Warren Buffett On Taxation: Listen To My Advice, Not My Accountant's

On Friday, I learned of this

Mr. Buffett has also already sheltered the bulk of his fortune from federal taxes by putting them into a foundation that will give the money away.

which was definitely puzzling in light of this.

But for those making more than $1 million — there were 236,883 such households in 2009 — I [Warren Buffett] would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate.

My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice.

On the one hand, Mr. Warren Buffett advocates for tax hikes on the rich. On the other, he has arranged to deprive the federal government of a huge chunk of taxes - namely, the taxes on his own estate.

After struggling, ultimately without success, to reconcile the words with the actions, it became impossible to argue with this.

It seems to me that Buffett’s actions imply a clear distrust of governmental taxing and spending programs and their ability to improve society in an efficient manner.

Indeed, Saul Elnadav. And casts his calls for tax increases in a less than credible light.

Latest Tax Rankings: Why The Nuclear Tax Hike Option Should Be Completely Off The Table, Not Simply At The Bottom of The List

While Majority Leader Mattiello's expressed intent is appreciated,

"The last thing you want to do is raise taxes," House Majority Leader Nicholas Mattiello said at a Greater Providence Chamber of Commerce luncheon at the R.I. Convention Center. "We have not gone there in the past and we hope this year we will not go there. I am confident we will not."

to be respectfully blunt, it doesn't go far enough. Accordingly, as we await Governor Chafee's proposed budget, a review, courtesy the invaluable Tax Foundation, of Rhode Island's current tax rankings is in order.

State and local tax burden: 5th Highest

Corporate income tax: 5th Highest.

Combined state/local property taxes: 7th Highest

And inching up one step (yippee?) this year, our business tax climate: 46th worst

Note: The first Tax Foundation link to their Rhode Island page lists our top income tax rate as 9.9%. I believe that particular data point is outdated.

Oh Darn - Guess We Have To Lower the Federal Tax Rate

... even federal employees are apparently finding it difficult to stay current.

About 98,000 federal, postal and congressional employees owed $1.03 billion in unpaid taxes at the end of fiscal 2010, according to records provided by the Internal Revenue Service.

No word on whether they also canvassed President Obama's cabinet for tax compliance.

Car Tax Reform

Warwick's Rob Cote has been leading the charge for a car tax revolt in the state. He has brought up the inequities in the law with things like being taxed at the full clean value of a car, in spite of its mileage and condition. If you have a 2005 Honda Accord, you will be assessed the same value if that car is Grandma's Sunday church car with 15,000 miles on it or if it's been in a couple accidents with 150,000 miles on it. Plus Cote has said that when you purchase a new car, the cities are using the brand new value of a car for the first five years. Everyone knows that even a brand new car loses value the minute it is driven off the lot, but yet you pay the full value.

Add on top of this, every town has their own tax rates for cars. That same Honda Accord is taxed at $76.68 if its owner lives in Providence and it is taxed at $9.75 if its owner lives on Block Island. Same exact car, vastly different taxes paid.

Add on top of that, in 1998, the General Assembly forced all towns to freeze their tax rate on cars. They cannot change. The towns who saw this freeze coming simply raised their rates at that time. Still today, no town can change its auto tax rate.

Now, based on Cote's initiative, State Representative Joseph McNamara is sponsoring legislation to make the car tax more fair. The bill will change the system so we pay a rate that more closely matches the value of the car, which in almost every case will be less than it is today.

So what will this mean? Higher property taxes is what it will mean. Originally, one of the purposes of the car tax was to lessen the burden on property owners, but now this change could increase that tax.

Let's walk through it this way. When you look at either the auto tax or the property tax, neither the rate nor the assessment matter by themselves. What matters is when the two of them are brought together. Basically what towns do is figure this out in reverse. They first figure out how much money they need, then they already have a decent idea of what their aggregate assessed value is and then use that to set the rate. But remember, in the case of the auto tax, the tax rate is frozen. Towns cannot change it. So what this change to the law could do is largely lower the aggregated assessed value, and without a rate change, the town will lose a lot of revenue.

Most mayors are not going to simply say "Oh well, we have less money, we'll just spend less." No, they will need to replace that money from somewhere. Unless the General Assembly is going to reimburse the revenue loss from the auto tax, then the mayors have to find that money themselves. Towns really only have one major source of revenue after the auto tax, and that is property tax. How much could be lost?

three quarters to a million dollars," said North Providence Mayor Charles Lombardi, "That revenue has to come from somewhere."

What might be the simplest solution? Unfreeze the rates. Let the towns set whatever rate they want. Then they can assess the autos at the correct amount and set the tax rate accordingly. Taxes paid won't go down at all, but you'll feel a whole better about your car being assessed appropriately.

Coming up in Committee: One Bill Scheduled to Be Heard Tomorrow (Relating to Car Tax Valuations)

The Rhode Island House of Representatives Municipal Government Committee is scheduled to hear a bill tomorrow that would, according to the official description, change the car-tax valuation "so that the assessment of used motor vehicles would be based on the average trade-in price, rather than retail price" (H7098).

All five of the bill's sponsors (Joseph McNamara, Robert Flaherty, Eileen Naughton, David Bennett, and Frank Ferri) represent the City of Warwick where -- probably not coincidentally -- community members have been very active in seeking to have the valuation rules changed.

Folks who have been active on this issue are invited to comment on whether this bill makes the change to car tax valuation rules that they have been seeking.

Surprise -- Governor Chafee Considering Tax Increases to Balance Next Year's Budget

On the last weekday of 2011, David Klepper of the Associated Press writes what could be the least surprising news story of the year (h/t WPRO News)...

As he prepares for his second year in office, Rhode Island Gov. Lincoln Chafee is looking for ways to spur the state's frail economy, rescue its struggling cities and eliminate another year's budget deficit -- possibly through additional taxes...

Chafee estimates that the state will face a $120 million deficit in next year's budget. While that's an improvement over the $300 million deficit lawmakers eliminated in the current year's budget, Chafee says the red ink will be difficult to erase through cuts alone. He wouldn't offer specifics but said he's weighing the possibility of recommending some form of tax increase.

4.The combined state and municipal budgets for Rhode Island have grown steadily (adjusted for inflation) over the past 10 years, a period of time which includes September 11, 2001 and its immediate aftermath, the end-of-the-financial world as we knew it in 2008, and the relative lull (at least domestically) in between.

Is it by design or by accident that government has been growing as if on autopilot -- or would you disagree with that characterization entirely? Compared with 10 years ago, are Rhode Islanders getting more in return for their increased spending?

We do not agree with the premise of these questions.

So, in Other Words, It Was Already a Scam?

It's instructive to watch the pieces that fall away when financial difficulties force changes in public policy, because they reveal glimpses of the scam inside. The latest (that I've noticed) comes with the car tax controversy:

The state Vehicle Value Commission dropped the value of some older cars during a brief meeting Tuesday, but did not address the ongoing controversy over the contention that the state puts too high a price tag on taxpayers' cars. ...

Up until last year, the state required municipalities to trim $6,000 off all vehicle valuations on the condition that the state would make up the difference in revenue to the localities. When the state found it could no longer afford the program, it gave communities the option to do away with all but $500 of the $6,000 value exemptions.

It is the state, not the municipality, that requires the use of the highest National Automobile Dealers Association level — the "clean retail value" — to determine the tax on all cars, whether they are "clean" or not. That's akin to appraising every house as if it is in excellent condition for its style and age.

As the above quotation explains, the state had been disguising this unfair method by discounting all cars and paying the difference from other revenue. In practical terms, while car owners may not have been paying too much for their own cars, income tax payers, and those whose money found its way to the General Assembly by other means, were paying too much for other people's cars.

Pension Reform Bait-and-Switch to Block Broader Reform

I've placed the 5.5% privatization tax in the context of the General Assembly's history of opposing such money-saving measures and pondered the language of the newly minted statute.

My concern, in brief, is that there really isn't anything limiting the application of the 5.5% "assessment" to state privatization. The only limit mentioned is to the displacement of employees included in General Law 36-8, which establishes the pension system. In other words, it appears to apply to any government agency that participates in state pensions, whether state, school district, or municipal. Mayoral academies, for example, can opt out of the pension system and so may be threatened with the surcharge. The limiting factor will only be how aggressive the folks who write the resulting regulations wish to be.

Even if the law does wind up limited to employees of the state, reformers should fear its effects on others of their strategies for improving government, notably consolidation. Any function moved from the municipal to the state level will now become permanently "in house."

Frankly, this sort of legerdemain is bound to happen when opposition parties jump on a fast-rolling bandwagon like pension reform.

Dual Purpose of the New 5.5% "Pension" Tax Exposed: To Discourage the Use of Non-State-Employees and To Gouge Yet Another Couple of Million from the Taxpayer

Who says? Why, the Director of the Department of Administration, Mr. Richard Licht, though he didn't actually use the words "gouge" or even "taxpayer". (Ah, the joy of euphemisms).

As Patrick noted, one of the few last minute amendments to the good-start-on-but-by-no means-comprehensive pension reform bill that survived a floor vote was a 5.5% tax on state services awarded to outside contractors - you know, the ones to which the state would not owe a pension, or vacation, or sick time, or a uniform allowance, or longevity pay, et public sector cetera. (Good job, Ian Donnis, clarifying this situation.)

[Donnis] asked Licht if the 5.5 percent assessment will curb the state’s use of outside employees. He responded:

That’s correct, and that’s actually the purpose of it. And independently of pension reform, our department is doing an analysis of contract employees, because there are instances where people working side by side — one works for an independent contractor, one works for the State of Rhode Island — yet they’re doing the same work.

(I'm shuddering as to the outcome of that analysis, by the way.)

Secondly, as to gouging. Possibly your reaction, when you heard about this new "assessment", was the same as mine: aren't the contractors just going to pass that cost back on to the state by increasing their bid by 5.5%??? In fact, that was the intent from the beginning.

Licht says the 5.5 percent assessment will be levied on the state. “The contractor doesn’t have to pay it,” he says. “It’s assessed against the state ...

Whew. The contractor doesn't have to pay it. The "state" does.

... wait a minute. The "state", in this case, means us taxpayers. It is our hard-earned money which funds the operation of state government! (Funny how Mr. Licht didn't actually phrase it that way. "The State" sounds so much more remote.)

Congratulations to the Governor for creating this win-win situation ... win-win solely for himself, that is: he looks good in the eyes of public employees by taxing non-state employee services and he looks good by funneling revenue to their pension fund from yet another tax-hole bored into our wallets.

"Industry-Funded"

Where does the government get its money to buy stuff? Do you know? It seems most people don't. They just seem to think it's free money or they'll get it from business or industry.

Just like this article about Obama's recent idea to help the Christmas tree industry by taxing it fifteen cents a tree to help with marketing Christmas trees.

"The administration said it was not a tax, but an industry-funded fee that the industry supported for marketing purposes."

Industry funded? What does that even mean? The Christmas tree industry is going to pay a 15 cent tax per tree which would then be returned to them by the US Government so they can engage in better marketing? Does this idea make sense to anyone? First, just keep the fifteen cents and do your own marketing. Second, "industry funded"? Who are you kidding. We know who the funding will be, the people who buy the trees. But I guess if you tell people that it's the businesses paying it, then who cares what the new tax is.

Want more examples of this? I recently saw a flyer advocating for after-school learning for children. One of the statistics cited was

"4 out of 5 parents (80%) favor using state dollars to fund afterschool and summer learning programs."

If you want even further evidence of people having no idea that this "government money" is their own, look at the biennial bond referenda. In last year's statewide election, we only had three spending questions to look at, the Higher Education Facilities Bond, Transportation Bonds and the Open Space and Recreation Bonds. They all passed. The closest vote was for the first one, and it won by 11 points. The Transportation bond won by 47 points, maybe because of the campaign that said if we vote for that bill, the federal government will match the state funds. Federal money? That's more free money! Right? Wrong. It's more taxpayer money, it's just coming from a different pocket.

Hopefully someday people will wake up and see all this government money for what it is, the taxpayers' money. Every time there is fraud and waste in the government, that is our money being stolen and wasted. This isn't free money, it's our money.

Even the $17/Week Co-Share: A Portrait of Greed

Exclusively, it appears, courtesy WPRO.

Christopher Cardarelli earned $77,000 as a firefighter last year and collected a $37,000 pension as a retired police captain but now he says he is paying too much for health benefits. ...

Cardarelli asserts that the city must reimburse him the $17 dollars a week he has been paying toward his health care because his contract says that if a retired cop is rehired then his town-financed healthcare is suspended, however, it says that the city will reimburse the retiree for any health care payments they are required to make by their new employer.

In addition to the matter of Mr. Cardarelli's unwillingness to pay a healthcare co-share that most of us can only dream about (Paul & Al made him the subject this morning of their "This Is Why You Suck" segment), this also becomes an excellent opportunity to once again highlight the extreme generosity of Rhode Island's public pension benefits: prima facie, Mr. Cardarelli is not ready to retire, nor does he need a pension to survive: he currently works a nice public sector job for North Providence.

Why, then, was he, along with thousands of other public employees, state and local, permitted to begin collecting a pension long before retirement age? And how can the bill on Smith Hill just voted out of committee honestly be framed as adequately reforming the pension system if it leave largely untouched these exceedingly generous pensions?

Claiborne Pell Was a Fiscal Extremist, According to Today's Democrats -- He Supported a Balanced Budget Constitutional Amendment

In September, Rhode Island State Democratic Chairman Edwin Pacheco staked his party to an aggressive stand against adding a balanced budget amendment to the United States Constitution, characterizing such an amendment in an official press release as "extreme economic policy". But support for Federal spending-with-no-ending has not always been the singularly dominant position amongst Rhode Island's Democratic leaders that it is today. At a previous time when the Federal budget deficit had grown to unprecedented levels, at least one prominent RI Democrat gave his unambiguous support to a balanced budget constitutional amendment, in a year when it had a realistic chance of passage. That Democratic leader was United States Senator Claiborne Pell.

In 1982, Senator Pell voted against a balanced-budget amendment that passed the Senate by a vote of 69-31. (The amendment later failed to pass in the House).

By 1986, Senator Pell had changed his position and voted in favor of sending a balanced-budget amendment to the states for ratification. The amendment lost by a single vote, 66-34 (2/3 required for passage). The amendment that Senator Pell voted for -- and that the present chairman of the RI Democratic Party would presumably find "extreme" -- read...

SECTION 1. Total outlays of the United States for any fiscal year shall not exceed total receipts to the United States for that year, unless three-fifths of the whole number of both houses of Congress shall provide for a specific excess of outlays over receipts. The public debt of the United States shall not be increased to fund any excess of outlays over receipts for any fiscal year, unless three-fifths of the whole number of both houses of Congress shall provide, by law, for such an increase.

SECTION 2. Any bill to increase revenue shall become law only if approved by a majority of the whole number of both Houses of Congress by rollcall vote.

SECTION 3. Prior to each fiscal year, the President shall transmit to the Congress a proposed budget for the United States Government for that fiscal year in which total outlays are not greater than total receipts. The President may also recommend an alternative budget in which total outlays exceed total receipts, which shall be accompanied by a detailed explanation of the need for such excess.

SECTION 4. The Congress may waive the provisions of this article for any fiscal year in which a declaration of war is in effect.

SECTION 5. The Congress shall enforce and implement this article by appropriate legislation.

