RI Taxes and Jobs: Who pays? Who doesn't?

Sep 12, 2013

The ancient cliché is that nothing in life is certain except death and taxes. RIPR political analyst Scott MacKay on why it’s time for Rhode Island lawmakers to make a serious study of our state’s tax structure.

With Rhode Island’s economic recovery still trailing our New England neighbors, there is no better time for the General Assembly to launch a measured study of the way we levy the taxes that pay for roads, schools and social services.

The Assembly has set up two initiatives on taxes. One would evaluate economic development tax breaks to determine what benefits they bring to our economic well-being. Some of the questions that hopefully will be answered:  Do tax incentives for Hollywood movies generate enough jobs to be worth it. How about the tax credits that are used to restore historic buildings?  And do communities that grant developers property tax relief get enough benefit to offset the cost burden they place on businesses and homeowners?

The other foray into taxes is a Special Joint Legislative Committee that met for the first time Thursday. Its mission is to consider the state sales tax with an eye toward making changes that would boost the economy. Let’s hope that these two studies don’t suffer the same fate as too many other studies and so-called Blue Ribbon Commission reports have over the years. Since the ill-fated Greenhouse Compact  study of the early 1980s, Rhode Island have witnessed one report after another that  have done little but gather dust.

Every time one interest group or another   babbles on about  tax changes, we are reminded of the folksy quip  of the late Sen. Russell Long of Louisiana. Whenever he heard the words ``tax reform,’’ Long said that it usually meant, ``Don’t   tax you, don’t  tax me, tax that fellow behind the tree.’’

For far too many years, Rhode Island  tax policy has been set by Long’s dictum. The whims of  the politicians in the Assembly, the lobbyists who prowl the marble corridors and the special interests who pay for political  campaigns generally get their way. This has created a tax code that favors some services and products over others but doesn’t necessarily help Rhode Island create jobs.

Rhode Island’s sales tax rate is 7 percent, which is higher than our New England neighbors. Yet because our sales tax is riddled with exemptions, Rhode Islanders ranked only 25th among the 50 states in the amount of sales taxes collected per $1,000 in personal income.

Many of us wonder why, for example, the state collects a sales tax on magazines but not on newspapers. Or why we pay gasoline taxes but none on home heating fuel. If you can afford a luxury box seat at a college basketball game, you won’t pay a tax. And if you own a luxury yacht, there is no tax on your repair or storage fees.

Beginning November 1st, you won’t pay a sales tax in Rhode Island on alcoholic beverages. You may wonder why this happened. Well, it was the result of the usual end of the legislative session ledger main that has given us so many other great ideas over the years. It turns out that Massachusetts dropped sales taxes on booze two years ago, which frosted Rhode Island liquor store owners along the Bay State’s borders. One of those package store owners just happens to be Rep. Jan Malik of Warren, whose establishment is a couple of Tiger Woods drives from the Massachusetts line.  In one of those delicious no conflict with my interest Statehouse moments, Malik persuaded his colleagues to cut taxes for liquor store proprietors.  Oil dealers argue that heating oil is a necessity of life that shouldn’t be taxed. Can the liquor guys make a similar claim?

While liquor stores get a tax break, restaurants, which produce thousands more jobs, don’t. Bars and restaurants will still have to collect the sales taxes on alcohol and pass it on to patrons.

Rhode Island’s sales tax rate hasn’t been raised since 1991, when it was hiked to cover the costs of the credit union crash bailout.  Gov. Lincoln Chafee tried shortly after he became governor to begin a conversation about lowering the top 7 percent rate by adding taxes to some items that are exempt, including entertainment and sports tickets. He met a solid wall of opposition from the business community and the Providence Journal, the state’s largest newspaper. (Maybe Chafee shouldn’t have tried to strike the newspaper’s tax exemption).

Then there is the whole question of the impact of taxes on the economy. In 2009, Massachusetts raised its sales tax from 5 percent to 6.25 percent. At about the same time, Rhode Island reduced income taxes for wealthier taxpayers. Then-Gov. Don Carcieri  asserted that lower income taxes on the high earners would spur economic growth.

So why is the Massachusetts economy doing so much better than ours? Or are taxes not the end all and be all of economic growth?

Taxation is never an easy issue. We only have to look again to Massachusetts, where Gov. Deval Patrick and lawmakers approved a tax on software services to finance transportation improvements.  But Patrick last week abruptly reversed course, calling for repeal of the tax in the aftermath of howls from the state’s influential high-technology community.

Wouldn’t it be nice if this time our lawmakers would consider the interests of all Rhode Islanders, instead of the Statehouse favored few, when making tax policy? If they don’t, the only solace we can take is that Bibles and coffins are exempt from the Rhode Island sales tax.