Don Roach: RI Sales Tax Needs to go

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Wednesday, February 27, 2013

Don Roach, GoLocalProv MINDSETTER™

I grew up in South Jersey and our neighbor to the southwest, Delaware was where we often shopped in order to avoid New Jersey’s sales tax. New Jersey’s sales tax rate is 7% and Delaware’s is 0% so it was a no brainer to pay a roughly $2.00 toll if you were going to purchase clothing, a vehicle, or any other large ticket item subject to sales tax. Throughout the years, government in New Jersey and Pennsylvania have tried a number of things to stem the tide of people going over the bridge and purchasing goods in Delaware. For example, Salem County is located right next to Delaware and they charge a 3.5 percent sales tax just to compete with Delaware.

What’s more, Delaware charges a gross receipts tax to businesses of 1-2% in lieu of charging consumers sales tax. That’s ingenious because that 1-2% is not a deterrent to businesses plopping themselves in Delaware because whatever 1-2% lost through this tax is more than made up by the additional sales volume.

A recent Rhode Island Center for Freedom and Prosperity report says RI wouldn’t lose much at all by repealing the sales tax say 105 million. But, I’d like to offer this – we can’t even tell what type of gains we’ll see by eliminating the sales tax because it’s a gift that keeps on giving.

Let me backtrack a bit and say there are a number of similarities between Rhode Island a Delaware. We’re both small states sandwiched by “richer” neighbors. We both have economic hubs (Boston & Philadelphia) within driving distance. We’re also ‘pass through’ states whereby people often drive through us on their way to somewhere else. Delaware probably has us beat on that point sitting in between Baltimore/DC and Philadelphia but people traveling to and from Boston generally pass through Rhode Island. Average Annual Daily Traffic averaged about 100,000 on I-95 in Deleware and approximately 132,000 in RI back in 2002. So RI actually has a higher traffic rate than Delaware which will only aide as we eliminate the sales tax.

If we eliminated the sales tax and slowly ramped up a 1-2% gross receipts sales tax not only would we attract consumers we would attract retail businesses. From a consumer perspective, there were times I was making a large purchase and I drove to Seekonk versus going to Warwick or the Providence Place Mall in order to avoid the additional sales tax. I’m cheap and wherever I can save I will. If Target in Warwick had a 0% sales tax compared with 6% in Massachusetts is anyone in this state ever going to make the drive to Seekonk? No they won’t.

From a retail business perspective you’ll want to position yourself in Rhode Island because there is a significant consumer base within 50 miles of Rhode Island in just about every direction but southeast.

There are no arguments against eliminating the sales tax that are relevant, in my opinion. I decided to do a little back-of-the-napkin analysis to see if Delaware had higher retail sales per person as compared with Rhode Island. I used 2009 Retail Sales Data and bounced it against 2010 census population data. What I found was intriguing – Delaware had $15.5k retail sales per person compared to Rhode Island’s paltry $11.5k. The un-weighted national average was about $13k so Rhode Island retail sales per person lag significantly behind the rest of the country.

Introduce 0% sales tax in this state and it would be revolutionary and we would realize significant economic gains. I just don’t believe our legislators and certainly not the governor will take a radical and common sense approach to attract business and consumers to the state.

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