SECTION 6. This article shall take effect for the fiscal year 1991 or for the second fiscal year beginning after its ratification, whichever is later.

By 1994, Senator Pell had changed positions once again and voted against two separate versions of a balanced budget amendment offered that year. During the floor debate in 1994, the Senator explained how his thinking had evolved over the preceding decade. Here is an excerpt, from the C-SPAN archives...

The intensity of the debate on the balanced budget amendment--and to a degree my own reaction to it--varies in proportion to the magnitude of deficits in the Federal budget over the last 12 years...

[In 1986] we were 2 years into the second Reagan administration and deep into a period of institutional deadlock between an executive branch that would not agree to fund programs and a legislative branch that often was not disposed to cut them. The deficit that year had risen to $221 billion.

The Senate that year narrowly failed to approve a balanced budget amendment, notwithstanding the fact that many of us--myself included again--this time felt that the institutional deadlock was approaching such drastic proportions that a constitutional solution might be the only way out of our dilemma...

Then, in 1992, things began to change for the better....As a percentage of gross domestic product, the fiscal year 1995 deficit is projected at 2.5 percent, down from 3.5 percent for fiscal year 1994. And it is expected to stabilize at 2.3 percent for fiscal year 1996-99. This is a significant figure because it shows that the deficit is very small relative to overall economic activity and the economy thus has substantial capacity to absorb the effects of deficit spending, albeit at levels which for other reasons certainly must be reduced.

In 1994, Senator Pell believed that the projected lowering of annual deficits to 2.3% of GDP made a balanced budget amendment unnecessary. Today, deficits are much larger than 2.3% of GDP and are larger as a percentage of GDP than they were when Senator Pell voted to send a balanced budget amendment to the states. 1986 had been the 3rd year out of 4 that the Federal deficit exceeded 5% of GDP (and in the 4th of those years, it was 4.8%). 2012 will be the fourth consecutive year that the deficit exceeds 7% of GDP (though OMB does project that it will be down to 3.3% of GDP by 2016 -- if you believe that the economy is going to grow by 23% while the percentage of revenue collected in Federal taxes jumps from 15% to 19% between 2010 and 2016).

Senator Pell thought that "institutional deadlock" was a problem in government during part of his tenure in office. This, at least, is something in common with current Rhode Island Democrats. In August, Rhode Island First District Congressman David Cicilline sent out a fundraising letter explaining his vote to raise the Federal debt ceiling as a response to "partisan gridlock". The difference, of course, is that Senator Pell believed that institutional deadlock made it necessary to strengthen constraints on Federal spending, while Congressman Cicilline believes that partisan gridlock justifies autopilot spending increases and unrestrained Federal borrowing -- and contemporary Democratic leaders like Edwin Pacheco believe that the kind of serious consideration Claiborne Pell gave to balancing the Federal budget is "extreme".

Car Tax Evaluation Committee: Typical?

Warwick Car Tax Revolt leader Rob Cote has done a great service to the citizens of Warwick and the state by keeping the heat on our elected officials regarding the car tax. Further to that end, he decided to drop in on the annual Car Tax Evaluation Committee meeting, buried somewhere in the State House Administrative building. What he found was an embarrassment (h/t Dan Yorke Show).

Unfortunately, I suspect this is all-too typical of what goes on with other boards in our state government.

Governor Chafee May Push His Sales Tax Plan Again

Fresh from the taping of this week’s Newsmakers program for WPRI-TV (CBS 12), host Tim White tweets…

Chafee says he may resurrect his controversial sales tax plan next year. Newsmakers (with myself, Ted Nesi and Ian Donnis) will be online soon.

Car Tax Shame All Around

It's always appropriate to call for a greater sense of shame among Rhode Island's politicians, but Ed Achorn was a little too specific in his column, last week:

The politicians of Rhode Island would be ashamed of themselves, had they not lost the capacity for feeling shame long ago. Their determination to balance their enormous budgets, larded with stunning benefits for special interests, on the breaking backs of struggling working people is outrageous.

I write of the General Assembly's action in permitting cities and towns to hike property taxes on the most shabby motor vehicles. Now, some municipalities are hammering people who own anything valued at $500 or more (according to the municipalities' highly skewed definition).

The reality must be acknowledged that municipal governments didn't have to increase their revenue from the car tax. Other means exist for them to absorb losses in money that the state, in its mismanagement, is unable to provide. For one, lost revenue is among the exemptions that allow them to raise property taxes beyond the cap; going that route would have given residents a stronger sense and say in whether their hometowns raised taxes at all. More wisely, local governments could simply have cut back spending, even though it might mean reducing the scope of their activities. We can't forget that the General Assembly also gave cities and towns permission to reduce school budgets for a couple of years, temporarily disengaging the statutory ratchet that requires school spending to go in no direction but up.

Yes, state legislators ought to feel shame that the tools that they leave to municipalities to balance budgets are so limited. Taxing clunkers was the easiest and most visible means of compensating for losses in state aid, and the General Assembly should have taken the opportunity of hardship to tone down the demands that it makes on local governments, from minimum manning to basic education plan (BEP) requirements to the way in which labor contracts must be negotiated.

The real shame, however, belongs with the people of Rhode Island, who continue to accept government as it is. Apathetic or on the take, too many voters implicitly agree that this is the way things ought to be.

That's Why We Call the Tax "Progressive"

Steven Colucci, a public school psychologist (I'm pretty sure), had a letter in the August 12 Providence Journal raising a point that comes up from time to time:

[In a previously published letter, Keith Garrison] notes that the top 1 percent pay 37 percent of the total income taxes. Mr. Garrison makes a couple of egregious errors. In order to compare apples with apples, I would prefer to know what proportion of the income of this top 1 percent goes to taxes, compared with the rest of us ...

Secondly, he wrongly suggests that small businesses would be hurt by a tax increase and that jobs would be lost. He curiously leaves out that the tax increase is on personal income and is not a business tax.

I understand that using the word "egregious" can spark a little burst of pleasure, but one should be extremely careful with logic and assertions of fact when deploying it. For one thing, that Mr. Colucci "would prefer to know" one thing doesn't mean that citation of the other thing is an error. Moreover, surely somebody with the time to write and send a letter to the Projo also has the time to do some quick research.

If Colucci had done so, he might have paused long enough to remember that people talk about the progressiveness of various taxes, and that income tax is heavily weighted against the rich. That is, they naturally pay more of their income in income taxes. At least in 2007, taxpayers earning over $200,000 per year made 24% of Rhode Island's income but paid 40% of its total income taxes.

Perhaps he'd argue that other taxes ought to be considered as well, which is ground that I covered in 2008. There, he'd find that it's true that families with higher income pay a smaller percentage of their income in total state and local taxes, but that's because things like property and sales taxes aren't calculated on income, but on the value of the item purchased, and such taxes will take up a larger proportion of a smaller income.

The most regressive tax, in this regard, is the excise tax category (such as on cigarettes, gas, and alcohol). According to the table at the above link, the lowest income quintile payed 4.9% of its income in excise taxes, but the portion for the top 1% of earners was 0.3% of income. Put that in dollar figures, though, and you're comparing $411.60 for the lower category and $2,361 for the higher (and remember that we're comparing 20% of people with 1% of people). For sales taxes, the number is $268,80 versus $3,148.

One suspects that, for Colucci, nothing will be fair until people who've worked hard to have comfortable incomes are taxed such that nobody, regardless of merit, has any less disposable income.

As to the second paragraph that I quoted above, I'd suggest that Mr. Colucci ought to familiarize himself a little bit more with the methods of income taxes. For multiple categories of businesses (sole proprietor, S-Corp, and so on), business income appears as personal income. Unarmed with that knowledge leads Colucci to make his own egregious error.

Property Tax Rates Don't Matter

Reading this article, I thought it worth reminding everybody once again that, given the way local budgeting is done, property tax rates don't really matter:

After voting to take court action against Mayor Charles A. Lombardi's vetoes, the Town Council changed its tune Wednesday night and voted unanimously to set the tax rate for residential property at $24.15 per $1,000 of assessed value.

This was the same rate proposed by Lombardi. For his part, he rescinded his previous veto of the $23.35 tax rate voted by the Town Council, showing a measure of deference to the council’s authority as the town’s tax-setting authority.

The tax rates might matter if cities and towns assessed the value of the property in their towns, applied the tax rate to it, and then figured out how much money they have to run local government. That's not how it works. In practice, the government calculates how much it needs, typically based on projected increases from the previous year, divides that number by the total value of property in the town, and figures out what the rate turns out to be per $1,000 of value.

Assuming that everybody's property increases or decreases at roughly the same rate, the actual dollar amount that every household pays in taxes will increase by the same percentage that the town's budget increases. In other words, it's more of an ownership fee based on the portion of the town's value that the family owns.

One consequence of this method is that you can't really compare property taxes from town to town, because a town with lower property values will have higher tax rates. Another, more central, consequence is that the town has no real incentive to attract additional property owners or try to get homeowners to invest in their own homes.

Scoring with Low Taxes

Kevin Hassett pointed out an interesting finding (not online) in the June 20 National Review:

At issue is the "Beckham law" that was enacted on June 10, 2005. Spain, in an effort to lure high-priced athletes, artists, and executives, passed a law that allowed these individuals to reside in Spain and pay a low flat tax of just 24 percent. Soccer star David Beckham was one of the first to take advantage of the law, hence its name. ...

A new study published by the National Bureau of Economic Research suggests that the link between taxes and soccer performance is more than just a coincidence. Economists Henrik Kleven, Camille Landais, and Emmanuel Saez gathered data on club performance in the top leagues of 14 European countries going back to 1980, and explored the extent top which changes in tax rates explain player mobility, and the extent to which player mobility explained performance.

They found that countries that allow professional soccer players to keep more of their pay do better. More local stars stay, and more foreign stars immigrate.

As any sports fan might observe, the effect is diluted when the field is narrower — say with World Cup teams or American professional clubs. Part of the reason for the correlation of low taxes and good soccer players is that teams in higher-tax areas have to pay more in salary to be competitive as employers, which leaves less money to pay players farther down the lists.

What Goes Up... Taxes

The other day, I made reference to the possibility that having an economy calibrated to two-income households, rather than the one-income households that were once the norm, is a hindrance on entrepreneurial ventures. Yes, if one spouse's attempt to create a business fails, the other spouse's income remains, but in the current marketplace, both incomes are necessary.

Since the effective doubling of the workforce, the market has adjusted household expenses, especially big-ticket expenses like housing, to the new normal income level. In an interesting spin-off discussion, Todd Zywicki ntoes that leading the big-ticket inflation is taxation:

Here's the key problem in Caldwell's argument: note his list of increased expenses for household "big necessities: mortgages (up 76 percent), cars (up 52 percent), taxes (up 25 percent), and health insurance (up 74 percent)." The problem is that while it is an accurate representation for mortgages, cars, and health insurance, that the expenses increase by that percentage, it is not for taxes. For the other expenses it is the percentage increase in dollars spent on those expenses. For taxes, however, the 25% increase is actually the percentage increase in the percentage of income spent on taxes. So the 25% is not how many more dollars go to paying taxes, it represents the household’s change from paying 24% of its income in taxes to 33% of its income in taxes–a change of 25% in the percentage of income dedicated to taxes, not a change of 25% in spending on taxes. I swear I am not making this up: I have attached to the bottom of this post the full excerpt from this book where this is done. And, again, I have laid this out in considerable detail previously here.

What this means is that once taxes are converted to an apples-to-apples comparison–percentage change in dollars instead of percentage change in percentage–household spending on taxes actually increased 140%, not 25%. The entire two-income trap, therefore, is actually a two-income tax trap, as I noted in my Wall Street Journal commentary on this awhile back.

Zywicki overstates when he declares that taxes constitute the "entire two-income trap." Even if taxes were the only expense to increase at all as a percentage of income, that wouldn't change the fact that it now takes two incomes to cover expenses that used to take one. That said, conservatives certainly aren't averse to arguing that we need to shrink government in both its activities and its expense.

And the Winner of this Week’s James McLaughlin Award Is…

…United States Senator Jack Reed, for his comments to John E. Mulligan of the Projo on the subject of the “Amazon Tax”…

U.S. Sen. Jack Reed has signed on in support of legislation to require online retailers to collect state sales taxes on their merchandise…

Reed said the Amazon bill could get caught up in the next round of Capitol Hill’s deficit-reduction debate. Reed said he hears that the new tax-collection mechanism could incorrectly be interpreted as a new form of taxation by Republicans who oppose raising taxes.

History Will Begin to be Made this Week

This is very likely going to be a memorable week in the history of self-government and public finance.

In addition to the Federal debt-ceiling issue which needs to be resolved by Tuesday in order for the Federal government to be able to keep paying everything it owes without resorting to various less-than-scrupulous financial gimmicks, the receiver for Central Falls may make an announcement as early as tomorrow that he is filing for bankruptcy. As Philip Marcelo wrote in today's Projo...

The square-mile city would be entering uncharted waters as federal municipal bankruptcy has been rarely tested nationally.

But the most important thing to keep in mind is that nothing ends this week. The reckoning (to use Matt Allen's word) of the fiscal crisis created by the political and social changes of the past 45 to 80 years, depending upon if you want to place the beginning of the problem with the New Deal or the Great Society or somewhere in between, is just beginning and what our society will look like as a result, for better or for worse, will be decided more by the reaction to this week's decisions than by the decisions themselves.

Finally, one symptom visible in Central Falls of the problem that is nationwide is captured beautifully by the quote from freshman state Rep. James McLaughlin in the Projo's CF story...

"They’re going to file for bankruptcy," said state Rep. James N. McLaughlin, a Democrat who represents a portion of the city and is opposed to [filing for bankruptcy]. "All avenues have not been exhausted. It is a rush because they do not have any money."

The Senate Still Scamming

It would appear that the U.S. Senate is in need of some major upsets, the next election cycle:

The plan, released this week by the bipartisan "Gang of Six" senators, punts on many of the most difficult issues, leaving it to congressional committees to fill in the details later. But supporters say it provides a framework to simplify the tax code, making it easier for businesses and individuals to comply while eliminating incentives to game the system. ...

The plan would simplify the tax code by reducing the number of tax brackets from six to three, lowering the top rate from 35 percent to somewhere between 23 percent and 29 percent. That could provide a windfall for wealthy taxpayers because the 35 percent tax bracket currently applies to taxable income above $379,150.

To help pay for lower rates, the plan would reduce popular tax breaks for mortgage interest, health insurance, charitable giving and retirement savings. Other tax breaks would be spared, including the $1,000-per-child tax credit and the earned income tax credit, which helps the working poor stay out of poverty.

All told, the plan would amount to a $1.2 trillion tax increase over the next decade, which means that it's all just a political trick. Worse, it's a trick that would increase taxes on productive, charitable middle class families while decreasing them for the wealthy. (Although, the article hints that capital gains taxes might be in for an increase down the road.)

The Senators are hoping, no doubt, that they'll be able to confuse voters with talk about cutting taxes and simplifying the tax code. If that's the case, however, I think they're underestimating the extent to which Americans are now paying attention to such Rhode Islandish schemes.

If You Are Not Careful, You Can Eventually Hit Your Head on a Debt Ceiling

There are about a half-a-dozen things I could comment on, in reaction to the announcement by Borders Books today that it is going all-the-way out of business. For now, following on from Justin's post earlier today, I will simply note this passage from the Wall Street Journal story on the subject...

