October 17, 2007

Hey, Rhode Islanders: You Just Gotta Live with the Taxes. They're Immutable!

Justin Katz

Anthony DiBella's column in yesterday's Providence Journal has to be read to be believed:

The immutable fact is that the bulk of a state’s revenue is based on scale or size. Unless we are going to merge with Massachusetts or Connecticut or become part of the United States of New England, we will always be at a relative disadvantage when it comes to tax liabilities. Even the governor's experience as a corporate executive should tell him that operational efficiencies derive primarily from economies of scale.

There are fixed, unavoidable costs to run any organization: salaries for employees, utility bills to heat offices and expenses to buy, lease or maintain equipment. Large states can apportion expenses over a large set of assets that reflect taxing capacity. ...

With regard to land area, we all know that we are the smallest of the 50 states, but relatively speaking, we are even smaller than that. Alaska, the largest U.S state, is over 570 times the size of Rhode Island. Our biggest neighbor, Massachusetts, ranks 45th in size but is nearly 8 times larger than us. Then there's the size of our population. As of the 2000 census, Rhode Island ranked 43rd, but again, relatively speaking, the state with the largest population, California, is over 33 times our size. Putting together these data regarding land area and population, the only surprise about Rhode Island having the 7th highest property tax rate in the nation (according to a brochure used to promote the Narragansett Indian Casino last year) should be that it isn't higher.

Considering that DiBella writes as if Rhode Island's 30th out of 50 median household income (not, apparently, adjusted for our high cost of living) and as if our 37th out of 50 "competitiveness" are positives for the state, readers may be forgiven for suspecting that his conclusions are a priori. "It's foolhardy to presume that the principle cause of our high taxes is frivolous or unnecessary state services," he writes. Apparently, it is incumbent upon small states to offer extended welfare benefits compared with the rest of the nation, including their neighbors, and to give lifetime benefits to part-time crossing guards.

The centerpiece of any solution, according to DiBella, must be a consolidation of "as many functions as possible." Somehow, I suspect the state's power mongers have a fondness for such solutions. And somehow, I don't think the supposed naturalness of the high tax burden in Rhode Island will stop the people who actually pay the bulk of the taxes from leaving.

Myself, I'm more of the Edward Achorn school of thought:

Last week, the nonprofit research group The Tax Foundation released its annual rankings for business tax climate.

Where did Rhode Island finish? If you guessed dead last, you've probably been reading the newspaper during the last several years.

The report makes clear that the Ocean State could hardly do more to scare off economic growth — you know, the jobs people need if they are to survive and pay sky-high taxes to support all those who depend on government. Rhode Island beat out New Jersey, New York and California for the highly dubious honor. ...

Rhode Island ranked 50th — dead last — in job creation from 2003 to 2006 and 42nd in production growth, says Tax Foundation economist Curtis Dubay, citing data from the U.S. Bureau of Labor Statistics and the Bureau of Economic Analysis.

It ranked 49th in population growth, as the middle class (notably including retirees) fled for less punishing states. While the nation's population has grown almost 3 percent, Rhode Island's fell over half a percent

Its income growth was 48th. While America's income grew almost 19 percent between 2003 and 2006, Rhode Island's grew at just under 14 percent.

Its state and local spending per capita ranked 9th highest in the country.

Those are terrible, even scary, numbers.

The one correction that I would make to Achorn's column is that his characterization of Rhode Island's quality of life as "superb!" does not apply to those many families whom the state forces to struggle to get by. Or those who must watch their children depart in order to find opportunity, or (for that matter) those who find themselves without it. A family that can't afford a night of cultural events is not made richer by them. Parents who must work seven days a week experience festivals as mere news stories, and those could come from anywhere.

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1. New Hampshire and Delaware are small too. They were 47th and 49th in the most recent tax-foundation rankings.

2. The op-ed mentions that RI ranks 30 out of 50 in median household income. How does an economic determinist like Mr. DiBella explain the difference between Massachusetts'/Connecticut's relatively high household incomes and Rhode Island's lower figure, if he doesn't believe it's possible for bad government policy to create a poor economic climate?

3. Did I miss a transition, or does he cite the fact that we've been ranked 37th out of 50 in business competitiveness like it's a good thing?

4. In another thread from last week, one commenter took exception to the fact that I supposed the existence of high-tax ideologues, people who believe that taxes must be kept high, regardless of what they pay for.

And it's unfair to call Mr. DiBella a high-tax ideologue because...???

Posted by: Andrew at October 17, 2007 9:49 AM


Can't help but wonder how the tiny state of Delaware fits into DiBella's argument. Couldn't find a reference to Rhode Island's tiny cousin anywhere in DiBella's weird fiction other than a reference to their tolls. Would make for a fascinating study of contrasts which is precisely why DiBella avoided making tiny state vs tiny state tax burden comparisons. Would blow up his premise.
With regard to Achorn his coziness with the core of the problem insiders like Speaker Murphy tends to render his repetitive and supercilious commentary on the state of Rhode Island nation as amusingly irrelevant.
Ed Achorn doth protest too much and too often given the company he keeps.

