February 3, 2008

Now Here's a Tax Bill That Ought to Pass

Justin Katz

With the growing stack of tax-raising bills, it's good to know that the General Assembly will at least have to address a different approach (emphasis added)

In an effort to bring some much needed tax relief to Rhode Islanders, while generating revenue in this era of hundred million dollar budget deficits, Representative Victor Moffitt (R-Dist. 28, Coventry) has introduced a bill that would lower the state sales tax to 5% from the current rate of 7%.

"By lowering the sales tax, individuals would be more inclined to buy products and companies would be more inclined to do business in Rhode Island, which would create jobs, and that would generate more income for the state than the current tax structure does at its present rate," said Representative Moffitt. "Let me be clear, this is not a move to lower and broaden the sales tax structure. There is no broadening of the sales tax in my proposal."

Recently, the Tax Foundation ranked Rhode Island 50th in the Unites States in Business Tax Climate Index. That ranking, taken in context with our current and projected budget crises, lends credence to the idea that the solution to Rhode Island's fiscal problems is lowering taxes, as opposed to raising them.

"The current sales tax rate of 7% was established back in the 1990's during the banking crisis, and at the time was said to be temporary," said Representative Moffitt. "Given our high tax burden, and our stagnating economy, it is time that the tax rate be lowered to so that we can be more competitive with our neighboring states."

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Kudos, man. Still doing the blog thing in the middle of the Super Bowl!

However, do you really think it is wise, in the middle of a massive budget deficit crisis, to continue to look for any and all ways to cut taxes? I mean, the theory is nice, but does Rep. Moffitt have any evidence that this "would generate more income for the state than the current tax structure does at its present rate”? It sounds like wishful thinking to me and, if it is wrong, it's going to drain the state fisc even further. Maybe that's the point.

I have watched Moffitt on the House floor and have had some respect for him. This, however, lessens that respect. It is totally irresponsible.

Posted by: Chalkdust at February 3, 2008 7:43 PM

I see watching the Super Bowl much the same as I would see getting drunk tonight: It might be fun, something different, but it's not worth the loss of precious hours to a man on the precipice. I'm not much of a baseball fan, anyway.

As to the matter of sales taxes, I wonder what evidence you would accept. We're facing a long-term, structural deficit that requires us to increase economic activity in the state. I know that I factor in sales tax when I decide where to buy more expensive goods.

I haven't found a good source for this data, but it looks like the change would have generated $247 million fewer dollars in fiscal 2007, which means that the economy would have needed another $5 billion (or so) in sales (which I believe is around a 40% increase). Of course, one must consider that, going into unsteady times, we're apt to lose economic activity based on reluctance to spend, and a lower sales tax would help with that, in addition to giving more money "to those who need it most" as the line goes. (The sales tax is the most regressive, don't you know?)

But even if it only starves the beast...

I'll agree with you, though, that what's truly needed is a holistic plan explained plainly to the people. As I began to delve into in the comments to this post, part of our problem (and this is a national difficulty, too) is our piecemeal maneuvering. It's "get as much of our policies passed as possible," not "let's sell everybody on our argument as a total package."

As far as taxes go, I'm starting to think that we should keep the capital gains tax where it is. Freeze the income tax. Drop the sales tax to the Massachusetts rate of 5%. Basically, just don't drop anything. A thorough slashing of government expenditures will be enough to brighten the economic mood and lead folks across the country to look with interest on Rhode Island.

Expenditures are a whole 'nother matter that I lack the time to attack right now.

Posted by: Justin Katz at February 3, 2008 8:17 PM

Chalkdust. Fourth highest taxed. Yet a half billion dollar operating shortfall.

We don't lack for revenue. The problem is too many expenditures. Expenditures need to be cut. Revenue does not need to be increased or even held level.

As for "irresponsible", are you seriously putting forth the notion that the General Assembly's spending at two and half times revenue levels is "responsible"? That top of the line spending on social programs and bottom of the barrel spending on higher ed is "responsible"? That public employee benefits equating to an additional 88% of salary while private sector bennies only equal an additional 33% of salary is "responsible"?

