John Hazen White’s LOOKOUT: RI Needs a Competitive Tax Policy
Monday, October 28, 2013
John Hazen White, Jr., MINDSETTER™
Most people accept the fact that the price of government services requires taxes. Few of us like paying taxes of course, especially when the price of government keeps rising due to entitlement payments that go to meet debt obligations rather than into investments like infrastructure and education that can have positive impacts today and tomorrow.
Things get especially skewed and off-balance when two lines get crossed between more people receiving government benefits (on the upswing) than those actually paying taxes. We are very close to such a situation here in Rhode Island, as the active tax base continues to diminish while the costs of government entitlements and spending keep going up. To have a healthy economy, we need to do just the opposite: grow the tax base by creating jobs.
Keep Raising Taxes is Not the Solution
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The knee jerk solution, unfortunately, has been to keep raising taxes and find new things to tax. It’s no wonder the Ocean State is at the top or in the top three spot of virtually any watchdogs’ tax rankings for worst states. Rhode Island is in the top ten overall for highest tax climates, its unemployment insurance tax, property taxes both residential and commercial, corporate taxes and the estate tax. We do a bit better when it comes to our income and sales taxes, but not by much. The state is even among the worst in the nation for the tax burden placed on its retirees. No wonder so many people leave.
As more people, across adult ages, depart the state and our population decreases, the tax burden on those remaining grows even more onerous. And it becomes increasingly difficult to attract transplants to replace them, especially businesses that would come with hiring needs. Why would any business relocate to Rhode Island when in-state businesses have enough of a problem dealing with our tax regime and heavy regulations?
Many ideas have been put forth on how to “move the needle” on the state’s moribund economy. Reshuffling and restacking the EDC, while it may be helpful in making sure another rushed insider deal like 38 Studios never happens again, is hardly going to do the trick. Reforming and streamlining our business regulatory structure, with its multiple duplications and organizational mazes, is an important task that we must make progress on. But the big problem is taxes.
If we cannot present a tax structure that is in sync with our neighbors and puts us on a better rung level in national rankings, we won’t be able to turn our economy around anytime soon. We recently tried to fiddle with the corporate tax, which is a good start, but we’ve made promises to certain heavyweight employers and granted them tax relief essentially for staying in the state, so corporate tax reform became an issue of carrot and sticks – to better the tax situation for other companies we’ll have to take something back from you. All of it took was a couple of statements about “rethinking” their position on the part of the affected companies and that was the end of that.
Eliminating or reducing the sales tax is currently being discussed, which is also a positive exercise. But no tax reform is revenue neutral. As the late humorist Art Buchwald wrote, “Tax reform is taking the taxes off things that have been taxed and putting taxes on things that haven’t been taxed before.”
Rhode Island Needs Tax Reform
If you reduce revenue in one area you have to make up for it in another, and that is going to affect someone negatively. This was the Governor’s approach, since abandoned, in reducing the sales tax rate but expanding the sales tax’s reach. Taxing charter boat trips around Newport Harbor and taxing taxi rides from the airport were two measures that did make it to legislation, but all they served to do was to aggravate those involved and demonstrate the silliness of such an arbitrary approach.
As challenging as it may be to achieve, this state needs to engage in comprehensive tax reform. In future columns I’ll address some of the taxes mentioned in this column with an eye to how harmful they are and what, if anything, can be done about them.
Years ago, when the state wasn’t in such a poor position, realigning taxes to achieve long-term growth would have been a lot easier to accomplish than it will be now. But we have to try nonetheless. It’s the only way to grow our economy and make it attractive to those who otherwise might very well appreciate living and working in the Ocean State. And for those of us already here, it could keep us in place.
Related Slideshow: Timeline - Rhode Island Pension Reform
GoLocalProv breaks down the sequence of events that have played out during Rhode Island's State Employee Pension Fund reform.
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2005-2010
In the five years before Raimondo was elected, pension changes included a decrease in established retirement age from 65 to 62, increased eligibility to retire, and modified COLA adjustments.
Read the Senate Fiscal Office's Brief
here.
(Photo: 401(k) 2013, Flickr)
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January 2009
Governor Don Carcieri makes pension reform a top priority in his emergency budget plan. His three-point plan included:
1. An established minimum retirment age of 59 for all state and municipal employees.
2. Elimination of cost-of-living increases.
3. Conversion of new hires into a 401(k) style plan.
See WPRI's coverage of Carcieri's proposal here.
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2009
Rhode Island increased mandatory employee contributions for new and current employees. New Mexico was the only other state to mandate current employees to increase their contributions.
Read the NCSL report here
(Photo: FutUndBeidl, Flickr)
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2010
Rhode Island's state administered public employee pension system only held 48% of the assets to cover future payments to its emplyees.
"This system as designed today is fundamentally unsustainable, and it is in your best interest to fix it" - Gina Raimondo
Check out Wall Street Journal's coverage here.