Posted by: Tim at October 17, 2007 10:05 AM

Delaware is also the credit card business capital of the U.S. It also has nice roadside beaches, too. Years ago, when a layoff almost forced me to leave here, Delaware topped my list of possible destinations (and probably will again, along with Maine, if I regain the itch to leave).

Posted by: rhody at October 17, 2007 11:07 AM

"The immutable fact is that the bulk of a state’s revenue is based on scale or size."

Honest to pete. And if we were geographically a large state, then that would be the justification for our high taxes. "Public employees have to drive long distances to get their jobs done. That's why Rhode Island's taxes are so high."

To misquote Clinton and Carville, it's not the geography, it's the elected official, stupid. As others have said, Delaware, anyone?

"operational efficiencies derive primarily from economies of scale."

Too often, however, when someone talks about bringing economies of scale to Rhode Island, what they really mean is consolidating power into the hands of the people who have already mucked this state up.

Posted by: Monique at October 17, 2007 11:46 AM

My family has been vacationing in Delaware the past few years. Initially I was shocked to find that homes similiar to mine were being taxed at less than 15% of what I pay here. Then last year I found out that some of the coastal towns near we stay, in Rehoboth Beach, don't even have a property tax. There was discussion in their newspapers about STARTING to institute a property tax! Go figure.

Posted by: Frank at October 17, 2007 11:48 AM

At what size is a government big enough to have achieved most of the economies of scale? And how does a government get disciplined for inefficiencies? In this state, voters don't provide that service.

Delaware is not only a major credit card center, it also is a major center for business incorporations. Could it be because it doesn't demonize business?

Posted by: chuckR at October 17, 2007 12:05 PM

Andrew says, "In another thread from last week, one commenter....."

That would be me. Hi, Andrew!

"... took exception to the fact that I supposed the existence of high-tax ideologues, people who believe that taxes must be kept high, regardless of what they pay for. And it's unfair to call Mr. DiBella a high-tax ideologue because...???"

[NOTE: Please, please, gentle reader, do not take me to task for Mr. DiBella's errors of fact, judgment or ideology. I am not claiming to agree with one thing he said. I'm only answering Andrew's question. It's sort of a silly debate, but since Andrew brought it up again, I respond. Everyone else should feel free to give this a pass]

1) Mr. DiBella does not appear to think that "taxes must be kept high, regardless of what they pay for". Instead, he thinks that taxes need to remain high (if they ARE high) to pay for the things we want.

2) He spends part of his article arguing that our tax burden isn't as high as some say. He may be right or wrong, but if he thinks the tax burden is not especially high, he can't be charged with wanting it to be "kept high".

3) He spends the last part of the article arguing for consolidation of functions as a means to save money and thus lower taxes. He certainly would not do that if his goal was to keep taxes high.

I think the answer is that he is not among those who "believe that taxes must be kept high, regardless of what they pay for", if such people exist.

Posted by: Thomas at October 17, 2007 1:11 PM

Typical progressive puke like we could hear from Crowley, Reback or Paiva Weed. My rebuttal editorial would be 3 words:
New Hampshire Deleware.

Posted by: Mike at October 17, 2007 8:12 PM

I like the Delaware plan myself:

1. Put toll booths at the North and South I-95 entrances to the state and on I-195 too. Charge the suckers huge amounts to enter and leave. It won't affect Rhode Islanders much, as they rarely leave the state except to emmigrate to Florida.

2. Re-write our laws to put corporations largely out of the reach of regulation. Sure, we'll probably takes some heat, like DE did about Enron's shell companies or the billions of $ the Russian mob laundered there, but we don't really care about that, do we, if it will get us lower property and sales taxes? We already put up with the government corruption, so we can deal with some corporate corruption with no problem.

Posted by: Thomas at October 17, 2007 10:36 PM

Does the Delaware Plan for state budgets still exist? Capping the budget at 98 percent of projected revenue is not a bad idea.

Posted by: rhody at October 18, 2007 11:36 AM

Mr. DiBella writes, "operational efficiencies derive primarily from economies of scale." That's simply not true in today's infomated world (which is probably why he's teaching at the War College and not a business school). If efficiencies all derived from economies of scale, WalMart would never have unseated KMart or Sears, nor Toyota and Honda have pushed GM and Ford to the wall -- the list of similar examples goes on and on.

First, in today's world there are tremendous gains from learning and adapting faster than competitors, and from using IT to take cost out of multiple steps in a a process (or to eliminate the process altogether) while improving quality and effectiveness at the same time.

This is the reality faced every day by people in the private sector who work for firms exposed to global competition. That Mr. DiBella and, one supposes, his supporters in the public sector can still say that it's all about scale just adds a further air of unreality to the debate over what to do about the train wreck that is Rhode Island today.

Still, his OpEd was priceless, though probably not for the reason he intended.

Posted by: John at October 22, 2007 7:03 PM
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