Borders filed for bankruptcy-court protection in February. It has since continued to bleed cash and has had trouble persuading publishers to ship merchandise to it on normal terms that allowed the chain to pay bills later, instead of right away.

Counterfactual alert: A Conservative Case for Raising Taxes?

Just throwing it out there. From Steven Hayward:

one problem with our current tax policy is that at the moment the American people as a whole are receiving a dollar of government for the price of only 60 cents. (I don’t say a “dollar’s worth of government,” but let’s leave that snark for another time.) Any time you can get a dollar of something at a 40 percent discount, you are going to demand more of it. My theory is simple: if the broad middle class of Americans are made to pay for all of the government they get, they may well start to demand less of it, quickly.

There’s corollary point to this. Back in the Reagan years, there was a vigorous internal debate about whether to resist tax increases because “starving the beast” would hold down spending. But evidence is now in: this strategy doesn’t work. {here's the source he cites-ed.}

Right now the anti-tax bias of the right has the effect of shifting costs onto future generations who do not vote in today’s elections, and enables liberals to defend against spending restraints very cheaply. Time to end the free ride....more to the point, the argument should be cast in terms of a creating pro-growth tax reform. Froma Harrop of the Providence Journal has a typically idiotic column out today saying Americans want higher taxes. It is not even worth the bother of debunking. There is one highly useable sentence in it: “Today, high-tax Sweden has only 7 percent unemployment, while ours is 9 percent. How come? Before the 2008 economic meltdown, Sweden prudently maintained a budget surplus equal to 3.6 percent of its economy.” Never mind that Sweden isn’t exactly putting its shoulder to the wheel in the fight against terrorists (or anything else), and just focus your mind on one fact: yes, it is a high tax country, but its corporate income tax rate is one-third lower than the U.S. rate (26% for Sweden; 39% for the U.S.). So, my opening bid is—yes. By all means let’s emulate Sweden’s tax rates, starting with a one-third cut in our corporate income tax rate, and a hike in middle class income tax rates. Deal? I didn’t think so.

Do Legislators Really Not Know How It Works?

So they've gone and passed the budget. Rhode Islanders should not find it encouraging, though, that the architects of public finances apparently think in this way, speaking about the new 7% tax on insurance awards:

Dion says the burden falls on the insurance company, not the consumer: "When you total your car or have your car stolen, you file a claim with your insurance company. Your insurance company would determine the value of your totaled or stolen car and issue you a check for that value plus the sales tax on that amount, which you can then use to purchase a replacement vehicle," he said.

"So if your totaled or stolen car was worth $10,000, ... under the proposed change, the insurance company would issue you a check for $10,700 to cover the value of the vehicle plus the sales tax and leave the insured whole."

Sounds to me as if the cost of an insurance award just went up for the company, which will just plug that number into its calculation of its premiums. As a rule of thumb — voters and consumers — you always pay.

For In-State Tuition, Show Us the Taxes

William Dimitri, of Johnston, makes an interesting suggestion regarding in-state tuition for illegal immigrants, in a Providence Journal letter that does not appear to be online:

On the one hand, those fortunate enough to earn in excess of $250,000 already pay a substantial amount of taxes, but that fact seems to escape the grasp of the ... proponents [wish to increase those taxes].

On the other hand, it is highly unlikely that those illegal immigrants whom Diaz, Pichardo and the other "immigrant advocates" want to benefit have ever paid income taxes.

How about requiring that those illegal immigrants provide copies of their tax returns for every year they have been in Rhode Island before granting them the privilege of paying in-state tuition rates (which would make the idea more palatable to those who do pay taxes and tuition, like me) and leave those who work legitimately and pay taxes alone and in peace.

Honestly, I don't know the statistics for illegal immigrants and income taxes, and even were such requirements included for in-state tuition, I'm can't say I'd be for it. How about requiring people to follow the proper procedures for entering and remaining in this country? Especially with in-state tuition, which amounts to government-subsidized higher education, following the rules for becoming a legal resident seems the least one can do.

What We Expect from Our Leaders

On last night's Matt Allen Show, Matt and I talked about expectations for the forthcoming budget, speeding tickets, and things on the blog. Stream by clicking here, or download it.

Seeming Wise, but Raising Taxes

For years, I've been arguing against transportation bonds on the grounds that such basic matters of infrastructure are the first expenses that our government ought to make. Instead, the political strategy becomes one in which elected officials and unelected bureaucrats spend as much money as they can on non-basic services and then return to taxpayers to fund critical projects like road and bridge repairs, often leveraging debt to delay the pain that such a strategy is sure to cause.

Well, the RI Senate is beginning to tackle the problem, but in a way that attempts to make the strategy more of a permanent fixture:

The Senate Commission on Sustainable Transportation Funding became the latest in a series of study groups to recommend highway tolls along with higher driving-related fees such as licensing and registration. ...

The commission also recommended that the state look into a VMT tax, for vehicle miles traveled. That would mean a fundamental change in the way driving is taxed. Now, motorists usually pay indirectly, through taxes and fees. A VMT tax would raise money by taxing actual miles driven. It remains unclear, however, how that would be done.

Sen. Louis DiPalma (D, Little Compton, Tiverton, Aquidneck Island) places cessation of debt as the first priority, which is good and necessary, but it's as part of an effort to add revenue sources. What the state government should be doing is starting its budget from zero, funding those things that give government the most justification to tax money out of the economy and then arguing for any additional expenditures and even tax/fee increases for everything else on the merits.

RIPEC's Chicken Acquiescence

Following on this Projo summary of this disappointing report from the Rhode Island Public Expenditures Council (RIPEC) isn't quite as pro-Chafee-tax as the headlines and the Chafeedom would have us believe, but there's far too much hedging in it.

With the exception of the new sales taxes proposed for business back-end purchases, RIPEC never quite spells out what aspects of the tax scheme it likes and doesn't. Instead, we get language like this:

The "Sales Tax Modernization Proposal" is projected to generate $164.9 million in additional revenue for the state in FY 2012 and would make fundamental changes to the state's sales tax system. As proposed, the plan would increase FY 2012 tax revenue from an estimated $2,380.3 million1 to $2,545.2 million, an overall increase of 6.9 percent (see chart 5). The sales tax itself would increase by approximately 20 percent. When total revenues generated through sales taxes – including the meals and beverage tax and hotel tax, which are collected by the state and remitted to the municipality in which they are collected – are considered, projected sales tax collections would total approximately $1,015 million. This level of collections would be greater than the amount of revenue generated through the personal income tax. Such a significant change should only be undertaken after careful evaluation of the pros and cons of the proposal, particularly as they relate to the state's tenuous economic recovery.

The conclusion toward which RIPEC mildly implies — and ought to have made explicit — is that no tax increase should be included in this "modernization" effort. If the state government really wants to boost the local economy, it should lower and broaden the sales tax rate in such a way as to effect an overall tax cut.

Nobody on the People's Side

Governor Donald Carcieri was limited in what he could accomplish, given the degree to which the Rhode Island Constitution favors the legislature, but at least he offered a different view. This tidbit, from the end of the article to which I linked earlier, is apt to give a taxpayer the hopeless sense that there's nobody on his or her side:

Asked at the time if the entire tax package was dead, House Finance Committee Chairman Helio Melo said that was not how he interpreted Fox's statement.

More recently, Melo acknowledged the lawmakers were exploring many options, including: how much the state might raise by extending the state's narrow sales tax to items already taxable in Massachusetts, and lowering the 7-percent rate by some amount, though not as much as the 6 percent that Chafee proposed.

Increasing taxes in the current national economy, with Rhode Island and Rhode Islanders experiencing pack-leading pain, should be a non-starter. I mean:

"It seems that almost every bit of data about the health of the US economy has disappointed expectations recently," said [M&G Investments fund manager Mike] Riddell, in a note sent to CNBC on Wednesday.

And:

"Interest rates are amazingly low and that, thanks to Ben Bernanke, is driving everything," [market strategist Peter]Yastrow said. "We’re on the verge of a great, great depression. The [Federal Reserve] knows it.

Meanwhile, indications are that the current crew running Rhode Island are exceedingly unlikely to arrest the state's death spiral.

To Whom Chafee Would Give a Refund

Some last-minute budget amendments that Governor Lincoln Chafee has submitted to the General Assembly are telling with regard to his attitude and priorities:

In another budget amendment, [Budget Officer Thomas] Mullaney announced a "medical-benefit holiday" for state workers, that will spare them, for one pay period, of having to contribute to their health insurance benefits. ...

The reason: the state's numbers crunchers said they initially overestimated by $3.086 million how much the state is likely to need to cover the cost of the self-insured benefits.

So, in the governor's view, when the state overestimates the cost of employee benefits and budgets accordingly, it should in some way transfer the excess to employees. That's certainly defensible, and it might even be advisable, but then we move on a few paragraphs:

Asked how Chafee intends to pay for the 25 new DMV staffers and other additions to his original spending plan, spokesman Michael Trainor pointed to the recent upswing in revenue collections in the months since Chafee laid out his $7.66-billion budget for the fiscal year that begins on July 1. His new proposal stands at $7,753,482,420.

State budget analysts now believe revenue will run $53.8 million ahead of earlier estimates for the year that ends June 30, and $65.9 million ahead for the year that begins July 1.

That is, when the government collects more in taxes and fees than it expects, in the governor's view, it should spend every penny, mostly in ways that will build in the expenses for future budgets to, for example, pay for hired employees. As writer Kathrine Gregg goes on to note, the total increase in revenue projections is $113.3 million, which "could be used to offset the projected $331-million deficit next year."

Not if this governor has his way.

A Simple Lesson in the Numbers

Michael Barone looked at employment and population numbers and came to a simple conclusion:

The lesson of the previous decade seems clear: if you take a previously prosperous and creative state and subject it to high taxes and intrusive regulations, it loses 5% of its private sector jobs; if you take a previously somewhat less prosperous and creative state and govern it with low taxes and light regulation, it gains 9% more jobs, even as the nation’s economy is suffering.

He's referring to California and Texas, respectively, but the lesson carries to other states, as well. That's why Rhode Island will never rise to the level at which its natural advantages ought to place it unless elected officials can find the wherewithal to reduce tax burdens, eliminate mandates (both on lower-tier governments and on the private sector), and ease the reams of regulations under which we live.

Rhode Island ought to be the glimmering jewel of New England; instead, it's the armpit. Incremental changes aren't going to fix things. Tax hikes certainly won't.

No Place Screws Up the Concept of Fiscal Responsibility Quite Like Rhode Island Does

The bill being heard today by the House Finance Committee that would give municipal bondholders a "first lien" on local government treasuries (H5376), introduced on behalf of the Rhode Island Department of Revenue and already passed by the Senate Finance committee (S0614), should not be passed into law. Peder Schaefer of the Rhode Island League of Cities and Towns, which has taken a position against the bill, relays a key rationale being advanced by its supporters, as offered at the Senate Finance hearing: "A bond lawyer retained by the Department of Revenue testified that the real reason for the bill was in the event of a Federal Bankruptcy in Central Falls. She testified that if this were to occur, bond holders would not have a first lien on city revenues. She believes that the language of the act would improve the credit quality of all municipal bonds in the state".

In other words, the Chafee administration Department of Revenue believes that a community should not be allowed to drastically restructure its finances to deal with a financial meltdown until the bondholders are taken care of. The bondholders come first, and then everyone else can fight over what's left.

But even those who don't believe that full-blown bankruptcy for Central Falls or any other Rhode Island community is likely should be troubled by this bill.

1. Allowing "first liens" on general tax-revenue does damage to the underpinnings of democratic governance. Tax revenue is taken from the income and/or wealth of taxpayers; revenue doesn't magically fall out of the sky, despite what some government officials might believe. To create a bondholder lien on general tax revenue is to create a bondholder lien on taxpayers, i.e. to grant one group of people long-term, legally enforceable claims on the incomes and wealth of another. This is less compatible with modern than with medieval concepts of government and property rights, and I don't think there's any case to be made that we will do any better than our ancestors did under a system where regular citizens can find a portion of their incomes automatically claimed by a class of people who assert their superior position in the order of things.

2. Consider possibile outcomes, short of Federal bankruptcy, in the case of Central Falls. Section 45-9 of RI law (already in place) gives a receiver the power to issue bonds on behalf of his municipality including the power to use them to fund a deficit or to fund pension obligations. (Regular municipal governments are barred from issuing bonds to cover a deficit; the current bill reinforces that a receiver is immune from this limitation). The receiver cannot break collectively bargained contracts, so union benefits are locked in. And if this bill is passed, bond-holding financiers will be locked in too -- which means that it's the people in-between who will absorb the entire burden of government's inability to rationally finance itself, as everyone else will have to be paid first, before regular citizens get anything from government. Except the bill, of course.

3. I know there is a group of people who believe that financial efficiency is the primary issue that needs to be addressed by government, and who aren't much concerned with the undemocratic system being installed for dealing with Rhode Island's financial mess (I think there may be more than a few of these folks in the Chafee administration). But even those who believe in nothing but the brutal efficiency of markets should be troubled by the imbalance created by this bill. If government writes into law that bondholders have a direct legal claim to money in the public treasury, then there is little to no risk of them not receiving their scheduled payments, and every bond covered by the law should be given the highest possible rating with lowest possible interest. Financiers who want to assert a legal claim over a portion of the tax levy and a right to take money through legal compulsion are not assuming true market risks, and should be paid accordingly.

In a special report put out last November, the Fitch Ratings service concurred with the idea that "first lien" bonds involve very limited risk, because people are required to pay whatever amount government demands of them...

Question: Given the strained finances of most state and local governments, and the likelihood of continued difficult times to come, why do Fitch’s ratings suggest confidence in the ability of most to meet their debt?

Answer:...Other commonly issued municipal bonds are secured by a first lien on sales or income taxes, where there is little if any legal discretion for the taxpayer to choose not to remit the taxes owed to the government.

Once upon time, in the Western tradition of democracy and self-government, it was understood that government's ability to compel people to surrender a portion of the fruits of their labor was a critical reason for limiting government claims on the property of the citizenry and to err on the side of the taxpayer. Rhode Island is sadly leading the way in eroding this tradition, asserting instead that government power to compel payment of taxes is a valid reason for allowing groups of people favored by the political class to make near-permanent claims on the livelihoods of average taxpayers.

Not Still, but Still, 6 Percent

Barrie Shore, of Providence, is right to call the Providence Journal out on its inaccurate reference to Rhode Island taxes:

The Journal has perpetuated the myth that Rhode Island higher-income taxpayers are enjoying a reduction in the top rate, to 5.99 percent from 9.90 percent. The truth is that as the top rate has shrunk from 9.90 percent to 5.99 percent, the flat tax at 6 percent has disappeared. That means that the lowering of the tax rate is illusionary. The 6 percent effective tax rate is still 6 percent. Then the Journal and politicians have congratulated themselves on a lowering of the tax rate, which did not occur.

It's actually worse than that, because the flat tax had been sc heduled to drop to 5.5% this year, so judged in terms of what the tax rate would have been without action, the General Assembly and Governor Carcieri actually increased the top effective rate.

Such are the complicated schemes of government that an increase can be proclaimed a decrease.

