March 14, 2011

The Biggest Tax Increase... and on Whom?

Justin Katz

Here's a point worth restating throughout the current session of the General Assembly (emphasis added):

By broadening the general sales tax and levying a new 1 percent tax, Chafee's budget would raise about $165 million in new tax revenue — even after taking into account the drop in the general sales tax rate. That would be one of the biggest tax increases in state history — if not the biggest, according to Gary S. Sasse, former state revenue director and now distinguished professor of public policy at Rhode Island College.

Whether Governor Chafee's manages to improve the state's ranking when it comes to taxation schemes, his solution to balancing the state's budget is to raise taxes on a population that's already heavily taxed. And it's not a neutral increase; there's a shift in burden involved. Consider (emphasis added):

Rep. Thomas Winfield, D-Smithfield, said that when he stopped for coffee at Fast Freddie's, in Greenville, a crowd of angry people objected to applying sales taxes to such a long list of items. When asked how he'd respond to the Fast Freddie's crowd, [Chafee Director of Administration Richard] Licht said that lowering the sales tax rate from 7 percent to 6 percent would save people money on big-ticket items, so they'd "pay a little more for their haircut but they'll save on their car."

Frankly, my family can no longer afford "big-ticket items." Chafee's revenue increase, in other words, leverages my basics to subsidize somebody else's luxuries. Would it be too cynical to discern the policy's hidden objective as making sure that Rhode Islanders have nowhere to hide from the taxman, even during times of economic hardship?

Yea or nay, the effect is once again that Rhode Island would turn the screw even more tightly on those who are struggling to get by and striving to advance.

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" Licht said that lowering the sales tax rate from 7 percent to 6 percent would save people money on big-ticket items, so they'd "pay a little more for their haircut but they'll save on their car.""

Wow. Now, that's some serious, question-dodging spin.

Let's try this. Rhode Island currently has the 5th highest state and local tax burden and it's been that high for years, meaning that Rhode Island taxpayers have already disproportionately sacrificed.

Do ya see, Mr. Licht and Governor Chafee, how a budget that closes a deficit by relying half on higher taxes and half on cuts (it doesn't; it's 2-1 taxes to cuts but let's pretend for a moment that it is 50/50) really is not shared sacrifice at all?

"Shared sacrifice" would be exclusively budget cuts going forward for as many years as we have had high taxes. 50/50 higher taxes to budget cuts only continues the disproportionate sacrifice that one side has been making for years.

Posted by: Monique at March 14, 2011 8:29 AM

Exactly. When people are struggling to afford the very necessities of life, how can he consider additional taxes on those necessities? When manufacturers are leaving, and not considering come to RI, how does adding sales tax to manufacturing equipment help the unemployment situation? When agriculture has finally started to "come back", and farmers are finally finding ways to sustain RI's farms while eking out a living, how does adding sales tax to any new equipment that might be on the horizon help RI?

Posted by: riborn at March 14, 2011 8:57 AM

Oh blah. The sales tax barely affects anything, prices in 'the necessities' vary more than that anyway... In reality, the sales tax (even if it is high) isn't breaking anyone's back.

What -is- of concern is regional competitiveness... If 2/3rd of our population lives within fifteen minutes' drive of a -lower- sales tax, we're going to lose a lot of economic activity.

Seriously, cry me a river about taxes being high. We have pretty low taxes here in America, even in Rhode Island. I figure that between local, state, federal, Social Security, Medicare, and sales taxes I pay about 25% of my income. That's not so bad, it certainly wouldn't propel me into a different class of consumer if I had 25% more to spend.

What bothers me is that I seem to not get much bang for the buck for my 25%. For 25% of every middle class person's income, this state and nation ought to have balanced budgets, for starters. Heck, my friends in Europe pay 40% and get 'free' health care, a decent government pension, and basically free college; we don't even approach getting that kind of value from our tax dollars.

A 1% sales tax on food adds about $40 annually to each family. Not a big deal.

