February 22, 2011

Expanding the Sales Tax: Possibilities

Marc Comtois

Neil Downing reports that Governor Chafee's proposed new 1% tax on various items would violate a multi-state agreement and could result in the loss of $1.8 million in revenue. However, since the new tax would generate $89 million (or $121 million, depends on who you ask), it's no surprise that the Governor is still going full speed ahead with the idea. Right now, according to this Taxadmin.org (PDF), Illinois is the only state with such a sales tax structure (Illinois has a sales tax of 6.25% and taxes food, prescription and non-prescription drugs at 1%).

Listening to WHJJ's Helen Glover this morning, I heard her speculate that perhaps this would open the door for the "flatten and expand" idea as a compromise (ie; drop the sales tax to 5% and apply it to everything). So, is Rhode Island going to follow the "Illinois model" (which Governor Chafee's plan seems most like)? Or will we end up with the flatten and expand approach> What do other states do ?

Well, we know there's no chance that Rhode Island will join the 5 States (Alaska, Delaware, Montana, New Hampshire and Oregon) that have NO state sales tax. Right now Rhode Island is one of ten states and Washington, D.C. that have a sales tax that excludes food and both prescription and non-prescription drugs. Setting the amount of the rate aside, this is actually a positive.

Sales Tax
Minnesota 6.875
New Jersey 7
New York4
Rhode Island7
Wash. D.C.6

*No state income tax

It's worth noting that, even though Rhode Island is currently amongst a "good" group, its higher rate as compared to the rates of all other states is what gives RI such bad publicity when it comes to snapshot analysis that doesn't focus on exemptions, just the overall "big" number.

To continue, several states don't tax food but tax non-prescription drugs at the regular sales tax rate:

Sales tax
New Mexico5
North Dakota5
South Carolina6

*Tax can be adjusted annually depending on various budgetary calculations.
**No state income tax

The following states tax non-prescription drugs at the regular rate and tax food, though at a different rate:

Sales taxFood tax
West Va.63

*local taxes on food
~includes statewide 1% local tax
**No state income tax

Finally, the following states tax everything (except prescription drugs) at the same rate. These might be the models for a potential flatten and expand by Rhode Island:

Sales Tax
*~South Dakota4

*State has rebates or tax credits to compensate poor households.
~No state income tax

As was noted, Illinois is the only state that taxes prescription drugs at 1% along with food and non-prescription drugs. This is the model that Governor Chafee's proposal most seems to mimic. However, my guess is that the states in the last table offer a model that would be very attractive to many in the General Assembly and to the various advocates who walk the halls.

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I did some cocktail-napkin math and showed that if we had a flat sales tax, it could be revenue-neutral at about 3.8%. I'd say tax -everything- at 5% and plug the budget with the rest. It would still compare favorably to our neighbors and bring retail jobs (and maybe storefronts) here.

With all the wailing and gnashing of teeth over 1%, you would think it actually matters... Nobody starves or skips their medication on account of 1% or 5% added to the bill. Prices of the core product fluctuate more than that on an annual basis anyway.

Posted by: mangeek at February 22, 2011 1:46 PM

"I heard her speculate that perhaps this would open the door for the "flatten and expand" idea as a compromise (ie; drop the sales tax to 5% and apply it to everything"

I think it would be politically easier to get the 1% tax in, then annually expand it until it equaled the tax on all other items.

Depite all of the "talk" I expect that is the plan.

Posted by: Warrington Faust at February 22, 2011 2:05 PM

"I think it would be politically easier to get the 1% tax in, then annually expand it"

Really? Isn't this an easy spin by those with the bully pulpit?

1%: Your taxes are going up!

5%: We're lowering your taxes by 2 points or nearly 29%!

Posted by: Patrick at February 22, 2011 2:31 PM


You must remember the Tax Foundation calls the General Excise Tax (GET) in the State of Hawaii one of the simplest forms of taxation in the nation.

The Hawaii GET is 4% on all islands except island of Oahu where a ½% surcharge was added Jan. 1, 2007 to be rescinded 2027 to support the construction of a $5.8 billion 20 mile high-speed elevated light-rail transit system which today 22 Feb. 2011 the ground was officially broken to start construction.

The Hawaii GET is applied to all transactions goods and services with only prescription drugs exempted.

The Tax Foundation indicates Hawaii collects an inordinately high amount of GET from Hawaii residents but fails to recognize high amounts of tourists and visitors which in calendar year 2010 enhanced the Hawaii economy by spending over $12.3 billion which was GET taxable.

Posted by: Ken at February 22, 2011 6:28 PM
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