January 5, 2010

Putting the Rabbit in the Dark, Restrictive Hat

Justin Katz

John Kostrzewa explains that Rhode Island's economy is done harm by "inconsistent, zig-zag public policy decisions that have kept business owners, investors and people from locating" in the state. He's talking about tax policy, there, but he goes on:

... for yet another year, political leaders have put off the hard choices until well into the new year, with no clear idea of when the budget will be balanced and how.

Elsewhere in the same Sunday paper, Rhode Island Speaker of the House Bill Murphy illustrates his prior wisdom in staying out of the press and out of the public eye:

The lawmakers are hoping for other options, including a possible new round of federal stimulus dollars. "Over several of our budgets, it seems that we've been able to pull a rabbit out of a hat. I don't know if there's any rabbit left, but if there's one left down there, we'll come through," Murphy said. The governor's tax overhaul may provide another rabbit.

There you go, Rhode Island. You're being governed by people whose leadership plan is to hope for tricks that give the illusion of miracles. Apparently, Speaker Murphy doesn't consider it to be a matter of deep concern that the magician is supposed to be the one who puts the rabbits in the dark, restrictive hat in the first place. The General Assembly is standing on stage reaching through the trap door in the table hoping, just hoping, that somebody else will slip another rodent in the empty space beneath, and all of our livelihoods depend on that bit of luck.

Want further indication of the reason for our state's collapse? Here's Murphy, again, on the reason that the Rhode Island public sector doesn't need to make the same sorts of adjustments to pensions that economic reality has forced on the rest of the economy:

"We're talking about state government," he said. "State government is different."

The speaker continued: "We can control state government. We can't control what an individual company does."

In other words, given the power of the General Assembly, the government can simply force taxpayers to continue funding unworkable benefits for unionized special interests, whatever the effects on everybody else. Murphy's fellow stooge and chosen successor, House Majority Leader Gordon Fox, digs the hole more deeply:

Fox quickly chimed in, saying lawmakers are concerned that Governor Carcieri's latest proposal — to eliminate the guarantee of annual cost-of-living increases — could hurt future state retirees, and by extension, the state budget and the economy.

Fox believes that a failure to ensure perpetually increasing pensions for the small segment of workers who actually receive them (often residing outside the state) will damage the economy, but a leadership class that has no solutions other than adding to an already oppressive burden on the local economy will not. Perhaps Mr. Fox should devote some meditation time to Murphy's magician metaphor. After all, the audience is always free to leave and decline to pay for the entertainment thereafter.

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"The speaker continued: "We can control state government."

He should have continued with: "But we choose not to."

Posted by: Patrick at January 5, 2010 3:01 PM

Justin, this piece was brilliant. It reminds me of the analogy a friend used when discussing the biennial referendum to 'borrow money to fix the roads and bridges, and get matching federal funds!'. He said it was like using a credit card to pay the bills in order to get the 'cash back'. Five massive loans (with accompanying matches from our own federal tax dollars) later and the roads and bridges are still broken, and we have massive debt to pay back. You don't pay the bills with credit, you pay them on a budget. The only way to win at the 'cash back' game is if you're an expert at finance with cash to back you up, something the legislature has proven it is not.

What -really- bothers me is how so many of these legislators will run unopposed in the next cycle.

People need to run for office, even if they're not 'politicians'. The state doesn't need expert dealmakers right now, it needs bold, new ideas from bold, new people, and it needs positive feedback on those ideas from the populace.

Even a small number of libertarians, republicans, or just common-sense everyday people could dramatically alter the status quo in those committee meetings. It's time to get behind new, different people, even if they're not totally aligned with your own values.

Posted by: mangeek at January 5, 2010 4:21 PM


One false misconstrued information that should be cleared up is the is the fact that if your retirement funds are being generated out of the State of RI by either the state or private business and you reside in another state under RI state law you must pay State of RI income tax via State of RI form 1040NR.

State of RI form 1040NR is used by part-time residents and full time non-residents.

So all the people who move out of RI to a state that has no state income tax but their retirement checks come from RI still must pay State of RI state income tax on income earned in RI.

Unfortunately even though my retirement income is totally exempt from State of HI state income tax I still must pay State of RI state income tax on that portion earned in RI.