I'm a die-hard fiscal conservative. We should worry less about the tax rate here and more about the return-on-investment of our tax dollars. Does your city have twice as many police and firefighters as it needs, but can't afford to pave the roads? Are we racking up structural deficits through bonds to save today, but double the cost of government for your kids? Are we taxing all the wrong things in all the wrong ways so the state compares unfavorably with competitors? Let's fix that stuff.

Posted by: mangeek at March 14, 2011 11:20 AM

re: Justin's observation on daily necessities vs big ticket items. Somewhere Monty Burns is saying - "Excellent, let the class warfare intensify."

Mangeek - remember heating oil prices - that may add more than $40 and if prices go up so will the state's take. Add in the bite on all the services not taxed currently, too. Wonder what the impact is from the whole laundry list.

Posted by: chuckR at March 14, 2011 1:32 PM

"remember heating oil prices - that may add more than $40 and if prices go up so will the state's take"

We could go on all day kvetching about what new things will get taxed, but it doesn't matter. If the state government spends more than it gets, it has to borrow or increase taxes. Instead of complaining about taxes and kicking the can to our kids, let's figure out ways to cut spending and focus there.

It doesn't matter where the money comes from, be it taxes on heating oil, food, yachts, or my income. It's gotta come from somewhere, and the only way to reduce it is to stop borrowing, shrink government, and build the economy.

Posted by: mangeek at March 14, 2011 2:53 PM

" Chafee's budget would raise about $165 million in new tax revenue"

Well if there are about 1 million Rhode Islanders, then this would mean about an extra $165 in new taxes from everyone. This year. But if raising taxes is the way to go to make ends meet this year, what happens when we're short again next year? Raise taxes again?

And we know that when a crisis has been settled, taxes never go down, right credit union crisis? So let's be a little careful with being ok about raising taxes "just a little bit".

Posted by: Patrick at March 14, 2011 2:53 PM

Don't get me wrong, I'm no fan of the Chafee tax plan, Patrick.

And yes, the end result will be $165 per-capita, per year. Still a drop in the bucket.

I think Job #1 should be meeting our obligations without doing long-term harm to the state's finances. That means not borrowing if you don't have to. Every dollar borrowed at 5% for 20 years costs us about $1.40 to repay. That's going to push taxes up.

Shrinking the government to make that job easier is the only way to get lower taxes responsibly. Until then, we shouldn't complain about the taxes themselves.

Posted by: mangeek at March 14, 2011 3:15 PM

"Shrinking the government to make that job easier is the only way to get lower taxes responsibly. Until then, we shouldn't complain about the taxes themselves."

Agreed somewhat. Why can't they go together? Why can't I complain about the taxes themselves and request that government shrinks to pay for the lack of additional taxation? That seems to make more sense.

You say we're not getting value for our money, and I agree. So rather than paying *more* and getting even less value for our money, what we should actually be doing is paying *less* and then getting more value for our money. So let's downsize what the costs are.

Oh wait, we talked about this before here and Monique even followed it up. Remember on the campaign trail, Chafee said he wouldn't even think about that extra 1% in taxes until he fundamentally changes the way the government spends. It doesn't seem like he's living up to that promise, is he?

Posted by: Patrick at March 14, 2011 4:23 PM


Your first comment was very revealing, so I'll be revelatory, too. Tomorrow, I have to figure out some way to get to the bank before 4:00 so I can deposit half a coffee can of pennies — pennies! — so I can pay my mortgage before the $70 late fee kicks in. You want to give me your young-lefty-professional attitude about how I've got a little more to give to Linc and the GA?

Yeah, $125 more on groceries would be a "drop in the bucket" to some people. Of course, that's what the local unions-and-friends coalition said of $300 more per year in property taxes. At some point, year after year, it all begins to add up to serious money. (Note, of course, that groceries won't be subject to the 1% tax, yet.)

Frankly, I don't want to live in Far West Europe. I don't want to rely on the government for more. I don't want the government to be efficient while doing a lot; I want it to be efficient while doing very little.

