Rhode Island’s Hidden Spending: Tax Expenditures

Tax expenditures result in very large revenue losses to the state. Over the years, Rhode Island has given up billions of dollars in potential tax revenue through tax expenditures.

Every other year, tax expenditures result in very large revenue losses to Rhode Island…tax expenditures cost the state at least $1.67 billion in lost revenue in 2008.

Rhode Island Department of Revenue publishes a Tax Expenditures Report detailing the more than two hundred tax expenditures and their annual costs. The most recent report, issued in 2010, using 2008 tax data, found that tax expenditures cost the state at least $1.67 billion in lost revenue in 2008.

As the state struggles to close a nearly $300 million budget gap and ensure that future budgets can be balanced without sacrificing the services that are necessary for the health of our people and our economy, it is critical that tax expenditures be subject to the same scrutiny as direct spending and become a part of the yearly budget process.

This issue brief analyzes the 2010 Tax Expenditure Report and proposes several steps that policy makers should take to ensure that these $1.67 billion dollars are no longer the “hidden spending” of the state’s budget.

Findings

The Poverty Institute’s analysis of the 2010 Tax Expenditures Report (TER) finds that:

At least $1.67 billion in potential tax revenue was forgone by the Ocean State in 2008. The largest losses occurred due to tax breaks provided against the sales tax ($847 million) and the income tax ($646 million).
The Ocean State has 227 tax preference items in its tax code, providing taxpayers 319 separate ways (or “tax break options”) to reduce their tax liabilities.
Of the 319 tax break options provided in the Rhode Island tax code, the 2010 TER provided could not provide an estimate of likely revenue loss for 121 of them, or almost 40 percent of all the options. Thus the true cost to the state in forgone revenues is likely higher than the $1.67 billion total listed in the 2010 TER.

Recommendations for improving transparency and accountability of tax expenditures

Create a commission to establish a performance review system: Rhode Island should have a permanent and comprehensive system to evaluate, on an on-going basis, whether tax expenditures are achieving their agreed-upon policy goals and/or are otherwise a good investment of state resources. This system would assess the hundreds of tax expenditures that already exist, as well as any newly enacted expenditures. In this legislative session, policy makers should create a commission to examine tax expenditure review systems in other states and recommend a system for Rhode Island.
Require a statement of purpose and an expiration date for new tax expenditures: As documented in the 2010 Tax Expenditures Report, evaluation of most existing tax expenditures is difficult because a legislative purpose is not defined. Policy makers should remedy this problem by requiring any newly enacted or modified tax expenditures to include a statement of purpose, criteria for assessment, and appropriate data collection requirements. In addition, there should be a sunset provision included with each new tax expenditure, a date on which the expenditure will expire and be removed from the tax code unless the legislature votes to extend it.

View the full report