Commercial Property Tax Levies and the Non-Profit "Problem"

Here is the first of several charts I will present regarding local taxation in Rhode Island. The data on the charts is based on information submitted to the Rhode Island Division of Municipal Finance for taxes payable in the 2009-2010 fiscal year; the Division of Municipal Finance provided me with the "Assessor's Statement of Assessed Value and Tax Levy", and the "Classification of Tax Roll" documents for each RI city and town.

This chart considers at an oft-neglected distinction here in Rhode Island, the commercial/industrial property tax as separated from the residential property tax collected by each Rhode Island community. This information is needed to begin to answer the question of whether non-profit properties are creating a burden on the communities they reside in.

Before going on, I will make one technical note. Assessment and levy figures are not reported to the Municipal Affairs department by the cities and towns in a uniform fashion. All RI municipalities use the same property classification structure, but the reported totals indicate some variation in what is counted as "residential" and what is counted as "commercial or "industrial" from community to community, for the purposes of calculating the levy.

The charts below the fold show official "residential" and "commercial" property tax levy payable for 2009-2010 reported by each municipality, and then a set of estimates I made based on individual tax-code data to try to group the same set of properties as "residential" or "commercial" in each city or town (including counting "mixed use" properties as residential even though the state officials classifies them as commercial). Adjusted figures are used in this and the related posts. If anyone feels that their community is being slighted, send me an email, and I'll explain the adjustment.

Now, back to the substance...

Bristol, home of Roger Williams University, is relatively low in the amount of commercial property tax it has to use per-resident, but other private college towns (Providence, Newport, Smithfield) are near the top of the list in terms of per-resident commercial and industrial property tax revenue collected.

You can always make the argument that something not being taxed means that there is another source of money out there to squeeze more more more out of, but there does not appear to be a strong statewide case that non-profits are overly depressing the amount of commercial and industrial property tax dollars being collected by their communities (unless, of course, you are using the progressive "logic" that someone not holding the #1 spot on a taxation list proves that taxes must be made higher).

In the end, if taxing non-profits is the best solution that a financially-strapped community is able to come up with for solving its fiscal woes, it is highly likely that the new revenue will quickly be absorbed into the same poor budgeting practices that created the original problem, and that a new budget hole will soon reappear. No matter how many "new" sources of revenue are added, there is not enough revenue in the world to sustain faster-than-inflation growth forever.

Finally, the results also suggest, much to the chagrin of the pack-everyone-into-cities land-use planning advocates, that strip-mall/big box development (Warwick, Middletown) seems to be very lucrative in terms of commercial tax revenue.

Extra Revenue Has to Come from Somewhere

Maybe the economy is improving in a way that folks like me don't feel. Maybe inflation is tied into the mix — somehow yielding state tax revenue without its actually meaning that the economy is improving. But when I read news like this, I can't help but wonder whether last year's ostensibly revenue-neutral income tax change is responsible, and in a way that bodes ill for the future:

A separate report on revenue collections through the first 10 months of the fiscal year, also released Monday, provided further evidence of an improving economy, with revenues running $76.9 million ahead of projections through April 30. Personal income-tax collections were up $62.1 million, or 7.8 percent, and other sources that were up included taxes paid by insurance companies, taxes on cigarettes and fees collected by state departments.

Accountants and employers are over-withholding income taxes, this year, to make sure their clients and employees are covered when the end of the tax year rolls around. That could mean that increased revenue, now, will translate into a whack at the budget at the tail end of fiscal '12.

Of course, the tax reform also shifted the burden toward working middle-class stiffs, so it could be that "revenue neutral" is turning out to mean an effective tax increase. Whatever the case, I'm with Gary Sasse:

"There is no fiscal justification for the governor’s sales-tax proposal," he said. "Fiscal conditions have changed."

The Insanity of A Mileage Tax

... has been set aside. But Anthony Watts over at Watts Up With That ominously predicts that this is just a postponement by the Obama administration and not a cancellation.

Today at 10:15AM EST, the story was updated, and now the White House says this:

“This is not an administration proposal,” White House spokeswoman Jennifer Psaki said. “This is not a bill supported by the administration. This was an early working draft proposal that was never formally circulated within the administration, does not taken into account the advice of the president’s senior advisers, economic team or Cabinet officials, and does not represent the views of the president.”

Translation:

…we are shelving the idea until after the 2012 election.

But 2013 is not that far away, especially in the minds of politicians who have lit on a particularly senseless and horrible way to stake a claim on yet more of our money. Accordingly, I have a question. (Everyone is welcome to chime in with theirs.)

Would this law be applied with the integrity and equality of health care reform? In other words, if a mileage tax law is implemented, how long before we hit the per capita equivalent of over a thousand exemptions? At which point, of course, principle has been left far behind and replaced with a favoritism-based political sham that turns easily into an ad at re-election time. ["We passed health care reform!!! (Without inconveniencing our supporters ...)"]

Comparative Budgets

I don't know Providence finances well enough to quibble with Mayor Angel Tavares's budget proposal, but in emphasis and presentation it stands in stark contrast to Governor Lincoln Chafee. Tavares led with controversial and concrete initiatives for spending reduction, while Chafee led with a massive tax increase. Maybe they'll get to the same place — if the unions and the General Assembly refuse to go along with Tavares's plan, for one possibility — but I doubt it.

The mayor's budget contrasts with others in this respect:

His budget includes raising the tax levy by 5.25 percent—one percent more than what is currently allowed by state law.

That's being touted as a major "sharing of the pain," but from the perspective of Tiverton, it's less than the average annual tax increase over the past decade. It puts things in perspective for me that a city on the brink of catastrophe considers an extreme measure to be less than our business as usual.

I guess those who've run the government, in Tiverton, haven't been as keen on "sharing the pain" as inflicting it.

Where One Percent Becomes Two in the Governor's Tax Increase Plan

On the WPRO Morning News this morning, Lisa Blais from the Rhode Island Tea Party pointed out an aspect of Governor Lincoln Chafee's sales-tax increase plan that so-far has been largely overlooked -- the Governor's budget raises the additional tax in Rhode Island on meals and on hotel rooms, above the regular sales tax, from 1% to 2%. Following the state legislature's conventon, the blue text in the exceprts below signifies proposed additions to existing law...

44-18-18.1. Local meals and beverage tax. -- (a) There is hereby levied and imposed, upon every purchaser of a meal and/or beverage, in addition to all other taxes and fees now imposed by law, a local meals and beverage tax upon each and every meal and/or beverage sold within the state of Rhode Island in or from an eating and/or drinking establishment, whether prepared in the eating and/or drinking establishment or not and whether consumed at the premises or not, at a rate of one percent of the gross receipts; provided, further, that for the period commencing July 1, 2011, the rate is two percent (2%) of gross receipts...

44-18-36.1. Hotel tax. -- (a) There is imposed a hotel tax of five percent (5%) upon the total consideration charged for occupancy of any space furnished by any hotel in this state. The hotel tax is in addition to any sales tax imposed...

(b) There is hereby levied and imposed, upon the total consideration charged foroccupancy of any space furnished by any hotel in this state, in addition to all other taxes and fees now imposed by law, a local hotel tax at a rate of one percent (1.0%), provided, however, for the period commencing July 1, 2011, the rate is two percent (2%)...

Time to Stop Being an Ostrich

When Ernst & Young, one of the Big 4 professional services firms, releases a study (PDF) that says Rhode Island is one of the worst in the nation for tax competitiveness when it comes to attracting new business, you'd better listen.

This study provides a state-by-state comparison of the tax liabilities that new investments in selected industries or types of economic activities would incur in each state, taking into consideration state and local statutory tax provisions and the financial and economic characteristics of the new investments. The analysis focuses on capital investments in industries that have location choices, such as factories or headquarters, rather than those that are tied to a specific geography, such as retailers or hotels. The estimated tax burdens on selected investments are combined to provide an overall measure of the business tax competitiveness of each state.

The usual advocates can debate and reframe and reshape the debate all you want in an effort to raise taxes on the rich and "big business". No matter how persuasive you may be, businesses don't care. They aren't coming here: E & Y have provided a first filter for them. And the businesses that are here may take a second look. They'll leave. Because business people listen to someone like Ernst & Young. Will Rhode Island?

Did you know "the rich" mean a cop married to a teacher?

Veronique de Rugy helps clarify income redistribution:

Here are some other data points that I find interesting:

Of the top 1 percent of income earners, only 23 percent are millionaires.

A household income above $380,000 puts you in the top 1 percent of income earners.

Of the top 10 percent of income earners, only 2 percent are millionaires.

A household income above $114,000 puts you in the top 10 percent of income earners. That means that a cop making $60K married to a teacher making $60K make it into the top 10 percent. (emphasis added)

Chafee Wants to Bite Charities and the American Flag

The common wisdom is that Governor Lincoln Chafee's sales-tax scheme is dead — or rather, that at least the 1% section is. Still, something in this op-ed by a couple of YMCA officials inspired me to skim that section of the budget:

Article 26 of the budget would also remove the tax exemption for all charitable organizations and impose a 1 percent sales tax on their purchases. Together, these proposals would seriously hinder the ability of our Ys to continue to employ 2,100 staffers, serve 140,000 Rhode Islanders and provide $7 million in free, subsidized and sponsored programs every year.

Sure enough, the relevant language attempts to sink the taxman's teeth into charitable activities:

(8) Charitable, educational, and religious organizations. (i) The sale to charitable, educational and religious organizations as defined in this section and the storage use and other consumption of tangible personal property, specified digital property, and/or services as defined in § 44-18-7.3. This shall also include hospitals not operated for profit, “educational institutions” as defined in § 44-18-30(17) not operated for a profit, churches, orphanages, and other institutions or organizations operated exclusively for religious or charitable purposes, interest free loan associations not operated for profit, nonprof it organized sporting leagues and associations and bands for boys and girls under the age of nineteen (19) years, the following vocational student organizations that are state chapters of national vocational students organizations: Distributive Education Clubs of America, (DECA); Future Business Leaders of America, phi beta lambda (FBLA/PBL); Future Farmers of America (FFA); Future Homemakers of America/Home Economics Related Occupations (FHA/HERD); and Vocational Industrial Clubs of America (VICA), organized nonprofit golden age and senior citizens clubs for men and women, and parent teacher associations. Sales made to the United States government, this state and its political subdivisions are exempt from this section.

If you haven't yet done so, it's worth your time to read through the tax-increasing portion of the budget; the effect is quite startling. For example, it's one thing to read the word "flags" on a list of newly taxed items; it's another to come across this:

(21) Flags. The sale, storage, consumption, or other use in this state of United States, Rhode Island or POW-MIA flags.

The governor wants to tax you on your American flag... which leads me back to my suspicion that this 1% section is mostly political. It links the budget to Chafee's campaign promises, but it's so egregious, so magnificently objectionable, that the outrage was sure to give the General Assembly cover not only to go against the governor's plan (in the eyes of his puppeteers), but also to move forward with the new 6% tax on other new items, including services, perhaps with some of the less objectionable 1% items (involving constituencies that have less political sway) added to the list.

The Logic of Taking Your Money

I don't want to let this one go without highlighting:

Just two people testified in favor of the governor's plan, out of more than 96 who signed up to speak.

The other was Kate Brock, of the pro-union advocacy group Ocean State Action, who questioned why the state taxes a lawnmower but not landscapers, or why it taxes nail polish but not a nail salon. "It is illogical to tax a good but not a service that results in the same outcome."

One suspects that Ms. Brock might find it further illogical to tax the landscapers but not the air that they breathe. After all, taxation is the singular purpose of government, right?

Do you think it'd do any good to point out to Brock the landscapers are taxed via their income? You know, as workers and individuals rather than as purchasable goods.

"By-Passing" the Qualifications for RI Social Service Benefits?

First of all, kudos to Terry Gorman of RIILE for obtaining the information contained in this post under Rhode Island's Access to Public Records law ("RI Gen Law 38-2-1 et seq" for other curious folks).

When someone goes to the State of Rhode Island and applies for social services, one of the first pieces of information for which they are asked is a social security number. However, there are instances when the applicant/recipient may not have one (more on that in a sec). When that happens, the staff at the Dept of Human Services is permitted to enter a "666" by-pass number - a nine digit number that starts with 666.

Know how many people are receiving benefits under a 666 by-pass number?

3,388.

Now, per the attorney for the Department of Human Services, here's who might need a by-pass number:

newborns, citizens or legal permanent residents in the process of obtaining a copy of their Social Security cards and foster care children

However, all four of these instances would be very temporary situations; the social security number/card is obtained and the correct number is then plugged in, replacing the 666 by-pass number.

Are we to believe that there is a steady new batch of 3,300 applicants continuously coming into the system who need to use the by-pass number while waiting for a social security number or a copy of their card to arrive? What is the follow-up procedure prescribed by the Dept of Human Services? More specifically, how long have the cases represented by each of those 3,388 numbers actively been receiving benefits? Weeks, while the SS card is obtained? Or years, because no one from the state asked them for their card after a reasonable amount of time had lapsed?

Or is it possible that the by-pass number, purportedly for babies and foster care children (and how could you argue with that purpose, you hard-hearted person???), is being used to distribute social service benefits to adults who do not qualify because they simply do not have a social security number and do not dare to apply for one because they migrated here illegally?

There is a pretty straightforward solution to this: everyone gets re-qualified and, in the process, goes through e-verify. We are told repeatedly by advocates of illegal immigration that "undocumented immigrants" do not qualify for social service benefits. So there could be no objection to re-certification. In fact, better oversight (of Medicaid, at least) was exactly the recommendation of the Acting Auditor General Dennis E. Hoyle Friday.

The auditors said the state needs to improve oversight for processing Medicaid claims, determining eligibility, and disbursement of other program benefits, among other recommendations.

Could the re-certification process cost more in increased staffing? Maybe. Here's a suggestion: modernize (at least to the 20th century; ya don't want to move too fast on these matters) the state's completely assinine boiler laws and move the FTE's from the boiler inspection division over to human services. The increased taxes needed to fund unqualified social service benefits are a far greater threat to the well-being of the state than the danger posed by modern, forty four gallon hot water boilers.

ADDENDUM

Michael Morse checks in to say that the hot water heater which he and his wife harbor at their small business, and which was subjected to a state inspection, is all of four gallons. In fact, the pertinent Rhode Island General Law, 28-25, "Boiler Inspection and Pressure Vessels", does not specify a minimum size or vintage that shall fall under the scope of the inspectors. Accordingly, in the eyes of the state, no boiler is too small or too new to escape inspection.

Do You Trust Me?

Speaker Fox and the various members of the Democratic leadership say the Chafee plan is dead.....Right?

“I’m not going to swear on any Bible about revenue enhancements at this point,” Fox said. “Before we go to the taxpayers and say we need to increase your taxes, we need to build some credibility with them to say that we have turned over every stone, every nickel and dime.”

“We’re still looking at a lot of things,” said House Finance Committee Chairman Helio Melo, D-East Providence. “The speaker did mention that he had major concerns with some of those 1-percent items. But I did not get the impression that he’s taken all of the sales tax off the table.”

Is it over?
It feels over
Don't you trust me?
No I don't

The Consistent(ly bad) Governor

Before the news cycle moves on, I'd like to highlight the following, from Philip Marcelo's story on the tax-increase dispute:

One floor up from where business leaders gathered, in a room adjacent to his office, the governor repeated his challenge to detractors: provide an alternative solution, and be specific. ...

