January 26, 2005

Rhode Island Politics & Taxation, Part VII

This posting continues a periodic series on Rhode Island politics and taxation (I, II, III, IV, V, VI).

The January 17-23, 2005 issue of the Providence Business News had an article which discloses that Providence has the fifth highest tax burden among the largest U.S. cities. The article begins:

In a new study that's sending shock waves through local business and political circles, the commercial property tax burden in Providence ranks fifth highest among the nation's 55 biggest cities, behind Chicago, Detroit, New York City and Des Moines. Boston ranks sixth.

To put the picture into even starker context, Providence's commercial tax burden is 70 percent higher than the average of the 55 surveyed cities...

Providence's commercial property tax burden is 17 percent higher than Boston's...

Comments from Peter Marino, director of policy at the Rhode Island Public Expenditure Council (RIPEC), explain why the tax burden is so high:

A lot of it depends on what's growing. Residential properties are growing in value, whereas commercial values are growing less strongly. If the city did nothing to alter the equation, that additional tax burden would shift to residential properties. But the city has made a conscious choice to maintain the same level of taxation on business and residential properties, despite the difference in valuation, which means percentage-wise the burden falls harder on commercial.

In other words, instead of dealing with the real problem of governmental overspending and the resulting high taxes, Providence politicians and bureaucrats have made a conscious choice to shift a portion of the tax burden from Providence residents to the Providence commercial sector.

The political and economic consequences of these actions can be easily deduced:

Undercharging Providence residents will be popular in the short-term and provide the opportunity for current politicians to increase their odds for re-election. However, businesses will have an economic incentive to leave Providence due to this tax burden - and they will act on the problem at some point in the future. When they do leave, that will reduce tax revenue without reducing government expenses. Somebody will have to pay the difference. But, since that has not happened yet, current politicians incur no personal political or economic price for failing to tackle today's structural problems. They gladly push the problems off to others in the future knowing that, by the time the true price has to be paid, it will likely be someone else's political problem.

However, even that analysis ignores the opportunity cost that is the unspoken and unquantifiable loss. Providence is a beautiful city with a lot of potential to be a great place to do business. But businesses are economically rational actors and one quick look at the tax burden will ensure they don't seriously consider locating in Providence. Nobody can ever know how many "could have moved my business to Providence but didn't" stories exist. That will mean less job growth around Providence, which increases the probability that state residents will have to look outside Rhode Island for jobs. That increases the potential for all of us to lose the company of both good friends and family. Quite a price to pay, isn't it?

Even if the politicians choose to ignore reality, the business world cannot. As James G. Hagan, president of the Greater Providence Chamber of Commerce, said:

"When you're one of the highest-taxed cities in one of the highest-taxed regions in the country, it's pretty difficult to attract investment and to even keep the investment you have."

Hagan pointed out businesses are the engine of economic growth and consequently require a less punitive tax environment...Hagan asserted that the city must cut spending and negotiate better labor contracts...

This leads back to the need to address the problem of government spending - which consists of both high current spending and the continuous growth in spending at a rate in excess of both inflation and the growth in taxpayers' incomes. The article continues:

...to begin dealing with the high property tax burdens faced by Providence and other Rhode Island communities, it will be necessary to take steps to further control costs, particularly in public educational systems. On average, school spending is growing 2.5 times the rate of inflation and is projected to continue this rate of growth through the rest of the decade.

In other words, under the status quo, the problem of an excessive tax burden is projected to worsen over time. I have written about the additional consequences of this trend:

Even so, this debate is about more than current taxation levels and today's family budgets. It is about freedom and opportunity for all and family budgets in the future. The greatness of our country is that people can live the American dream through the power of education and hard work.

High taxation and mediocre public education create a disincentive for new-business formation in Rhode Island. That means fewer new jobs, and less of a chance for working people to realize the American dream. It also means people have an economic incentive to leave the state and the ones who can afford to do so will continue to leave.

Unfortunately, the ones who cannot afford to leave are the people who can least afford the crushing blow of high taxation and mediocre education. The status quo dooms these families to an ongoing decline in their standard of living. That is unjust.

This should not be our vision for Rhode Island. Nonetheless, it is our current trajectory unless enough people stand up and challenge the status quo.