The benefits gained by moving out of RI is lower or no property taxes, school taxes, sales taxes, car rental taxes, hotel taxes, food entertainment taxes, business taxes, lower cost health, life, property insurance, better public transportation, better public school systems, better parks, recreation & beaches, better roads/bridges and in most cases better weather.

Posted by: Ken at January 5, 2010 4:28 PM

May I suggest that they've been pulling rabbits out of a rearward facing body orifice rather than out of a hat?

The precarious nature of state finances has been inarguable for years, at least since they started selling tobacco money at a discount to raise short-term cash (essentially a payday loan to the state).

And again when the magnitude of the unfunded pension and OPEB liabilities -- BILLIONS of dollars -- became known.

Yet last June, in the midst of the most severe recession in decades, they again raised spending by 13%. Business as usual.

The Democrats are in control, and will continue to strangle the goose until it's dead, all at the behest of their union and poverty pimp benefactors.

Just look at Detroit, and what's occurring now in California and New York, It's the nature of the Democrat beast, for here and nationally it is now an appendage of the public sector unions and welfare industry.

Rhode Island is doomed. Leave now, if you can, and go to a place that has not been, and is not now, under long-term Democrat control.

Posted by: Ragin' Rhode Islander at January 5, 2010 4:47 PM


That wasn't the point of my parenthetical note. Fox was claiming that increasing public-sector pensions is crucial for the economy, meaning that pensioners have money to spend. If you're out of state, you're not spending that money to the benefit of RI's economy.

Posted by: Justin Katz at January 5, 2010 5:14 PM

Even Rhode Islanders who are present and accounted for don't spend here. With Massachusetts strip-malls within the deadly 'fifteen minute' travel zone, it just makes sense to drive over and purchase there.

I just got off the phone with an old friend who was waiting in line to get a nickel off a gallon of gas.

What will determine Rhode Island's future will not be the rate of taxes, nor the friendliness of our zoning boards, or the amount of inane regulation, but how well it compares to our neighbors. We don't have to have -no- sales tax, but it -must- be lower than Massachusetts'. We don't need to serve prospective business owners with glossy reports of what they need to get started here, but we can't afford to have fire officials walk in, point up at something, grumble "that's gotta go" and walk out.

We're in a death-spiral, and we're having our butts handed to us on a platter in virtually every department by our neighbors. All we need to do to fix it is be -as good as- our neighbors, which shouldn't be hard, considering that a smaller unit -should- be able to move faster. Unfortunately, the current crew on Smith Street has shown themselves unable to do that, so it becomes necessary to clean-house (pardon the pun).

Posted by: mangeek at January 5, 2010 5:37 PM


That is correct!

We are out of state not putting demands or strain on RI State, city and town resources but having to pay taxes to support the residents and State of RI just because our income is generated in RI.

Our imposed income tax is free money to the State of RI and it's residents to squander.

I hand over $2,000 to the State of RI every year for nothing!

I wonder how much greater the budget deficit would be if all out of state taxpayers just stopped paying RI-1040NR?

I know State of RI published it is trying to collect $10 million in back income taxes from just one non-resident!

Posted by: Ken at January 5, 2010 8:14 PM

Mangeek, right on. We need lower sales taxes in RI to be competitive or better than our neighboring states.

Ken, you say you pay $2,000 a year in income tax to RI. Do they take that out before you even get your check, or do you pay it as a part of your 1040-NR? If it's the latter, why? If you don't pay your RI income tax, what happens? Extradition?

Posted by: Patrick at January 5, 2010 9:24 PM


It's over $2,000 not $2,000.

It's after my accountant calculates the RI-1040NR. Hawaii banks pay dam great interest on checking and savings accounts also rated best banks in USA during this recession so I earn more interest income over the year!

As a full time non-resident of RI, if I do not pay State of RI income tax via RI-1040NR it's the same as living in RI and not paying your state income tax. You are subject to the same legal criminal penalties.

If you derive any income within the State of RI you must pay state income tax on that amount according to RI state law that is also why I moved all my banking accounts out of RI to HI where my retirement income is exempt from State of HI income tax.

