November 17, 2010

What Chafee Means by "Harmful"

Justin Katz

I've received reader email expressing cynicism at the Providence Journal PolitiFact's release, post-election, of its finding that Governor-elect Lincoln Chafee's statement was "barely true" that "experts say the property tax 'is the most harmful to economic growth and ... the sales tax is least harmful." Indeed, Eugene Emery's article notes:

[Tax Foundation economist Kail] Padgitt referred us to a study by the Paris-based Organisation for Economic Co-operation and Development, an international agency founded to help its 33 member countries find the best economic policies.

The OECD's 2008 study of tax structures and economic growth says that when taxation is necessary, a stronger reliance on property taxes is the best method for encouraging an economy to grow, followed by consumption taxes, such as sales taxes. High corporate taxes, it concluded, were the worst when it came to increasing the gross domestic product (GDP).

The only rational conclusion to which one can come, on the question, is that it depends. Blanket statements of which tax is preferable are fatally flawed in that there are limitless number of ways in which a regional government can hinder or help its local economy, and the particular mix at any given time will have a huge effect on what tax increases are more or less damaging.

Inasmuch as Rhode Island's underlying problem is an inability to attract and retain economically productive people — to start and populate businesses — increasing property taxes should be a nonstarter. On the other hand, given the size of the state, with cross-border shopping opportunities mere minutes away for most residents (and the Internet readily accessible), increasing the sales tax will likely drive our consumer economy increasingly away. That's good for neither near-term economic growth nor the initiation or immigration of businesses to the state.

But it's nothing new to suggest that Rhode Island cannot afford to increase any taxes (or fees, for that matter). What's interesting about Chafee's statement is what I think underlies it. Local progressives, among whom Chafee clearly numbers, often declare that the property tax is "the most regressive." That's obviously questionable in comparison with a proposal to tax necessities that are currently exempt from taxation, under the law. But I'd wager that Chafee is extrapolating from that cliché that regressiveness in the tax structure is inherently harmful to the economy.

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Sales tax competitiveness is so important here. In my neighborhood we've had vacant commercial property for over a decade. If we could keep Rhode Islanders here when buying consumer goods, the net-effect of shifting to lean more on property or income taxes would be to fill those properties and create entry-level retail jobs, which would be very good for the people that the new 1% sales tax hits hardest. Also, those vacant properties would be tax-paying and job-creating businesses.

Our policy makers like to hide behind the academics of tax studies, but those don't factor-in that most of us aren't 'captive' customers like most are In larger states; it's just as far a drive from our population centers to Warwick as it is to Attleboro.

Posted by: mangeek at November 17, 2010 8:58 AM

This also got me thinking about all sorts of other simple things our friends at the state house don't seem to have the vision to understand.

For instance, it seems that state law says that municipalities are free to give teachers raises based on 'up to ten steps' with progression based on years at work. Simply changing the language to allow towns to attach any other relevant criteria to the requirement would likely have dramatic effects on local budgets and the quality of education our kids get. It's literally a one-line, non-controversial fix to two of our biggest problems.

Posted by: mangeek at November 17, 2010 9:06 AM

Lincoln Chafee doesn't like the property tax (now) because he can't raise it, like he did capriciously when he was Mayor of Warwick.

If he were taking the helm of the State with a balanced budget, or even with a surplus; he'd raise taxes. It's what he lives keep filling the pot to pay greater patronage to his parasitic devotees.

Posted by: George at November 17, 2010 11:56 AM

The ones who voted in Chafee all want to pay the new 1% tax on food, clothing, gas, medicine, textbooks, etc. Just more money for local and state government to hand over to the unions.
Good thing I buy my stuff online. My sacred vow, I will NEVER pay the 1% tax if it is passed.

Posted by: bobbbbb at November 18, 2010 1:53 AM
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