Chafee rejected business leaders’ arguments that the tax plan would hurt job creation. "Show me the evidence," he said.

The Chafee administration's attitude is entirely in keeping with the theme that inspired Anchor Rising's very first "Chafeedom" post. You'll recall that, soon after his election, Chafee evinced a pattern of declining to meet with advocates who disagreed with him on their particular issues. Supposedly, he'd already conducted all the meetings he needed and didn't think any more would be constructive. The ban on participation in and denunciation of talk radio soon followed.

Now, those who oppose his tax-increasing ways are called upon to show him evidence and propose solutions that he'll find acceptable. Only, one would be entirely rational to suppose that acceptability is a false hurdle, impossible to clear.

Mixing in the fact that "his administration could not produce an analysis on the potential impact to businesses," it's clear that this guy really doesn't care for discussion and open discourse, as he claims. That's just an illusion (fooling, most of all, the governor himself) accomplished by always insisting that the other side has to do more while one's own view is correct by assumption.

Spending reductions in the tax code

I'm not the first or only one to note it, but it's worth mentioning around here that President Obama attempted to redefine a tax increase in his speech yesterday as a "spending reduction in the tax code".

The president also called for undoing the Bush tax cuts for upper-income taxpayers, and for canceling other tax cuts many of them receive such as the mortgage interest deduction — items that instead of labeling “tax increases” he called “spending reductions in the tax code.”

*Progressives, Liberals, Democrats - take your pick, I don't know what the preferred appellation is anymore.

Sales Tax "Modernization" Gaffed: Gordon Speaks; Gov Backs Away; All Eyes Turn Keenly to the G.A.

The Pawtucket Times' Jim Baron reports.

Gov. Lincoln Chafee’s plan to radically overhaul the state’s sales tax structure is effectively dead.

After more than six hours of nearly unanimous testimony denouncing Chafee’s proposal to lower the state sales tax from 7 to 6 percent and broaden it to a vast array of goods and services that are now exempt, House Speaker Gordon Fox had heard enough.

Fox issued a written statement shortly after the finance committee adjourned saying “Governor Chafee's proposed multi-tiered sales tax approach is unacceptable … After speaking with a majority of House members, we will not support the current proposal.”

“The House will not pass the budget in its current form,” the Speaker announced. “We will instead develop alternatives to this proposal and will continue to work with the Governor to amend his budget submission.”

And, down the hall,

Hours later, Chafee apparently ran up the white flag. Rather than mounting a fight to save his proposal, the governor’s office issued a terse statement that said, “I look forward to working with Chairman Melo and Speaker Fox to advance an honest, responsible budget that fixes our chronic structural deficits and puts Rhode Island on a path to prosperity."

Taxing the Rich won't get you there

One of Megan Mcardle's readers did the math on "taxing the rich" and how it would "help" with the budget:

[T]otal taxable income in 2008 was $5,488 billion. Taxable income over $100,000 was $1,582 billion, over $200,000 was $1,185 billion, over $500,000 was $820 billion, over $1 million was $616 billion, over $2 million was $460 billion, over $5 million was $302 billion, and over $10 million was $212 billion. Effective tax rates as a percentage of taxable income seem to top out around 27%.

You can estimate the effects of various proposals in the best case, which is that each percentage point increase in the marginal rate translates to an equal increase in the effective rate. Going back to 2000 ("Clinton era") marginal rates on income over $200,000, let's call it a 5 percentage point increase in the marginal rate, would therefore yield $59 billion on a static basis. Going from there to a 45% rate on incomes over $1 million (another 5 percentage point increase) yields an additional $31 billion. Or, instead, on top of 2000 rates over $200,000, 50%/60%/70% on $500,000/$5 million/$10 million? An extra $133 billion, or nearly 1% of GDP. That's not accounting for the further middle class tax cuts that are usually proposed along with these "millionaires' taxes."

Now, compare this to deficits of $1,413 billion in 2009 and $1,293 billion in 2010, and using optimistic White House estimates, $1,645 billion in 2011 $1,101 billion in 2012, $768 billion in 2013, and continuing at over $600 billion after.

Alternatively, you might also notice that while taxable income in 2008 was $5,488 billion, adjusted gross income on all returns was $7,583 billion on taxable returns only (with an additional $680 billion on untaxable returns), which means that $2,095 billion isn't even in the tax base. $592 billion of that difference is exemptions, which are not tax expenditures, and $1,512 billion is deductions, which are mostly tax expenditures.

Chafee Assumes New Tax Plan is a Go

Maybe the Governor knows it's a done deal?

Governor Chafee’s proposed sales-tax changes have yet to be approved by the General Assembly, but plans are already under way to roll out the program, according to state officials.

State Department of Revenue officials testifying before the House Finance Committee this week said that the department has already begun the work of drafting regulations and notices and assembling public outreach materials to explain the changes to taxpayers and businesses.

They say the estimated cost for implementing the tax would be $126,687 in the current fiscal year and about $1.5 million in fiscal year 2012, and would require the addition of 21 new state employees to administer the tax.

[Melio] would not commit to the Assembly hitting the administration’s hoped-for June 1 approval date. He also voiced concern that the administration was assuming about $165 million in new revenue from the sales tax, based on a July 1 implementation date.

“We are trying to be realistic here, and I hope they are, too. My concern is when a governor puts in 12 months of revenue. My question is, is that going to be reality?” he said. “Before any decision is made, we need to have an opportunity to hear from the general public and really vent this out. I don’t want to be rushed, or put under the gun.”

Finding a Way to Build the Tax Wall

Rhode Island's aristocracy chose to believe in their own power to impose taxes rather than the power of economic incentives, and some don't like the result:

State Rep. Raymond Gallison, D-Bristol, says local businesses are losing revenue that could help the state's financial situation, while the state itself has not generated any new revenue from the law, according to the Chafee administration.

Large online retailers such as Amazon.com and Overstock.com cut ties with local companies and individuals immediately in response to the state law. In effect, the companies absolved themselves of the responsibility of collecting the Rhode Island sales tax, but they also denied local affiliated businesses vital revenue, he says.

Of course, the preferred solution is to turn to state government's big brother to help with the bullying:

Governor Chafee, state Senate President M. Teresa Paiva Weed and House Speaker Gordon D. Fox are urging the state's congressional delegation to pursue national legislation that would require online retailers and other remote sellers to collect state sales taxes.

You'd think they'd learn that increasing taxes is increasing taxes, and consumers and the economy ultimately pay the price. eTailers aren't forcing their sales upon Rhode Islanders, and there are reasons Rhode Islanders turn to them and are willing to delay their gratification to buy goods online.

Elected officials should devote their energy to helping brick-and-mortar companies counteract those reasons rather than seeking to build economic barriers in everybody's way.

The Government Way: Doing Less with More!

Marc and Matt discussed the trend of government's tendency, over time, to do less with more on last night's Matt Allen Show. Stream by clicking here, or download it.

Where's the Money Supposed to Come From?

On Monday night, the Tiverton Town Council finally let the ax swing on a new trash collection system that will at least double the cost of curb-side pickup for residents. (The metaphor is meant to indicate an executioner, not a lumberjack.)

The Tiverton Town Council approved a contract on Monday night to begin a trash metering program on May 16. Town officials state they will notify the more than 7,000 residents who use Tiverton’s trash service that they [must] purchase and use special bags for the pay-as-you-throw program, or else their roadside rubbish will not be taken a few weeks after that date.

Yes, prior councils have not adequately prepared the town for the expense of closing the dump in a few years. Yes, it's only a hundred, or a couple hundred, dollars more in expense per year. Yes, provisions have to be made. But this sort of fiscal responsibility is real easy for folks whose oil tanks don't dry up on Christmas Day, as mine did. For the rest of us, where is this money supposed to come from?

Inasmuch as a some hundreds of dollars per year are already collected, per household, to pay for garbage pickup via property taxes, this is not truly a pay-for-use reform. We cannot opt out of 50% or so of the cost. What remains is not sufficient for us to make other arrangements.

Moreover, this new fee structure is essentially a 2-4% tax increase added to what is sure to be a 4-5% increase in regular property taxes, which comes on top of last year's 7-8% increase. To my knowledge, no public contract is going down in cost; no departments are seeing their budgets reduced, and yet homeowners are presumed capable of tightening their belts ever more. If my experience is any indication, many residents have seen their income stagnate or even decrease over the past few years; many have been unemployed.

Where's the money supposed to come from? Guess we'll just notch our quality of life down accordingly.

Lamenting Taxes While Endorsing Taxers

The Providence Journal editorial board is right, of course, to speak out against Governor Chafee's proposed expansion of sales taxes:

This is not a matter of greed; for many businesses, it is a question of survival. Small businesses are the job engines of any economy, and when they are wiped out, jobs disappear. Rhode Island's years of suffering one of America's worst unemployment rates should have taught that lesson. ...

Taxing manufacturing machinery and equipment, which Mr. Chafee wants to do, seems especially shortsighted --- which is why 33 states, including Rhode Island, currently do not do it, Mr. Sasse notes. Encouraging productivity and innovation ultimately pays off in more jobs and higher tax revenues.

I convey the thought only half seriously, but I did wonder whether the Projo should make a habit of mentioning — disclosing, if you will — that its product will face a new tax, as well.

More broadly, the editorial is an excellent example of the paper's tendency to treat issues as if they can be constructed to generate the perfect political regime (from the writers' perspective). That is, the Providence Journal is an establishment entity, in Rhode Island, and its endorsements and policy advocacy have helped to bring Rhode Island to its current circumstances.

Hopefully those who are coming to see the folly of the Chafee Way will follow the logic back to other aspects of RI governance and politics that preceded his election.

The Macro View of Government Growth in Rhode Island

While waiting to go on the air on this evening's Matt Allen show on WPRO (630AM), I heard Matt play Governor Lincoln Chafee's Director of Administration Richard Licht tell Dan Yorke something to the effect that tax increases were necessary to maintain a reasonable level of government services in Rhode Island.

Governor Carcieri had begun to reduce spending on the portion of the budget funded by Rhode Island taxes. However, it was more than offset by increased spending from Federal and local sources. In fact, the sum of money raised from state and local taxes plus federal money spent by the state and has increased at a steady clip over the past 10 years by about 25%, after adjustment for inflation.

Here was the description of the spending pattern, written at the time: "This pattern is one of government growth on autopilot for most of the decade, whether the national economic climate was good or bad, whether state revenues were increasing or decreasing.

This idea of government expansion that is automatic and inevitable -- with everything outside of government expected to adjust accordingly, of course -- is an important focus of the dissatisfaction being expressed with regards to the direction that our state and nation are headed, as more and more people come to realize that steady increases in the real amount spent by government cannot continue indefinitely".

Does the Chafee administration believe that this trend has to continue forever, in order for government to be effective, or that reducing total spending to the level of say 5 years ago is an impossibility?

For the record, I have twice sent Lincoln Chafee, once as a candidate and once as governor-elect, a set of questions that included the issue of the steady growth in the Rhode Island budget. The question was...

The combined state and municipal budgets for Rhode Island have grown steadily (adjusted for inflation) over the past 10 years, a period of time which includes September 11, 2001 and its immediate aftermath, the end-of-the-financial world as we knew it in 2008, and the relative lull (at least domestically) in between.

Is it by design or by accident that government has been growing as if on autopilot -- or would you disagree with that characterization entirely? Compared with 10 years ago, are Rhode Islanders getting more in return for their increased spending?

We do not agree with the premise of these questions.

Thinning the Fuel Won't Create Efficiency

My Patch column, this week, defines the target population of Rhode Island's recent and proposed tax changes and offers a brief economics lesson to suggest that the apparent strategy is perhaps not the best:

The consequence, overall, is that Rhode Islanders who've invested in property have seen local taxes climb inexorably. Last year, the real cost of those investments increased courtesy of the income tax change. Meanwhile, the tax bite resulting from their efforts to improve their financial positions broadened, and now they'll be rewarded for modest spending habits with a new sales tax targeting essentials. The harm is exacerbated if they've had the audacity to reproduce, thus creating larger families requiring more of life's basics.

In short, with Rhode Island's economic recovery barely detectable, and scarcely felt, the state is turning the screws on home-buying parents who are striving to build their futures. The tendency may satisfy special interests, by protecting government handouts and special deals, and it may comfort politicians, inasmuch as busy families are less able to be politically active, but it is economic suicide.

One Bad Tax Plan Shouldn't be Replaced by Another

The ProJo reports that there is a bill in the RI House proposing an alternative to Governor Chafee's 6%/1% "lower and broaden" tax policy. Let's call it "promise to lower and broaden":

The bill, cosponsored by Representatives Brian Newberry, R-North Smithfield, Samuel Azzinaro, D-Westerly, Scott Slater, D-Providence, and Peter Palumbo, D-Cranston, would also add the equivalent of a dorm tax on the rental charges for student and teacher housing at the state’s educational institutions.

The way the bill is drafted, many of these exemptions would go away as soon as the bill passed, but the sales-tax rate would remain at 7 percent until July 1, 2012, Monica S. Staaf, legal counsel for the Rhode Island Association of Realtors, told the House committee.

provided, further, that for the period commencing July 1, 2012, the tax is six percent (6%); and provided, further, that for the period commencing July 1, 2013, the tax rate is five percent (5%); and provided, further, that for the period commencing July 1, 2014, the tax rate is four percent (4%); and provided, further, that for the period commencing July 1, 2015, the tax rate is three percent (3%).

The Governor's Faith That You Don't Matter

Here's an interesting tidbit from Ed Achorn:

I asked Governor Chafee last week whether he, or anyone in his administration, had done an analysis of the number of jobs that his tax hikes would cost the state, since many financially stressed Rhode Islanders would respond by traveling the short distance to neighboring states for goods and services.

After three rounds of spin by Mr. Chafee and his aides, I finally got the governor's answer on the fourth try:

"No."

The loss of such private-sector jobs seem to be of little concern.

To take the charitable view, it might just be that Chafee and his administration lack the competence to ask and answer such difficult questions. It's much easier to simply calculate a tax as if it will have no effect on the behavior being taxed. One would think, though, that some effort might have been made to figure out what incentives would be created by the new taxes and what ripples would therefore be likely.

Be that as it may, government budgeting isn't ultimately a matter of predicting revenue and planning expenses on its basis. Rather, it's ultimately a matter of making the books appear balanced to conform with the law and adjusting later when financial reality gives the politicians excuses to act. In the case of the current governor, it seems likely that, when revenue doesn't increase as much as he expects and when his meager and vague cuts and efficiencies don't produce the predicted savings, he'll seek to increase taxation yet again. More of that shared sacrifice... meaning that taxpayers share the sacrifice among themselves to support government.

Fifth Highest State & Local Tax Burden: The Sacrifice isn't Really Shared If One Party Is Already Disproportionately "Sharing"

With difficulty, I'm going to disregard the spectacle of the governor attempting to sell his proposed $176 million sales tax hike as a remake of Rhode Island into a "tax haven" and just focus on one critical data point.

Governor Chafee has balanced his proposed budget with, on the one hand, suggested "cuts" that seem quite ethereal at this point and, on the other, a grimly real revenue stream that would represent "one of the biggest tax increases in state history".

He describes this budget as "shared sacrifice". This characterization contains a fatal premise: that the pre-existing budget burden or level of sacrifice is equal. Nothing could be further from the truth.