These are the things that put us in our current precarious position. The only "responsible" course of action is to do the opposite of all that. And that includes cutting of the sales tax.

Posted by: Monique at February 3, 2008 9:02 PM

I was just reading this interesting post over at consumerist.com http://consumerist.com/351183/death-by-cellphone-taxes-and-cheating-it

Interesting to note: we are #7 on the list for highest cell phone taxes at 19.55%. Hmmm, I think I'll move to Nevada where it is 6.22%.

I have to admit that until recently I was ignorant to alot of these extra taxes. Maybe we'll move back to taxachusetts. I'm starting to miss it! (only 11.11% there!)

Posted by: Christine at February 3, 2008 11:12 PM

In Hawaii there is no sales tax. Sales tax is imposed on the individual doing the purchasing. Therefore, if anything goes wrong the individual purchaser is at fault and is responsible for the sales tax.

Hawaii has a general exercise tax (4%) which is levied on all goods and services (for profit and non-profit) transactions (prescription drugs are exempt). For profit and non-profit business have the option to pass along to the consumer the 4% general exercise tax on the business gross consumer transactions.

Businesses not consumers in Hawaii are responsible for paying the general exercise tax on all of their consumer transaction.

On the island of Oahu only on Jan 1, 2007 .05% was added to the general exercise tax (4%) to fund the $2.64 billion 22 mile East-West elevated high speed light commuter rail transit system to be built connecting Waikiki Beach, the new second City Kapolei, new University of Hawaii West campus with spurs added (2018) to the Honolulu International Airport and University of Hawaii Manoa main campus thus providing commuter traffic relief (Oahu was voted as having the best bus transit system in USA but people still love their cars.)

In Hawaii all business are treated equal with the general exercise tax and population and visitors accept paying the passed on tax on all transactions of goods and services.

All of the businesses that are exempted on the mainland with a sales tax would be, if they were operating in Hawaii, required to pay the general exercise tax in Hawaii as part of doing business in the state.

City of Honolulu, Hawaii is the largest city in the United States and Waikiki Beach tourist area receives approximately 70,000 tourist and 20,000 residents each day (lots of 4.5% rung up). 132 islands covering 1,523 miles long make up the State of Hawaii which is ranked 43 out of 50 states in land mass and has the most southern point in the USA. Hawaii has one school district which is NEA covering the 1,523 miles.

Hawaii has a Republican Governor (female) and Democratic General Assembly. The Governor ran on a platform of not raising taxes but in order to build the new light rail she had to add the .05% tax. The Governor and officials who signed "no new tax pledge" held a public news conference at the state house and publicly asked taxpayers forgiveness before putting the tax in place. Over whelming majority of taxpayers forgave and the additional.05% goes into a special account. The state has had budget surpluses for the pass two years which has been returned to the state taxpayers per the state constitution.

Posted by: Ken at February 3, 2008 11:59 PM

I don't think the sales (or whatever) tax in Hawaii is really comparable. It would be quite a different matter for you to decide to hop the border when you buy a computer than it is for me, for whom the MA store is actually closer than a comparable RI store.

Posted by: Justin Katz at February 4, 2008 6:01 AM

Chalkdust if you're looking for proof that this will bring more money into the state, here is all you need.

If I can buy stuff as inexpensively in RI as I can in MA, I'll stop going to Rt 1 in Attleboro to do all of my shopping. I can't be the only one who does or the only one who will stop.

Posted by: Greg at February 4, 2008 7:42 AM

>>If I can buy stuff as inexpensively in RI as I can in MA, I'll stop going to Rt 1 in Attleboro to do all of my shopping. I can't be the only one who does or the only one who will stop.

Though I'd still be inclined to shop in MA, just to deprive the General Assembly of the revenue.

Tax revenue is the fuel which enables the corruption engine on Smith Hill to run - the less revenue they get, the less corruption we get.

