January 23, 2014
Kate Brewster, Executive Director
I am honored to have participated on the Commission. I appreciate that all of the members are deeply concerned about the state’s economy and eager to enact policies that will help grow jobs in our state.
Costly, broad-based tax cuts of any form, however, are not the solution to building Rhode Island’s economy. Given all of the areas in which the state needs to invest to be competitive, particularly education and transportation, our state simply cannot afford the substantial revenue losses that would be incurred under both the 0 percent and 3 percent sales tax proposals.
The two models that have been used to estimate the impact of these proposals (REMI and STAMP) both predict significant net revenue losses. The STAMP model predicts the state will lose just over $300 million in year one by eliminating the sales tax, and close to $50 million under the 3 percent proposal. There are good reasons to believe that actual revenue losses would be even greater than that: the STAMP model assumes almost instantaneous response to tax changes on the part of businesses, ignoring that it takes considerable time to execute new investments and hiring, and much larger incentive effects on investment and job creation than most mainstream economic research has estimated.
The REMI model used by the Office of Revenue Analysis in the state’s Department of Revenue predicts much deeper revenue losses. That model estimates that the state will lose $846 million in the first year if the sales tax is eliminated, and puts the cumulative losses of that proposal at $3.6 billion over five years. The 3 percent sales tax proposal causes the state to lose approximately $475 million in the first year and $2 billion over 5 years.
Revenue losses of this magnitude will result in unprecedented cuts to essential public services, to the detriment of residents and businesses. Of particular concern is Rhode Island’s ability to educate its current and future workforce if either of these proposals is enacted. Business leaders are increasingly voicing concerns about the skills of Rhode Island’s workers and, in fact, this is an area where our state is uncompetitive with neighboring states. Compared to Rhode Island, Massachusetts and Connecticut have a smaller share of adults without a high school diploma and a larger share of adults with a bachelor’s or graduate degree.
And in exchange for substantial reductions in critical public services, Rhode Island’s economy would experience either net job losses or only trivial gains. Under the REMI model, in year one the state stands to lose 8,423 state and local government jobs, while gaining only 926 in the private sector. That is a net loss of 7,497 jobs. By year five, the state has still lost just under 600 jobs on net, which is unacceptable in this economic climate.
Under the 3 percent sales tax, the state gains a net of 67 jobs by year five on a private sector employment base that currently stands at 409,000 jobs. Again, this tiny gain comes at the cost of $2 billion worth of investment in education and other critical services over the five-year period.
STAMP, on the other hand, projects the wildly unrealistic outcome of 25,000 jobs created in year one under the sales tax repeal proposal, for example. The REMI model predicts that jobs will grow in retail trade and accommodation and food services, while jobs in education and health care will be lost. In other words, we will be trading higher-paying, highly-skilled jobs in teaching and nursing for the lower wage jobs of cashiers. No state can bet its economic future on low-wage jobs that increasingly make it hard to raise a family and make it to the middle class.
Losses in revenue and jobs would be undesirable in a good economy. These proposals are even more troubling given our state’s high unemployment, projected out-year budget deficits, and anticipated losses in gambling revenue when Massachusetts casinos come on line at some point in the future.
No convincing evidence has been presented to this commission to demonstrate that there is widespread shopping in Massachusetts and/or Connecticut on the part of Rhode Island residents. Given the cost of gasoline and other auto-related expenses and the less than one percent gap in the rate of sales tax among the three states, there is strong reason for skepticism that any measurable tax-motivated shopping is occurring. However, even assuming that having a sales tax that is the same as – or lower – than our neighbors would increase sales in our state, it could be achieved simply by lowering the rate to 6.25 percent. This would make Rhode Island’s sales tax rate lower than Connecticut’s, and put us on an equal footing with Massachusetts, eliminating any “competitive advantage” that they enjoy.
To make up for the estimated $100 million revenue loss, the state could extend the sales tax to purchases not now covered, such as additional services. Other states, including Connecticut, have done this in effort to modernize this important revenue source by having the sales tax more closely reflect today’s economy.
Today, Rhode Island has one of the most narrow sales tax bases in the country, and collections from this important source of revenue are below the national average.
Reducing the rate and paying for the reduction with a responsible base broadening would modernize our sales tax while preserving the revenue necessary to maintain public services and invest in creating jobs and building a strong economy. When Rhode Island’s sales tax law was passed in 1947, the drafters could have never foreseen how the economy would change. Back then, people spent more on goods than services and they bought those goods at local stores. Today, Americans consume more services than goods and buy more things online, where purchases can escape taxation.
Time and time again in the past 20 years, the citizens of Rhode Island have been told that certain tax proposals would be the “game changer” that would turn the state’s economy around. We were told that when the state cut income and business property taxes in the late 1990s, when capital gains taxes were cut in 2001, and when the flat tax option was adopted in 2006. We should learn a strong lesson from this experience: State tax policy is an exceedingly weak lever with which to influence the direction of Rhode Island’s economy. The far better course of action is to devote our energies and resources to continually improving the way the state provides fundamental services that make the state a place where businesses want to invest and where the increasingly skilled workers that businesses need want to live. That means investing in education at all levels, roads and bridges, health care, child care, and safe communities. Appropriate tax reforms have their place, but we should reject once and for all the notion that tax policy and economic development policy are synonymous.