Rhode Island has the fifth highest state and local tax burden. Any addition - even one item, never mind the nightmare list proposed by the governor - to the state sales tax rolls would only exacerbate the already high level of sacrifice on one side.

Sacrifice Starting from Unequal Footing

Monique and Matt talked taxes and sacrifice on last night's Matt Allen Show. Stream by clicking here, or download it.

Drug Dealer... Not a Stretch for Rhode Island

I've admitted before that I'm more or less ambivalent about the legality of marijuana, but as usual, Rhode Island's method of operations layers in an unseemly and suspicious twist to the process:

All told, that's $3.5 million in new tax revenue over two years. The Health Department is expected to announce on Tuesday the names of operators for up to three dispensaries. They will be chosen from a list of 18 applications. ...

The future of the state's caregiver system is unclear. Last month, two bills were introduced in the General Assembly that would require all medicinal marijuana to be grown and sold through dispensaries — a move that would for all intents and purposes end the caregiver program.

To put some totals on this sequence of legislation, the governor is expecting medical marijuana to be a $60 million business in Rhode Island, and the General Assembly may make the law of the land such that all the money filters through three entities hand-picked by the state. That's an instant $20 million business facilitated by the Department of Health. Looks like another instance of corruption by design, in Rhode Island.

If Rhode Island is to shift this slice of the illegal drug industry into the legal category, it should follow either the pharmacy model (if the pretense of medical benefit is to be maintained) or the liquor store model. Making the State House a den of pot kingpins is not the way to go.

(The applications submitted by the three newly selected dispensaries are linked here. There are no names as blatantly indicative of inside dealings as, say, Bill Lynch's, but that's hardly a mitigating factor when the potential for corruption is baked into the legal regime.)

The Tax List

Perusing the list of items that Governor Chafee wishes to move from tax-exempt to taxable, I came across this peculiar item, sure to help grow the economy:

Employment agency services

Sure, employment agencies are arguably unnecessary middlemen in employment chain, but they're a halfway step for businesses looking to ease into hiring. And they're now going to have to add 6% to the cost of the transaction or just absorb it.

I also like this item, on the 1% list:

Transfers or sales made to immediate family members

Don't forget to file the appropriate form Ma and Pa! Uncle Linc is watching.

The Biggest Tax Increase... and on Whom?

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.

New Taxables

Ted Nesi has put up a list of newly-taxed items being proposed by Governor Chafee. I've copied it after the jump. As a commenter to Ted noted:

...the fact Rhode Island has so many sales tax exemptions is interesting in and of itself. The state has a total of 82 exemptions, 20 of which have been added over just the past 19 years, according to the Chafee administration.

Open Thread: Combined Reporting, Good Idea or Not?

Rhode Island Governor Lincoln Chafee has proposed "combined reporting" in his FY2012 budget proposal as a means of raising revenue for Rhode Island. Given this is the most technical of the Governor's major proposed "revenue enhancers", the floor is open for any insights into the details of how and why "combined reporting" is supposed to work.

Expanding the Sales Tax: Possibilities

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.

*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:

*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:

*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:

*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.

Making Sure the Minimum Business Tax Change You Want is the One You Get

Legislators and concerned citizens, be aware: taxophilic previous generations of Rhode Island lawmakers have written the minimum tax imposed on businesses into two separate places in the law. State law contains separate provisions for a "franchise tax" and a "minimum corporate income tax" and for many if not most Rhode Island corporations, both sections would need be modified in order for them to see a change in their minimum tax liability.

Section 44-11-2(e) of RI law specifies the minimum corporate income tax...

The tax imposed upon any corporation under this section shall not be less than five hundred dollars ($500).

A small business corporation having an election in effect under subchapter S, 26 U.S.C. section 1361 et seq., shall not be subject to the Rhode Island income tax on corporations, except that the corporation shall be subject to the provisions of subsection (a), to the extent of the income that is subjected to federal tax under subchapter S.

The franchise tax is defined in the next chapter of the law, in section 44-12-1(a), with no blanket exception for S-corps...

Every corporation, joint-stock company, or association incorporated in this state or qualified to do business in this state, whether or not doing business for profit, all referred to in this section under the term "corporation", except those enumerated in section 44-12-11, shall pay an annual franchise tax to the state upon its authorized capital stock of two dollars fifty cents ($2.50) for each ten thousand dollars ($10,000) of such stock or fractional part, or the sum of five hundred dollars ($500), whichever is greater, thereof.

In the case of corporations liable to a tax under chapter 11 of this title, only the amount by which the franchise tax exceeds the tax payable under that chapter shall be assessed.

Both sections of corporate tax law must be considered when determining how a proposed change to minimum taxes will impact liabilities, even when a proposed change is only being applied to one tax or the other. And, as currently written, several of the minimum business tax bills that have been introduced to the legislature, if adopted in isolation, appear not to change the tax liabilities of Rhode Island businesses at all.

Representatives Stephen Ucci (D-Johnston/Cranston), Peter Petrarca (D-Johnston/Lincoln/Smithfield), Joy Hearn (D-Barrington/East Providence), Robert Phillips (D-Woonsocket), and Peter Martin (D-Newport) have introduced a bill (H5153) that reduces the minimum corporate income tax specified in 44-11-2(e) to $50. If no other change to the law is made in conjunction with H5153, the tax-liability of corporations covered by the franchise tax (i.e., most RI corporations) will remain unchanged. The franchise tax will still exist, meaning that a corporation would continue to owe the same $500 under the new law that it owed under the old law, now in the form of a $50 corporate minimum income tax, plus the $450 difference between the franchise tax and the income tax. (And an S-Corp that didn't owe the income tax would still owe the $500, all as franchise tax).

Representatives Gregory Schadone (D-North Providence), Jan Malik (D-Warren/Barrington), and Arthur Corvese (D-North Providence) have introduced a bill (H5167) with an identical structure to H5153, differing only in that it changes the minimum income tax to $250. Again, this bill by itself would not reduce the tax-liabilities of corporations that owe the minimum franchise tax.

A bill (H5060) introduced by Representatives Donna Walsh (D-Charlestown/New Shoreham/South Kingstown/Westerly), Patricia Serpa (D-West Warwick/Warwick/Coventry), Frank Ferri (D-Warwick), Larry Valencia (D-Exeter/Charlestown/Richmond), and Deborah Ruggiero (D-Jamestown/Middletown) modifies the minimum corporate income tax by introducing a graduated scale. At the low end, corporations to which it applies (i.e. C-Corps and LLCs) that in a given year record less than $250,000 in gross receipts would have no income tax liability -- but again, if no additional change to the law is made, the amount of taxes owed would not change because the C-corps and the LLCs would still owe the state the difference between $500 franchise tax and the $0 corporate minimum income tax.

Representatives Doreen Costa (R-North Kingstown/Exeter), Larry Ehrhardt (R-North Kingstown), Mike Chippendale (R-Foster/Coventry/Glocester), and Dan Gordon (R-Portsmouth/Tiverton/Little Compton) have been working the problem from the other end, introducing a bill (H5100) that would repeal the franchise tax in its entirety . This is a little better than the previous measures, as the S-Corps exempted from 44-11 would no longer have to pay a minimum tax or a franchise tax. However C-corps and LLCs would still have to pay the $500 minimum income tax specified in 44-11-1 even in the absence of the franchise tax. (Also, there could also be impacts from this law as you move up the scale away from the minimum, depending on whether a particular company currently has a greater liability computed from the franchise tax or the income tax).

Finally, State Senators Nick Kettle (R-Coventry/Foster/Scituate), Christopher Ottiano (R-Bristol/Portsmouth), David Bates (R-Barrington/Bristol), Dawson Hodgson (R-East Greenwich/Warwick/North Kingstown), and Glen Shibley (R-Coventry/Warwick/West Warwick/East Greenwich) have introduced a Senate bill which repeals both the minimum franchise tax and the minimum corporate income tax (S0103). This piece of legislation, where both the franchise tax and the corporate minimum income tax are changed at the same time, is the model that should be used in order to really effect a change in the current system.

Health Care "Reform" = IRS Expansion

U.S. News tells us that the IRS is ramping up because of the new health care reform plan (we're all so surprised!):

The Internal Revenue Service says it will need an battalion of 1,054 new auditors and staffers and new facilities at a cost to taxpayers of more than $359 million in fiscal 2012 just to watch over the initial implementation of President Obama's healthcare reforms.

Among the new corps will be 81 workers assigned to make sure tanning salons pay a new 10 percent excise tax. Their cost: $11.5 million....[They] will be tasked just to handle the tax reporting of 25,000 tanning salons. They face a new 10 percent excise tax on indoor tanning services. Another 76 will be assigned to make sure businesses engaged in making and import[ing] drugs pay their new fee which is expected to deliver $2.8 billion to the Treasury in 2012 and 2013. The new healthcare corps will also require new facilities and computers.

Terry Gorman: The Burning Truth About the Cost of Illegal Immigration

I feel compelled to clarify some of the misstatements made by reporter Gene Emery in a PolitiFact hit piece which gave me a rating of "Pants On Fire".

First off, when I first spoke with Mr. Emery, he stated that he became interested in the cost of illegal immigration after seeing a RIILE sign at our new Governor's inauguration that announced that illegal aliens cost RI taxpayers $400 million per year. If that were the case, then why did he begin his article with the statement that Mr. Gorman stated that fact on the Helen Glover Show of January 6, 2011? Why bring someone else into the story if the story is meant to criticize me? Is there an agenda? He then went on to state that reliable data on this subject is difficult to find. His facts seem to bear this out.

Next, he disputes 8,740 as the number of illegal alien children and the US born children of illegal aliens in RI in 2004. I provided him the source for my information to no avail. The same source estimates that number to be 10,770 in 2010. It appears that Mr. Emery conveniently uses the numbers that seem to make his assertions work. The cost estimates for education were completely misrepresented by this reporter. In our conversations and emails, I emphatically stated that I believed the costs associated with my estimates were to educate illegal alien children AND the US born children of illegal aliens - the latter number he seems to have left out. I also stated in our telephone interviews and e-mails that I applied the RIDE statistic of 20.1% of the total student population enrolled in Special Education in RI to my 8,740 estimate to arrive at my total education cost. These figures are easily accessible on the RI Department of Elementary and Secondary Education website, RIDE, under the heading In$ite. The reporter references data from the Pew Hispanic Center reports that seem to verify his numbers but he neglects to avail himself of ALL the data, some of which would substantiate my numbers. Another agenda in the making?

The RIDE study I mentioned estimates the cost to educate English Language Learners, ELL students, in Providence alone to be in excess of $25 million. Jessica Vaughn, Director of Policy Studies at the well respected, non-partisan group Center for Immigration Studies submitted a Letter to the Editor on February 7, 2011 rebutting Mr. Emery's assertions. But it was only posted on projo.com and not printed in the Providence Journal. Why? In that letter, Ms. Vaughn gave the reporter her own rating of "Pants on Fire ".

Mr. Emery also mistakenly asserts that, in my estimates, I use Medicaid figures. Medicaid was never mentioned in any of our conversations or emails. I referenced solely RIte Care figures. Although now he has informed all of us that we currently have 350 illegal alien pregnant women receiving social services in our state, he claims that cost to be only $600,000 dollars. Does it not cost on average $10,000 per delivery at hospitals in RI? He also asserts that the state of RI does not keep track of these babies once they are born. These babies are automatically US citizens by virtue of their birth on US soil. They are also entitled to welfare, food stamps, housing and medical care. Does he expect us to believe that our state does not keep track of these costs?

He also asserts that one of my sources for costs was an Interpeter at a local hospitaI. I specifically stated to him that the interpeter informed me that she was required by her hospital administration to record, on a daily basis, any services provided to patients who did not have a Social Security, Green card number, passport etc. According to Mr. Emery, hospitals in RI do not keep track of the uncompensated care costs for services rendered to illegal aliens. If that is the case, how do they justify their requests for reimbursement from the state for those costs each year?

Here is another questionable statement. A spokesman for the Hospital Association of Rhode Island claims that hospitals in RI do not require patients to provide their Social Security numbers or their Green Card number if they have them. If that is the case, how do hospitals pursue them if they default on their payments?

All in all, I find Mr. Emery's PolitiFact assertions to be classified as "Pants on Fire ". Maybe this post will force the State of Rhode Island to finally reveal the enormous cost of illegal immigration to the taxpayers. When they do, I'm sure I know whose "Pants On Fire" will be extinguished. MINE.

Terry Gorman is the Executive Director of Rhode Islanders for Immigration Law Enforcement.

In-State Tuition is Not Free!

Sen. Pichardo and Rep. Diaz have proposed to extend in-state college tuition rates to illegal immigrants.

Let's be clear. Regardless of cost, offering in-state tuition rates to illegal aliens is a complete non-starter on principle. It would become yet another enticement for individuals to come here illegally - in the process, endangering themselves and breaching our sovereignty. We need to reduce, not amplify, such factors.

Hoever, it is instructive as to the legislative mindset to take a look at the more prosaic matter of cost. The in-state tuition rate does not cover the expense of that student's education at the college or university. The balance must be picked up by others - others like out-of-state students, state tax payers and/or the institution's privately funded endowment.

Unfortunately, the honorable solons who have submitted this bill seem not to be aware of this tuition differential and the considerable fiscal burden that it confers. Rep Diaz's lack of awareness on this point appears especially acute.

“All children should be included in the Race to the Top,” Diaz said. “At a time of state cuts, this bill is a boon for CCRI and our state universities.”

Actually, no. Broadening the qualification for in-state tuition is not at all like increasing the number of new customers to a commercial business. On the contrary, far from being a "boon", every additional in-state tuition payer represents an operating shortfall that the institution must attempt to cover from some other source.

Stated more bluntly, every in-state tuition rate honored is a financial drain on that institution. Naturally, the affected colleges and universities would be well within their right to look to us to pick up the losses arising from this proposed law. But the state is facing a deficit in the hundreds of millions so that doesn't seem real feasible.

Accordingly, the question that poses itself about this bill is: how? How could a legislator propose a bill without fully understanding its financial ramifications to all affected parties, including his or her own constituency?

"Surplus" Just Means They Haven't Spent It, Yet

Gary Trott tries to apply too much common sense to public-sector budgeting:

What should a Rhode Island city or town do if it suddenly finds itself with a surplus of unspent funds amounting to nearly $6 million? You'd think that it would do the responsible thing and not spend those funds in order to ease up a little bit on the taxpayer.

Well, that's not what the School Committee in Warwick did during the final days of December when it voted unanimously to take the $6 million surplus from the previous year and spend it by giving raises to teachers and also by cutting the 20 percent contribution that the teachers were to pay toward their health care benefits (ProJo 7 to 7 News Blog, Dec. 29).

The problem is that this isn't just spending for spending's sake, as Trott takes it. Rather, all of the incentives push government bodies in the direction of spending everything and, in particular, spending as much as possible on raises and benefits for employees.

Obviously, the electoral threat implicit in public-sector unionization is one incentive. So is the likelihood that unspent dollars won't just be considered a windfall to be kept, but will be targeted (rightly, in my view) both for a direct return to taxpayers and for a reduction in subsequent years' budgets. When the money isn't given freely as an economic exchange, but is taken under threat of law as taxation, the emphasis shifts from claiming as much money as a consumer can be convinced that the service is worth to providing cover for the claim that so much, and more, is needed, or even required by law. The process becomes one of budget tricks.