Posted by: Ragin' Rhode Islander at February 4, 2008 10:37 AM

I went to Attleboro Rt. 1 just this morning and bought over $200 dollars of merchandise and services. Why would I pay RI's 7% instead of Mass 5% sales tax. And in a couple of weeks I'll be returning to buy a very large screen TV saving a lot of sales tax. I wish I could buy in RI where I live but it's my money and I'll save where and when I can. Five years ago shortly after the Governor was inaugurated I went to his constiuent service office at the State House and I asked the gentleman there why we can't reduce the sales tax to 5% since both our neighboring States are at 5% and New Hampshire is "0%". It was obvious we couldn't compete at that level. I asked him why I should buy in RI instead of Mass or CT. I was told I should want to support my own State. Anyway, they told me that lowering the RI State sales tax would cost the State of RI millions of dollars. I tried to explain that people would rather buy in their home State. He didn't agree with that. Some Republican administration! I wasted my time but I tried and now 5 years later they're starting to see the error of their ways when they realize that 70 percent of RI residents live within 10 miles of neighboring State borders. Doesn't seem like rocket science to me.

Posted by: George at February 4, 2008 1:51 PM

According to Justin, "it looks like the change would have generated $247 million fewer dollars in fiscal 2007, which means that the economy would have needed another $5 billion (or so) in sales (which I believe is around a 40% increase)."

George's $200 notwithstanding, does anyone here really think that you're going to increase sales by 40% by doing this? If not, the state will lose income in a deficit crisis. I still say that's irresponsible.

Posted by: Chalkdust at February 4, 2008 3:44 PM

Chalkie, just because you don't believe that lowering taxes increases spending doesn't mean it's not true.

Posted by: Greg at February 4, 2008 3:59 PM


Of course lowering sales taxes increases spending, but the relationship is not linear. Accoring to Justin, spending would need to increase 40% just to break even. I don't think that's happening.

Posted by: Chalkdust at February 4, 2008 4:32 PM

There is simply NO way to know how much money is currently going out of state so there's really no way to know the amount that will STOP going out of state once the tax structure is re-aligned to match our neighbors.

Maybe we'll even get a few MA residents come into Rhode Island and spend some money here. Like my in-laws who live in Mansfield but won't spend a dime in Rhodey.

Posted by: Greg at February 4, 2008 4:49 PM


Under Rhode Island general laws you as an individual are required to pay the State of Rhode Island 7% sales tax on purchases that are taxable.

On your State of Rhode Island state income tax return there is a section for individuals to fill out adding the difference in taxes paid for all out of state (RI) purchases that are subject to RI taxes.

It’s called being honest or else paying and being fined during a future audit.

How many millions of dollars does RI loose each year to out of state sales? That lost revenue must be made up with other taxes or fines.

With a sales tax, the individual consumer is held accountable.

As I stated, the Hawaii general excise tax is levied against the for-profit and non-profit business for all transactions goods and services and the business are allowed to pass on the general excise tax on to the consumer during the transactions. Out of state purchases arriving into Hawaii are subject to State of Hawaii “use tax” which is the same as the “excise tax” but the receiving individual is held as the responsible party for the Hawaii “use tax”.

With a state-wide general excise tax the business is held accountable.

A much simpler concept and the state get all of the tax dollars even on out of state sales.

Posted by: Ken at February 4, 2008 5:06 PM

Greg says "There is simply NO way to know how much money is currently going out of state"

So you admit that you support a policy without any knowledge of the likely consequences?

I'd suggest that this kind of thinking is, in part, how we got into our current troubles. cf, the tax cuts for the wealthy.

Posted by: Chalkdust at February 4, 2008 6:51 PM

Hold off on those computer, furniture, jewlery and big screen TV purchases until August when Mass. has their anuual NO SALES TAX weekend. Buy to your hearts content and when you re-enter RI think of Pat Crowley as you raise your middle finger and SMILE.

"Progressives eat money. Like other rodents, if you deny them a food source their populations will decline".

Posted by: Mike at February 4, 2008 7:03 PM

I have faith that the free market always works when unencumbered by interference from government.

You have faith that the government always knows better than the free market.

Which one of us is right?

Posted by: Greg at February 4, 2008 8:51 PM


If you're referring to me.....then I will say it's not about faith at all. It's about evidence. The evidence (Justin's) says that, if we drop RI sales tax from 7% to 5%, we need to increase RI sales 40% to make up the lost revenues.