Posted by: Ken at January 5, 2010 10:22 PM

I'd be fine eliminating the out-of-stater income tax if we were on top of our obligations. Unfortunately, it appears that we're $10B behind in our own state pension liability, with a $6.5B annual budget (arguably it should be more like $4B). If the state pension fund was a well-underwritten mortgage, we'd be about 4.5 years behind on our payments. I don't know about you, but my bank won't let me do that.

Once the 'rabbits' stop appearing, we're going to face a system that's 'going ponzi' as they say, and state taxes will have to be ratcheted-up to levels that we can't even imagine today.

Just like with a company going bankrupt, where stockholder equity is wiped-out to pay the bondholders, I'm afraid that Ken is (in my opinion) 'last in line' for having his taxes cut. This place is going under (partly) because the taxes are too high, we need to take care of those of us who are -here- first, even at the expense of those of you who have left for greener pastures.

Sorry Ken, you can't cash-out your RI stock, there are a million resident bondholders in line before you. I wish we could, it's certainly sensible what you're asking for, but it's just not possible for the time being.

Posted by: mangeek at January 5, 2010 10:25 PM

mangeek and all Anchor Rising,

Just remember as the current State of RI income tax laws are written, if you put your (20,30 or 40) years in for retirement working state, municipal, fire, police, military, for profit private business sector, non-profit private business sector and move out of State of RI residing full time in another state to sustain your lower fixed income subsistence under State of RI law you will be legally under penalty of law obligated to pay the State of RI state income tax on any amount of retirement income generated within the legal boundaries of the State of RI till that income is terminated or you die (only two things are permanent death and RI taxes).

Posted by: Ken at January 5, 2010 11:02 PM

Ken, that's sort of the way it's supposed to work. Retirement contributions (from you and your employer) to IRAs, 401k, 403b, and other forms of funds are tax-deferred, meaning you put them in pre-tax (as an incentive to save). When you withdraw the money, it gets taxed as current income.

If you wanted to get out of 'paying taxes' well into your retirement, there are Roth IRAs, where you put the money in post-tax, but are guaranteed to be able to withdraw it tax-free later.

It's somewhat of a gamble either way, and the system we're using, where only 5% of the population is saving adequately for retirement, will likely prove to be the next generation's albatross.

I know that once my nest-egg is nicely-sized, I intend to spawn a Roth and max it out for the rest of my working life, I have a feeling the tax man is going to be taking more in the future, partly to prevent that other 95% from living in boxes on the street.

An informal poll at the pub one night showed me how bad the situation really is: Out of twelve friends, only three even -had- retirement savings, and two were grossly underfunded.

This is going to have massive social implications, too. Forty years ago people had savings. There was often a big incentive to getting married (house, cash, etc.). These days we're mostly living in debt, and you have to size-up your potential spouse to make sure they themselves aren't an 'unfunded liability'. Any wonder why marriage and kids are coming later and later? Who wants to get married to $15k in credit cards and no retirement plans?

Posted by: mangeek at January 5, 2010 11:26 PM


You're talking to somebody that is just reaching 65 (retired 4 yrs ago). A lot of my retirement investments were started I am surmising long before you were born but I appreciate your advice however a lot is locked in stone and treating me very fairly as I am living off of early calculated 50% of retirement income (reinvesting and banking other 50%). I still have two long term retirement milestones that come due in 5 years boosting retirement income another 25%.

It just irks me that I do not live in RI anymore and under current tax laws I must pay RI state income tax on that portion generated from RI.

Also the fact that a lot of people continue to point the finger at Florida (state, teacher and municipal) RI transplants claiming they are getting a better deal because there is no income tax in Florida! RI-1040NR eliminates that income tax advantage for anyone living out of state and deriving an income in the State of RI. They pay RI income tax like us private retirees are forced to do! State of RI gets a lot of free money from out of state retirees!

As a matter of fact Florida and New Hampshire in certain cases have higher property and local school taxes than Hawaii (HI school are supported by state income tax and 4.5% sales tax ($0.05 supports new high speed public rail system) even though both have no state income tax and lowest yearly temperature in HI under 3,000 ft level is 60 degrees.

Time to check your retirement plan, investments or origin of your final retirement check and how many years till retirement! If it comes out of RI you'll be paying RI income tax till you die!

Posted by: Ken at January 6, 2010 12:22 AM
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