In Tiverton, for example, the school department claims that the town is required to make up for any difference in the amount of state aid that is estimated at the financial town meeting. (Naturally, extra aid is never reduced from the local appropriation.) So, say the local appropriation is $20 million and the FTM estimates that the schools will get $5 million in state/fed aid. If the aid comes in at $4 million, then the schools take another $1 million from the town's property tax pool.

Here's the best part: for the purposes of calculating the state-imposed cap on how much additional money it can request, the school department considers the $21 million to be part of its new baseline. It then begins the performance of declarations about what it will have to cut, close, and eliminate if the town doesn't bust the cap.

The process doesn't begin, in short, with the question of what the payer will bear, but with what the payee can take. The only way to change the incentives and the outcome would be to organize enough voters to place better candidates on the boards, councils, and committees and counterbalance the corrupt symbiosis between elected officials and labor.

Drunk on Taxation

Speaking of statism, the Providence Journal editorial page betrayed its inclination in that direction, recently, on the topic of alcohol tax:

Congratulations. By beating each other's alcohol tax down to zero, neither New Hampshire nor Massachusetts is collecting revenues that it could.

And where does this new era of tax-free booze to the north leave Rhode Island merchants with their 7 percent liquor sales tax? In a tough competitive place. ...

This region must start thinking of itself more as a confederation and less as a collection of six feudal rivalries. The six New England states should agree to a region-wide liquor tax. They could all end up richer.

"They," obviously, means the state governments, not the people of New England, who could, by the editors' advice be more extensively taxed if they were more effectively trapped by cooperating governments. Lost in the analysis — not even mentioned — is the benefit of this interstate competition to consumers, who are not, especially with alcohol, necessarily of the leisure class.

Yes, yes, we can all agree that alcohol is, in a technical sense, unnecessary, and sometimes, it turns wicked. But one's perspective on taxation and the relationship between the state and the people is much more broadly applicable.

Watching the exchange of dollars for alcohol and lottery tickets while in line at the liquor store, one is tempted to wonder what percentage of the taxes and gambling profit the government siphons off before handing the money back in the form of inefficient services. No doubt, the editors would defend their position suggesting that sin taxes force residents to support important government activities (such as infrastructure and education) that they'd otherwise let slip, if left to their own choices. That only returns to the statist point: it comes down to one group of citizens taking from another to support their own priorities, which they assume to be more important and which, in many cases, winds up benefiting them financially.

Up and Out, or Just Out?

Yesterday, I presented two facts:

• Every year, from 2003 to 2008, thousands of people who had filed tax returns from Rhode Island filed them from somewhere else. Subtracting those who moved in the opposite direction, during that five-year span, the state lost 17,221 taxpayers.
• Because those leaving have typically had higher average incomes, the state has lost hundreds of millions of dollars, on a net basis, in taxable incomes — $915,863,000 to be exact, from 2003 to 2008.

Nonetheless, on Monday, I showed that, for most of that time span, wealthier taxpayers increased at a healthy rate. So who is leaving the state? The following charts show trends by income bracket, using IRS and American Community Survey data.

Sticking to the years for which I have data from both sources, the number of households earning below $50,000 decreased by 38,335 from 2002 to 2008, while the number of tax returns decreased by 19,353. For the range of $50,000-74,999, the corresponding numbers were 15,740 and 6. Noting that my migration data is shy a year, with 17,221 tax returns directly attributable to out migration from 2003 to 2008, it 's tempting to suggest a direct flow of this group out of the state.

However, those losses correspond with a 44,910 increase in households earning above $75,000, accounting for all but 9,165. For tax returns, the numbers are a 31,841 increase above $75,000, for an overall increase of 12,482. Considering that those leaving the state have had a higher income than those arriving, it can't be the case that Rhode Island is importing wealthier residents.

And anybody who's been living in Rhode Island will find a dramatic shift toward wealth to be a surprise. Indeed, Phoenix Marketing data of millionaire households shows the increase in millionaires to be relatively small. My suspicion is that, given the housing boom, the shift has more to do with the sale of houses — with people in the upper-working to lower-middle class range selling their homes, often leaving thereafter. The phasing out of the capital gains tax would have created incentive both to sell (because able to keep more of the profit) and to buy (because property in Rhode Island would be taxed at a lower rate, perhaps 0%, when sold).

Call it an "up and out" trend. Each year, until the end of the decade, the number of one-year-only "rich" people amounted to more than those who returned to prior income levels or left the state.

One puzzle in the numbers arises from the difference between Census household data and IRS return data. Why did the number of households between $50,000 and $74,999 (what I'm calling "lower middle class") decrease while the number of tax returns remained pretty much the same? One possibility is that people joined their incomes for the household results but filed separate returns. A look at just joint returns suggests that as a factor:

Turning to the Census data, households earning between $100,000 and $199,999, for example, increased by 25,274 (2002-2008), with 16,426 of those directly attributable to an increase in joint returns. That leaves 8,848 households, which would account for 17,696 tax returns if they all paired up.

Unfortunately, I've run out of time, this morning, so I'll have to draw the threads together later.

(The next post in this series is here.)

Giving Away the Store, or Maintaining a Base?

Yesterday, I showed that the number of high-income tax returns increased every year in Rhode Island from 2002 to 2007. In fact, the rate of growth among taxpayers in every income category above $50,000 was greater in Rhode Island than in its neighboring states through 2004, when things began to change.

During the decade, Governor Carcieri and the General Assembly enacted various tax reforms, agreeing to phase out the capital gains tax in 2002 and beginning a stepped reduction of an alternative flat tax in 2006. Of course, during this same period, especially the latter part of the decade, the state government faced massive budget deficits year after year and used one budget gimmick and one-time fix after another to muddle through.

The question arises, therefore, whether the tax reforms needlessly gave away money that the state could have used (although it never came close to equaling the deficits) or the tax reforms were a positive influence despite larger problems. I'm not sure that it's possible to collect enough data to declare the question answered, but today, I'll add some charts to the mix that I believe continue to point in the direction of my thesis: that tax policy helped Rhode Island to maintain and increase its base of wealth, which could have been a spark of capital for entrepreneurs and other producers, but heavy regulations, mandates, and taxes stifled growth and motivation among "the productive class," which therefore didn't act as kindling to get Rhode Island's economic fire going.

The following charts, drawn from this data, show the amount of state income taxes claimed on IRS tax returns for those filing in Rhode Island, Massachusetts, and Connecticut, respectively:

Once again, it appears that the dot-com bust that began the millenium did not affect Rhode Island as deeply as it did Massachusetts. From that footing, with the implementation of the capital gains tax phaseout and a reduction of the state's nation-leading top tax bracket on the horizon, Rhode Island led the three states in the rate at which it increased the revenue drawn from the upper brackets. The numbers throughout the decade are as follows:

During the early part of the decade, Rhode Island led in the rate of increase of wealthy taxpayers, although that healthy development for the state overall did reduce the rate of growth in revenue that the government drew from them. Tax policy, however, wasn't to blame for Rhode Island's slowed growth during the latter part of the decade. Something else was, and I'd argue that the improving attitude of the government toward taxation prevented Rhode Island from doing worse, comparatively... until that attitude started to change in a vocal way during and after the debate over the flat tax.

The IRS also provides taxpayer migration data, which compares the location from which every American files his or her return to his or her location the year before. The years shown for migration are those in which the returns were filed, which means that the taxpayer moved during or just after the tax year (which is what the years used thus far in these posts have referred to).

Not that it matters; Rhode Island's loss of taxpayers has been consistently between 2,000 and 4,500 for the entire decade:

The bars at the top of the chart show the migration of actual people, and the line at the bottom shows the net loss of taxable adjusted gross income. That is, from 2003 to 2008, after subtracting the incomes of people who came to Rhode Island, former Rhode Islanders took with them almost $1 billion in income. With the exception of the two years that the revenue loss moderated, the average adjusted gross income of those leaving was greater than those arriving:

In the past, I've looked at the data of migration to counties abutting Rhode Island on the theory that such people aren't leaving the region but, rather, wanted to stay within work-and-play reach of Rhode Island:

The image that emerges is a pull of wealth away from Rhode Island. The fact that the wealthy were increasing in number, within the state, suggests that they continued to find Rhode Island to offer a friendly environment. Some other income range must account for those thousands of lost taxpayers, and I'll take a closer look in that direction tomorrow.

(The next post in this series is here.)

Trends of the Decade

Three critical considerations tend to get lost in debates about population and the ways in which it flows and changes over time. The first is that large trends trump. A tax break isn't going to prevent a global economic hurricane from rearing its head in one state while devastating the next one over; there will surely be differences in how the states weather the storm, but the storm will appear in statistical results for both.

The second is the complexity of the numbers. As the income brackets shift within a state, the reasons for each individual change will span so many categories of information that a thorough picture becomes impossible to paint. Marriage rates, tax policy, welfare policy, different markets, employment, and on and on will affect the results. When multiple states are on the table, the number of policies and trends is that much greater. As far as I know, nobody has undertaken a study to break regional changes down to the percentage effect of every demographic shift, and even then assumptions would have to be made which individuals move to which categories.

The third factor that tends to get lost is that the effects of public policies don't just splash into the society on the day that they are signed into law. The debate leading up to passage of a law will affect people's behavior, as will the perceived likelihood that a particular policy will survive the political winds. Taxpayers (to limit the field) will respond to changes in the law, but they'll also respond to a general sense of a state's direction. Meanwhile, laws can either betoken additional reforms in the same direction, or they can make it to the governor's desk with the impression of having barely little chance of resisting repeal or efforts to undermine them.

In any event, what those with a specific interest in the health of a particular state must do is to assess the condition of the state and determine what effect policies have had, or will have, from the baseline of what would happen in their absence. If the widget industry is in decline, tax breaks for widget manufacturers will preserve their jobs to some extent, even if they cannot prevent the trendline from drifting down.

Such are the thoughts that came to mind upon viewing the following set of charts, which will probably take me multiple days to roll out, and which update previous posts here, here, and here.

Each data point in this chart (based on this data) represents the percentage change in the number of IRS tax returns claiming an income range from the previous year. Thus, in 2004, the number of tax returns showing $200,000 or more in adjusted gross income increased by 16.7% from 2003; from 2004 to 2005, the change was 14.6% — still a large increase, but because the rate of change slowed, the graph shifts down. The red lines show tax returns filed from Rhode Island, blue from Massachusetts, and green from Connecticut. The smaller the dash marks of a line, the lower the income bracket.

Because the highest bracket is the most controversial, because it is most affected by Rhode Island's constantly churning tax policy of the last decade, and because it results in about 40% of all income taxes to the state, the solid lines are of greatest interest. And as is clear, all three states began the decade with losses of such taxpayers (likely because of both migration away from the region and a loss of wealth associated with the dot-com bust). In 2002, the year that Rhode Island began to phase its capital gains tax toward zero percent, we were the first of the three states to show an increase in wealthy households, and we led the three states until 2005.

At that point, our state was in the midst of a series of budget-deficit years to which our elected officials responded with one one-time fix after another. The General Assembly enacted the flat tax phase-out in 2006, but whereas the capital gains change promised to make investments made in and from Rhode Island more valuable (because less taxed) over time, the flat tax phased out gradually and required calculation against the benefits of itemizing and capital gains income. In 2006, the flat tax offered an 8% rate (as opposed to the regular 9.9%) and decreased 0.5% each year.

In any event, as the final years of the decade wore on and brought economic crisis, it became increasingly clear that lawmakers would backtrack on tax reform, and by 2008 Rhode Island led the region in loss of wealthy taxpayers. The capital gains tax phaseout disappeared in 2009, and the flat-tax alternative was frozen by the larger income tax overhaul last year.

An alternative narrative would be that Rhode Island recovered more quickly from the dot-com bust at the beginning of the decade because it had benefited less from the corresponding boom. Then, with so much waterfront property, the state experienced the ups and downs of the real estate bubble more profoundly than its neighboring states.

As this post began by noting, this type of data is subject to interpretation, and given data related to taxpayer migration as well as trends indicated by tax returns and Census data, I'd argue that my long-running explanation still stands: Favorable changes in income tax policy have helped Rhode Island to maintain and grow its base of wealthy residents. Unfortunately, though, heavy regulations, mandates, and taxes overall have not allowed the economy to capitalize on that available economic spark. The "productive class" — my term for the upwardly mobile upper-working to lower-middle class range — has not effectively acted as the kindling to turn that available money into economic growth.

Thus, Rhode Island has been more vulnerable to the mobility of the wealthiest Americans and has not fostered an environment of long-term advancement for the motivated workers and entrepreneurs who will willingly add hours of labor to the economy. Inasmuch as my own quest for upward mobility has not yet borne the fruit that would allow me to continue with this topic, today, I'll have to take up the specifics of taxpayer migration data tomorrow morning.

(The next post in this series is here.)

The IRS Goes to Jail

This is the agency that will be central to ensuring that healthcare is universal:

The number of prisoners who file false tax returns with the Internal Revenue Service has more than doubled in the last five years, according to a new Treasury Department report, and the amount of money the IRS has mistakenly refunded to those prisoners has nearly tripled. Meanwhile, the report, from the Department's Inspector General for Tax Administration, accuses the IRS of failing to enforce a law passed by Congress in 2008 to crack down on false returns coming from the nation's prisons.

According to the study, in 2009, prisoners filed 44,944 false tax returns, attempting to claim $295.1 million in refunds. The report says IRS officials caught the fraud in many cases and stopped $256 million of that from being refunded -- but the IRS did mistakenly pay $39.1 million in refunds to prisoners filing fraudulent returns. The report also notes that there is some evidence that fraud is even more widespread than these figures suggest.

The solution is a simpler tax code and a lighter tax burden. If the government didn't take so much money out of the economy, it would be easier to track, and if it didn't insist on withholding tax-free loans for itself from Americans' paychecks, it wouldn't be sending back so much money (without interest, naturally) at the end of the tax year.

Letting the Scam's Legislative Architect Run the Budget

Here's a worrying tidbit about a frontrunner for the open House Finance Committee chairmanship in the General Assembly:

[Rep. Helio Melo (D, East Providence)] is the current deputy Finance Committee chairman, and House leaders signaled their confidence in him by letting him take the lead on last year's big end-of-session, income-tax overhaul.

I suppose that the experience ushering into law a reform that took Rhode Island's tax policy in the wrong direction while making it appear to do the opposite will be a valuable point of reference when making the state's budget appear to be balanced when there is no way it could be.

Almost Like Another Ponzi Scheme

This doesn't appear to be a sustainable system:

Consider an average-wage, two-earner couple together earning $89,000 a year. Upon retiring in 2011, they would have paid $114,000 in Medicare payroll taxes during their careers.

But they can expect to receive medical services - from prescriptions to hospital care - worth $355,000, or about three times what they put in.

As each generation shrinks in size from the previous, the number of payers decreases, and as medical science and individual longevity advance, the pay outs increase. That's why folks my age don't really expect to see a penny of such "entitlements."

The New Tax Scam

Yesterday, Marc highlighted the peculiarity of a tax reform that purports to lower most Rhode Islanders' taxes while increasing withholdings:

The point is to give workers "a little cushion so that when they get to the end of the year, they [won't] be in a situation where they'd owe money on their personal income tax," said state Tax Administrator David M. Sullivan.