If that's right, and some simple math says it is, I don't think there is any reasonable hope that it will happen. It would be a great idea if we could afford it, but we can't now, and it would put the state in an even worse position if we did.

So, you do faith-based economics if you like. I'm part of the reality-based crowd.

Posted by: Chakdust at February 4, 2008 9:25 PM


You seem like an intelligent person. As such, I'm sure you also know from your reading, or perhaps from first hand experience, that any estimate of how tax collections will respond to a cut or rise in rates usually have very wide confidence intervals. Therefore, the most accurate statement you could make would be that nobody can be sure that making RI's sales tax equal to Massachusetts' would increase revenue, decrease revenue, or leave it about the same. The truth is that there are many confounding variables (e.g., energy prices, habit, desire to punish the RI political system, better selection in MA stores, etc. etc. etc.)that make accurate estimates impossible. This has been true of all tax changes made since I can remember, from the JFK cut to the Reagn cut to the Bush (father) and Clinton changes. The perhaps ugly reality is that tax policy remains as much art as science.

Posted by: John at February 4, 2008 11:22 PM

Making people pay less taxes is ALWAYS a good thing. It's a shame you believe that we should not lower the sales tax to the Mass rate...5%. I believe that increased buying will more than make up for a 2% lower sales tax. That's why I'm proud to be a Republican Conservative. I believe that the people will do the right thing and not assume that they won't as you believe.

Posted by: George at February 5, 2008 12:03 AM


In terms of general principles, I can't disagree with what you say. Nonetheless, Justin was right that, in order for a reduction in the RI sales tax from 7% to 5% to return the same amount of revenue to the state, there would have to be a 40% increase in sales.

Please tell me if you think that, there is ANY reasonably likely set of circumstances under which RI businesses will experience a 40% growth in sales because of the reduction. I believe there is not, whatever confidence interval you care to specify.

But, we're both shooting from the hip here, aren't we? Let me put my money where my mouth is. Find me any mainstream emprical economist (not Poverty Insittute, but not Tax Institute or Manhattan Institute either) who will specify for attribution that there is a reasonable econometric model that produces an estimated increase of 40% in spending from the proposed tax reduction. Do that, and I will double my contribution to Anchor Rising.

Posted by: Chalkdust at February 5, 2008 12:26 AM


If less taxes are always good, it follows that no taxes are best.

Please show me a country, state or city that has followed this principle. If you can't find one, maybe you can start your own.

Please let us know how it works out.

When you say you think that people will shop where sales taxes are lower (given equal prices), you are not trusting people to do the "right" thing, you are trusting people to do what is in their self-interest. That's the fundamental basis of economics, and I don't disagree.

But you being a Republican Conservative doesn't have anything to do with whether lowering the sales tax will increase revenues. That's an empirical question, not an ideological one.

Posted by: Chalkdust at February 5, 2008 12:42 AM

If you want to deal with "reality" chalk dust I suggest you go to Seekonk or Emerald Square Mall in August and see the people with RI plates wheeling out expensive items from the sores and SMILING. You "progressives" doubled the garette taxes, gave yourselves the usual big pat on the back and proceeded to watch as revenues did not double but actually FELL. Millions less for your union hacks and welfare leeches. Better stick o Darfur and doghouse resolutions.
Congratulations progressives!

"Progressives eat money. Like other rodents, if you deny them a food source their populations will decline".

Posted by: Mike at February 5, 2008 8:15 AM


I'd be hard pressed to find such a model, in so far as you are asking for a linear one independent variable change type of analysis. But in truth, the real problem to analyze is more complicated, isn't it? For example, I'd recommend reducing the sales tax rate and base to match those in Mass. I'd also recommend a package of other measures to increase the attractiveness of RI to wealth producers and make it less attractive to wealth consumers (or, to put it differently, people who benefit from the forced redistribution of the wealth created by others). Not eliminating the safety net, mind you, but bringing RI's public sector pensions and social safety net programs more into line with the national average. Finally, you would have to reckon with the expected change in overall economic activity. Those are a lot of independent variables that could affect the final amount of sales tax revenue raised over the succeeding five years (or whatever your forecast horizon). On balance, I believe that from a fiscal point of view, RI would be relatively better off after five years as a result of these measures than it would be under the status quo. However, nobody and no analytical technique can ever "prove" a future outcome. All it can do is help to inform judgments that inescapably have to be made in the face of a certain irreducible amount of uncertainty.