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November 2010
Gina Raimondo defeats opponent Kernan King in the election for General Treasurer of Rhode Island using her platform to reform the structure of Rhode Island's public employee pension system. She received 201,625 votes, more than any other politician on the 2010 Rhode Island ballot.
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April 2011
Raimondo leads effort to reduce the state’s assumed rate of return on pension investments from 8.25 to 7.5%.
Her proposal includes plans to suspend the Cost of Living Adjustment (which allows for raises corresponding with rates of inflation for retirees), changing the retirement age to match Social Security ages, and adding a defined contribution plan.
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May 2011
Raimondo releases “Truth in Numbers”, a report detailing the pension crisis and offering possible solutions. She continues to work to raise public support for her proposal.
"Decades of ignoring actuarial assumptions led to lower taxpayer & employee contributions being made into the system." - Gina Raimondo (Truth in Numbers)
Read GoLocalProv's analysis of the report here.
Read the Truth in Numbers report here.
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October 2011
Governor Lincoln Chafee and General Treasurer Gina Raimondo present their pension reform legislation proposal before a joint session of the General Assembly.
“Our fundamental goal throughout this process has been to provide retirement security through reforms that are fair to the three main interested parties: retirees, current employees and the taxpayer…I join the General Treasurer in urging the General Assembly to take decisive action and adopt these reforms.”- Gov. Lincoln Chafee
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October 2011
Head of Rhode Island firefighters’ union accuses Raimondo of “cooking the books” to create a pension problem where one did not exist. Paul Valletta Jr. states that Raimondo raised Rhode Islanders’ assumed mortality rate to increase liability to the state, using data from 1994 instead of updated information from 2008, and lowered the anticipated rate of return on state investments.
“You’re going after the retirees! In this economic time, how could you possibly take a pension away?” Paul Valletta Jr (Head of RI Firefighters' Union)
Read more from the firefighters' battle with Raimondo here.
Check out the New York Times' take on RI's pension crisis here.
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November 17, 2011
The Rhode Island Retirement Security Act (RIRSA) is enacted by the General Assembly with bipartisan support in both chambers. RIRSA’s passing is slated to reduce the unfunded liability of RI’s pension system and increase its funding status by $3 billion and 60% respectively, level contributions to the pension system by taxpayers, save municipalities $100 million through lessened contributions to teacher and MERS pension systems, and lower the cost of borrowing.
Read more from GoLocalProv here.
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November 18, 2011
Governor Lincoln Chafee signs RIRSA into law. According to a December 2011 Brown University poll, 60% of Rhode Island residents support the reform. Following its enactment, Raimondo holds regional sessions to educate public employees on the effects of the legislation on their retirement benefits.
Read about how Rhode Islanders react to RIRSA here.
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January 2012
Raimondo hosts local workshops to explain the pension reforms across Rhode Island. She also receives national attention for her contributions to the state’s pension reforms. The reforms are given praise and many believe Rhode Island will serve as a template for other States’ future pension reforms.
Read about the pension workshop here.
Read Raimondo's feature in Institutional Investor here.
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March - April 2012
Raimondo opposes Governor Chafee’s proposal to cut pension-funded deposits. She continued to provide workshops on the pension reforms.
“The present law is sound fiscal policy and should remain unchanged.” -George Nee (Rhode Island AFL-CIO President)
See WPRI's coverage of Chafee's attempt to cut pension fund deposits
here.
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March 2013
Led by the Rhode Island State Association of Fire Fighters, unions protest the 2011 pension reform outside of the Omni Providence where Governor Lincoln Chafee and General Treasurer Gina Raimondo conduct a national conference of bond investors.
Read about Raimondo's discussion of distressed municipalities here.
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April 2013
The pension plan comes under increased scrutiny as a result of the involvement of hedge funds and private equity firms. Reports show that $200 million of the state pension fund was lost in 2012.
"In short, impressive educational credentials and limited knowledge of investment industry realities made Raimondo ideally suited to champion private equity’s public pension money grab." - Ted Seidle (Forbes)
Read GoLocalProv's coverage of the State Pension Fund's losses here.
Read Ted Seidle's criticism of Raimondo in Forbes.
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June 2013
Reports show that the State’s retirement system increased in 2013 by $20 million despite the reforms being put into effect the previous year.
Read GoLocalProv's investigation into the rising pension costs here.
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September 2013
Matt Taibbi publishes an article in Rolling Stone detailing Raimondo’s use of hedge funds as a questionably ethical tool to aid with pension reform.
Read Taibbi's article in Rolling Stone.
Read GoLocalProv's response to Taibbi here.
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October 2013
As Raimondo eyes the role of Governor of Rhode Island in 2014, more behind-the-curtain information about the 2011 pension reform comes to light.
Read more from GoLocalProv about the players in the pension battle here.
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