state’s residents are put to work and receive paychecks “instead of welfare checks.”
And that doesn’t include the benefit the organization says local municipalities themselves would get.
“As an added and significant benefit, cities and towns are expected to see local revenue increases of approximately $150 million, mostly from a larger number of businesses paying local commercial property taxes as a result of the economic boom, which could lead to local property tax reductions for families or a reduction in aid from the state.”
Too Quick to Dismiss?
Ed Mazze, a Distinguished University Professor of Business Administration at the University of Rhode Island, is quick to dismiss the RICFP report and question the organization’s agenda.
“Although some believe that eliminating sales taxes would be a great economic incentive to create jobs, there is no evidence that this has ever happened in modern times,” he said. “This is a theory that is constantly advanced by groups who believe government is too large, and the solution is do away with taxes and cut expenditures. This theory has always been advanced by organizations and individuals with an agenda to raise money from donors who do not want to be confused by the economic realities of today.”
Still, Lardaro says there’s a very “serious revenue crisis” coming for Rhode Island as it is and state leaders will need to find some way to make up for the lost revenue that will soon hit the state’s budget with or without a change to the sales tax code.
“Personally, I don’t think RI can afford to eliminate its sales tax since its “Fiscal Cliff” will occur within five years, when legalized gambling in MA comes on line,” he said. “The combination of the resulting large loss of revenue for RI and the near certainty that RI will spend virtually all of the new revenue it sees during this period where RI has gambling but MA does not, will almost certainly cause a serious revenue crisis here. So severe, in fact, that our state’s elected officials might actually have to provide some leadership!”
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