Posted by: John at February 5, 2008 9:00 AM

Re: the "need 40% increase in sales" comments.

First, glad to see that some are in effect acknowledging that RI's sales tax rate is a whopping 40% higher than that of MA. That and we still can't fill potholes.

Second, don't forget that a reduction in the sales tax rate cannot be judged in isolation to sales tax revenues.

Retail business staying in RI instead of crossing the border is search of a better deal will result in increased income taxes collected from RI retailers, and increased employment in those stores, which in turn will result in more tax revenue.

Static analysis vs. dynamic analysis.

For now, savvy Rhode Islanders will make defer shopping in RI and then make trips to MA to stock up on stuff: fill up the tank to take advantage of the lower gas tax; stock up on booze (no sales tax, whereas RI charges sales tax on top of the excise tax); 40% lower sales tax rate than that of MA on other items. Oh, and have a nice meal while there, enjoying the lower meals tax.

It's a wonder that anyone shops in RI for anything but clothes and food ... apparently the same mental midgets that vote for their peers in the General Assembly.

Doing as much shopping as possible in MA is one way to "rage against the [union - welfare - corruption] machine" that is the Democrat operation on Smith Hill. Deprive them of revenue and help starve the beast.

Posted by: Ragin' Rhode Islander at February 5, 2008 10:21 AM

Ragin' may have just stumbled onto the new rallying cry.

"Starve the Beast! Shop in Mass!"

Or shop online. Most sites aren't taxing you yet.

Posted by: Greg at February 5, 2008 10:32 AM


I would never think that an appropriate model would be either linear or have only one independent variable. That wouldn't make much more sense as a way of figuring it out than going with Mike to Seekonk to count cars in the parking lots.

(By the way, Mike, a lot of people in Providence and the East Bay, myself included, shop in Attleboro or Seekonk because the big box stores there are closer and/or less hassle to get to than those in Cranston, not because of the sales tax. If RI was 5% and MA was 7%, I would do the same. Except for really big purchases, I would lose more than the $2 per $100 in gas, time, and aggravation by staying in RI. Second, if insisting on real analysis before a policy change makes one a "Progressive", I will happily accept that label)

My sense is that the 40% increase in sales that would be necessary to offset the lost revenue is much too large to be reasonably expected. I am willing to have my mind changed by evidence, but not by theoretical arguments.

I agree that nobody can "prove" this one way or another. That should not prevent us from insisting on a thorough analysis by qualified professionals, who can at least give us good evidence (beyond theory) to think that the hoped-for effects are within the range of reasonable expectations.

I seriously doubt that Rep. Moffitt has done this, but I would be pleased to hear otherwise. You and me bantering back and forth certainly doesn't cut it.

Changing policy without such an analysis, is foolish. Advocating this particular change without the benefit of thorough analysis, in the middle of a deficit crisis, is dangerous.

For an interesting article suggesting that our current problems stem in large part from the GA's willingness to act without thinking, try this:

Posted by: Chalkdust at February 5, 2008 10:52 AM

Have you ever stopped to wonder WHY there are no Big Box stores on the East Bay? Or why they start just over the Mass. line like Tijuana bordellos feet over the US border.
The Taxpayers-United-Will Never Be Defeated!!!

Posted by: Mike at February 5, 2008 7:32 PM


Undeveloped (cheap) land with good access to the Providence metro market via interstate highways.

You're not saying you think it was the sales tax differential, are you?

I am not against a sales tax decrease. I'd like it in fact, because the tax is regressive. But not without a clear analysis of the consequences and definitely not in the middle of a deficit crisis.

I'd ask why you're not interested in this analysis but I'm guessing you don't want to solve the deficit crisis. You want to see the state to go down the tubes.

Posted by: Chalkdust at February 5, 2008 8:44 PM
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