Be all that as it may, the fact remains that Chafee is sending a giant tax increase our way, and it shifts the burden toward people who are struggling and striving. A haircut tax doesn't affect you as much as it affects me, with my family of five. That's not class warfare (Chuck); it's noting that the governor's proposed change in taxation shifts the tax burden toward people who can least afford it.

There should be no increase in taxes, because I can't afford it and because we want to encourage economic activity among those with more resources than I possess. Giving families like mine incentive either to leave or to give up the race and jump into the arms of government subsidies is not going to move the state out of crisis.

Posted by: Justin Katz at March 14, 2011 4:49 PM

"Cry me a river"... man, it's tough to resist the swear words, sometimes. Why do the supposedly broad minded seem always to have the most difficulty understanding the differing circumstances of others and discoursing with sympathy when their experiences leave them with a reason to be sunnier about having their money taken away?

Posted by: Justin Katz at March 14, 2011 4:53 PM

I’m surprised Chafee didn’t try to tax the air we breathe.

This is creating a two tax tier system, the 7% (anyone who believes the tax will drop to the 6% level, I have a bridge to sell you) plus the 1% tax. This creates more layers of government, meaning bigger state government.

It also means small business owners will have to pay an accountant more to make sure they are complying with the new tax code. That added cost will be passed on to the consumer. It will be cutting into the small business owner’s profit margin, and increasing his prices making him less competitive.

Remember the 1% sales tax on food from restaurants to little places like Taco Bell? Where is that money being used?

Chafee was elected for four years, the General Assembly gets elected every two, I can not see any legislator backing this plan. He/she would have to explain his or her vote in the next election cycle. There is no comprehensive plan to get the state out of the current fiscal mess, and Chafee knows it.

Posted by: Justanotherjoe at March 14, 2011 6:24 PM

"But if raising taxes is the way to go to make ends meet this year, what happens when we're short again next year? Raise taxes again? "

Count on it. By the end of the decade we will have a double digit sales tax. Just like progressive California and Shi*cago.

Posted by: Tommy Cranston at March 14, 2011 7:28 PM

You go right on not complaining about the taxes mangeek, and while you're at it please hold your breath until the government cuts spending. That 25% you pay now will go right down to 0% (unless of course you die resident in RI with over $875,000 in assets), then there'll be some final reckoning. Your apathy provides a nice cushion for Chafee - no need to cut when no one complains and the new money is coming in.

I choose to advocate for not raising taxes, especially those that impact working familys' ability to put food on the table, a roof over their heads, clothes and shoes on their bodies, and heat their home. For you, $40/year is nothing (and you must be one heck of a coupon queen to spend less than $80/week on groceries). For many many working families it's $40 they don't have.

Didn't your parents ever tell you to try to imagine walking in someone else's shoes? Try walking in the shoes of a family where working three jobs is now the norm and they are thankful to have those three jobs. They've never asked for government help, medicaid, welfare, food stamps, heating assistance, they wouldn't know where to go. Before you so cavalierly generalize that the proposed new taxes are not going to break people, look around at the grocery store check out at what people are buying. Watch at the gas station and you will see people put $5 of gas in their cars. These proposed taxes won't touch Chafee, and they apparently are not going to impact you - at least not this time.

Posted by: riborn at March 14, 2011 8:29 PM

Folks, I'd much rather 'flatten, simplify, and broaden' the sales tax as I mentioned in another post. Eliminate all exemptions and drop the tax to 5%, which closes the budget gap and makes us a destination instead of a liability for retail activity.

As for the tax hitting those who can least afford it, you're right. It's unfortunate. But remember that last year we cut the highest bracket of income taxes out of the picture.

Even with taxes where they are, we're not fully-funding our obligations or taking care of infrastructure properly... I'm an advocate of squeezing more value from existing dollars rather than raising taxes, but if we start by keeping taxes low, we end up running deficits, which require borrowing, which makes taxes harder to cut in the long run.

I think that in all likelihood, if Americans want the services they do, and want to keep offering the kind of compensation they seem to in government jobs, and want to do it responsibly, taxes can only go up.

Posted by: mangeek at March 15, 2011 9:58 AM
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