As Marc points out, the effect of that "cushion" is to give the government a tax-free loan throughout the year courtesy Rhode Island's working population. Commenters to his post even go so far as to suggest the "cushion" might actually be to protect the state from the possibility that it won't be able to afford refunds when the tax year's over.

Such a prediction is a bit aggressive, for me, but the red flags of this scam are enough without them. For starters, consider this discordant note:

The changes make the state tax system easier to understand and calculate, said Michael F. Canole, the Rhode Island Division of Taxation's chief of examinations. "We've simplified our personal income tax," he said.

If the system is simpler, why is it necessary for the state to raise withholdings by so much? Typically, each exemption has taken $3,650 of income out of the withholding calculation; this year it will be $1,000. Seems to me that a simpler code would be easier to predict.

That leads to the obvious questions of for whom the tax code is easier and whom it will harm and help:

A report prepared by the Division of Taxation in September said that, as a result of the changes, 81 percent of Rhode Islanders "will either pay the same or less in personal income taxes going forward."

We know that the objective of the tax reform was to be "revenue neutral," meaning that it would create winners and losers. We've also read that the wealthiest will not be among the losers (although I can't find the link to that story, just now). And we know that the central change, beyond freezing the flat tax as the new highest bracket, is to eliminate itemized deductions.

So, the answer to my questions is that the loser 19% are going to be middle-income Rhode Islanders who, by their actions, have high deductions — people who've bought property with loans, who invest in businesses, and who have unreimbursed medical expenses for a few. Productive, advancing people. The sorts of people who have been leaving Rhode Island, but whom the state desperately needs if it is going to manage to pull out of its nosedive.

A look at the Dept. of Taxation's FAQ regarding the revised tax rates shows the standard deduction to which all "married filing jointly" taxpayers will be limited as $15,000. That's half of my itemizations, last year, meaning that my taxable income is going to more than double.

Frankly, although it feels odd to imagine such scheming, I can't help but wonder whether the just-in-case over-withholding — despite the simpler tax code — is actually meant to distract the losers until the tax year is over. After all, if the message is that "most Rhode Islanders" will actually pay lower taxes, but that everybody is going to have higher withholdings, then the average taxpayer won't figure out that he or she is in the negative 19 until it's too late.

(By the way, I don't have time to find the reports and dig into them, right now, but I can't help but wonder whether that 19% is measured by tax returns or actual taxpayers. If the former, then the number of losers is twice as high... and even that doesn't include their children.)

Only in RI can Taxes go down but the amount withheld go up!

Lower taxes? Sounds good:

Rhode Island begins to put in place provisions of state tax legislation that...make the state tax system easier to understand and calculate, said Michael F. Canole, the Rhode Island Division of Taxation’s chief of examinations. “We’ve simplified our personal income tax,” he said.

The changes will also ultimately reduce overall state tax liability for many taxpayers. A report prepared by the Division of Taxation in September said that, as a result of the changes, 81 percent of Rhode Islanders “will either pay the same or less in personal income taxes going forward.”

To implement those changes, state tax officials designed the withholding system for 2011 so that, for many workers, more state tax is withheld each pay period, not less.

The point is to give workers “a little cushion so that when they get to the end of the year, they [won’t] be in a situation where they’d owe money on their personal income tax,” said state Tax Administrator David M. Sullivan.

Policy Stasis as Economic Boost

I think John Kostrzewa overstates the ability of the recent tax-cut preservation legislation to boost the economy:

... I give [President Obama] credit for crafting the compromise with the Republicans because the major pieces of the bill will create an economic stimulus that will stir job creation. It is not the same type of $800-billion stimulus approved last year that funneled taxpayers’ money into the hands of government bureaucrats who spent it inefficiently.

Rather, most of the money this time will go directly to taxpayers who will spend it on basic needs to run their households. Because two-thirds of economic activity in the U.S. economy is based on consumer spending, the money people will get to keep, rather than pay in taxes, will boost their confidence and spur growth.

The tax-cut legislation didn't really add anything to economic policy; it just prevented a massive shift in an unhealthy direction. That it's been passed will surely steady the markets' anxiety, but that just brings the needle back to zero from the red side of the dial, where it hovered only because the president and Democrats were threatening negative change.

The most significant addition to policy, that I've seen, is the Social Security payroll tax cut, which I'll certainly welcome in the short-term, but which only decreases my expectation of ever benefiting from the program in years to come. Of course, that skepticism is also the status quo; Americans of my generation and younger more accurately see Social Security and MediCare as taxes than as investments.

Local Budgets and Generosity at Christmas

A local controversy with statewide implications is the subject of my Patch.com column, this week. In short, the Tiverton school department spent $367,165 in local funds to make up for estimated state funds that didn't materialize, and now the municipal government is taking it back.

Of course, given the season, I couldn't treat the topic without working in a moral:

The largest portion of my workdays, over the last decade, has been spent remodeling houses in neighborhoods of Newport that appear zoned to require airy names rather than street numbers. Tourists who venture away from the Breakers, Chateau-sur-Mer, and the rest of the Bellevue arcade of opulence may spot plaques and embossed stones labeling the homes of families still in the flesh and still in the money. My sense of humor being what it is, I've dubbed my North Tiverton cottage Piddlinghouse and await only the free time and resources to whittle a name-post at the end of my driveway.

The title would be apt, given the Dickensian feel of this Christmas season. Most of the presents under our tree will be a testament to the generosity of my children's extended family - as well as the generosity of Mr. and Mrs. Claus. The legendary couple made an appearance at a recent family gathering, and the next day, the person who arranged the visit swung by Piddlinghouse with a box of like-new used clothes that the jolly Mrs. had thought we might put to good use.

Does Santa Claus exist? I'll offer an unequivocal "yes."

Tabulating Rhode Island's FY2011 Federal Earmarks

For those interested, HERE is a working list of all of the earmarks contained in the lame duck FY2011 budget. I assume it will be continually updated as required (hence, the "working"). I've also broken out the RI earmarks from messr's Reed, Whitehouse, Langevin and Kennedy and you can download it HERE.

All told, according to the latest info, RI's Congressional delegation has requested $53,625,000, broken down as follows:

* Approximately $41.4 million tabbed for Department of Defense projects
* $2.65 million is tabbed for EPA--particularly wastewater improvement projects--and Parks Service projects
* $2.5 million for economic development projects (broadly defined) with money going to the John H. Chafee Center for International Business, Rhode Island School of Design and URI
* Approximately $7.12 million is going to various projects under the Dep't of Labor, HHS, & Education.

Speaking of Being Rich...

Did you happen to see this profile of the $250,000 family, in the Washington Post, no less?

Just how flush is a family of four with a $250,000 income? ...

The bottom line: Living in high-tax areas on either coast can leave our $250,000-a-year-family with little margin. Even with an additional $3,000 in investment income, they end up in the red - after taxes, saving for retirement and their children's education and a middle-of-the-road cost of living - in seven of the eight communities in the analysis.

Taxes already take a huge chunk from such households (as from all households on the independent side of the line between beneficiaries and payers), and I'm naturally inclined to rail against that fact. Still, we should be clear about the import of these findings.

The first thing to note is that some percentage of the above-$250,000 group are actually small business owners who process their companies' finances through their own tax filings. They aren't actually living on that amount of money.

Beyond that group, though, rich families live relatively well. They've less stress about paying for education; they've larger homes; they've services to help maintain those homes; they'll actually get to retire; and so on. In short, they're "in the red" only in the sense that they aren't amassing an unused sum of money.

The point, with respect to increased taxes in this income bracket, is that they won't jar loose unproductive resources. Rather, they will require such families to transfer money away from other expenses. Investments in long-term projects (materials, employees, and equipment, for business owners) will be one of the first things to go. Charity will likely lead the list. Consumer goods — the purchase of which creates a long line of jobs — will likely take a larger hit than retirement investment and college saving. Perhaps they'll downgrade their homes and cars, decreasing not only their spending, but also the amount of taxes that governments of various tiers are able to collect.

Nobody should pretend that the richest 2% are living lives of like toil to those of use closer to the median income, but in certain regions of the country, most of them aren't sitting on untapped mounds of cash.

Whose Taxes Will Change How

This Neil Downing article points to an egregious error in the waning year of Governor Carcieri's time in office (emphasis added):

... the amount of Rhode Island income tax withheld from your pay will change because of massive changes to the state income tax law enacted in June. Employers will have to withhold more in tax for some workers, less in tax for others. ...

... the new law lowers the top tax rate to 5.99 percent from 9.9 percent, increases the standard deduction amounts for most taxpayers and eliminates the option to itemize deductions.

As I've explained, before, the central act of the new law was to freeze the flat tax where it already was. Folks who pay attention only a little bit may be lured by the elimination of that 9.9% red mark, but those who take the time to understand the upshot (especially those affected by the change) should realize that what was actually eliminated was a pending decrease in their tax burden.

The second act of the law was to transfer wealth from folks who do those economically active things that create deductions — such as buying local property and spending money on careers and businesses. Downing reports that the changes in paycheck withholding will be "slight," but what's "slight" on an individual basis is massive in aggregate.

Downing also explains the coming increase in TDI taxes and federal withholding amounts. Layer in there the tax increase if U.S. House Democrats foil the tax-cut extensions. Our state and nation could wake up in January 2011 with one pounding hangover.

"Body of Proof" Flips Paiva-Weed on tax credits

The upcoming, filmed in Rhode Island, ABC show Body of Proof (starring Dana Delaney and Jeri Ryan) was feted at the State House today. Both Delaney and Ryan extolled the virtues of the Ocean State while executive producer Matt Gross explained that it was the tax credits that brought the production to Rhode Island:

"Having produced ten feature films and 200 hours of television all over the United States and out of the country, I can tell you this has been my best experience to date," said executive producer Matt Gross. "The state supports the needs of production like no other I have ever been to."

Gross credited the film and television production tax incentive -- which provides a 25 percent transferable credit for all related spending in Rhode Island -- with drawing the project to Rhode Island.

The production has generated more than $30 million of revenue in Rhode Island and has led to the creation of about 170 (temporary) full-time jobs, said State senate president Teresa Paiva Weed...."I was one of the skeptics when the film tax credits came out ... but have come ... to be a real believer because we now know that it works," said Paiva Weed. "A recent study showed that the film tax credit generates $8 for every $1 of investment from our state. And I don't think there's a better investment that also builds on our tourism industry."

Chafee's Aimin' to Give It

What's the famous H.L. Menken quotation? "Democracy is the theory that the common people know what they want, and deserve to get it good and hard." I suspect that's going to be the unofficial slogan of the Linc Chafee years in Rhode Island. It came to mind when the Department of Revenue found that Chafee's plan to tax everything that moves in Rhode Island would actually increase the taxes that we pay by $121 million, rather than the $89.4 million that he'd been claiming:

The list of 93 items that are exempt from the existing 7-percent state sales tax, in addition to food, clothing and medicine, is made up of items that state lawmakers deliberately chose not to tax, among them: school meals, prosthetic devices and sales to charitable, educational and religious organizations. Also included: equipment purchased for manufacturing purposes and adaptive equipment that helps amputee veterans drive their cars. [Don't forget heating fuel.]

When asked last week whether Chafee favors taxing such items, his spokesman, Michael Trainor, said the former U.S. senator "never wavered" during the campaign from his plan to establish a 1-percent tax on exempt items, and is not wavering now.

"Certainly, in the early days of his administration, there needs to be additional revenue," Trainor said. "He views this as a temporary extension to the exempt items that would be retired as soon as the budget situation is under control."

And what happens when "the budget system" (along with spending) becomes more out of control? Well, the difference between items currently taxed at 7% and those to be taxed at 1% is minimal, wouldn't you say?

The quotation came to mind, again, when Chafee dug in on his pledge to wipe away E-Verify at the state level, doubled down with an intention to bring this campaign across state borders, and offered this non sequitur, which raises serious questions about the governor-elect's capacity for reason:

"We have a disaster of an economy. Unemployment is one of the worst in the country. We're way worse than our neighbors, who all have the same labor laws as us," except for the immigration order, he said. "Obviously it's not working."

Blaming the state's economic woes on the fact that the state government has at least minimal controls against the hiring of illegal immigrants is nonsense on its face. Can the man who is soon to be the chief executive of our state think no more clearly than that? Even the Providence Journal editors think Chafee's way off, on this one:

The governor-elect argued that E-Verify "simply doesn’t work" and "has proved ineffective."

That would surprise people with much greater expertise on the subject, including Janet Napolitano, the secretary of homeland security for President Obama, whom Mr. Chafee strongly supports.

"E-Verify is a smart, simple and effective tool that helps employers and businesses throughout the nation maintain a legal workforce," Ms. Napolitano said this month, in announcing that the program is being expanded at the federal level to include U.S. passports and passport cards for employment verification. Thirteen states now mandate E-Verify and the number will grow. (See "Chafee understates use of E-Verify system," news, Nov. 19.)

And even you don't agree with Chris Plante and the National Organization of Marriage, perhaps you'll hear echoes of Menken in the Chafee camp's handling of Plante's effort at least to be heard on the issue in the governor's office:

[Dhavee spokesman Michael Trainor] also denied ever telling Plante "that the governor-elect would sit down with him." In fact, Trainor said, his letter reflected his belief that a meeting would probably "not be productive" in light of Chafee's "long-established position" on the issue.

But Trainor said Chafee is, in fact, open to talking with Plante one-on-one about the issue. Explaining why his own letter to Plante did not raise this possibility, Trainor said it was sent without the governor-elect's knowledge, amid "literally hundreds of requests for meetings."

"But now that Mr. Plante has decided to make a public issue of this, Lincoln Chafee is more than willing to have him in and to have a conversation."

It's just basic politics to make some effort to allow the opposition to feel as if it has had input, thereby defusing some of the bitterness from the debate. Governor Carcieri, for one, met with advocates for same-sex marriage even though his stand was at least as strong in the opposite direction as Chafee's.

The frightening theme that recurs with every article concerning the soon-to-be governor of Rhode Island is that the people of the state are going to have to look to the General Assembly for balance and reason while Chafee's in the executive seat. Those who believe that the healthiest outcome for Rhode Island would be a hastening of its demise (and therefore, its recovery) may soon get their wish.

Proposed Poster Boards for Gov-Elect Chafee's Upcoming Budget Summit

We learn of the budget summit - neither date nor location firm at this point - from Ted Nesi over at WPRI 12.

Gov.-elect Lincoln Chafee will hold a daylong budget summit next month to kick-start discussions of how to close Rhode Island’s $300 million projected deficit for the fiscal year that starts July 1, WPRI.com has confirmed.

The tax-and-spending conference is tentatively scheduled for Friday, Dec. 17, but that date isn’t official yet, Chafee spokesman Mike Trainor told me on Tuesday. The presenters and participants will be “an interdisciplinary group” that will include legislative leaders and fiscal experts, he said. The event may be held at URI’s rustic W. Alton Jones campus in West Greenwich.

My first reaction was to ask whether tax payers would be invited to the summit. Then it occurred to me that we might be just as well represented by some of the following facts in 72 point font at the front of the room for participants to keep in mind - or eliminate - as they contemplate solutions. (Did I leave any out?)

RI's sales tax 19th highest: "Race to the Top" of Education Excellence, Not National Sales Tax Ranking

Tenth Highest (Combined Local and State Tax Burden) is High Enough

"Minimum" Manning (and Other Unfunded Mandates) Means Maximum Property Taxes: Give Cities and Towns the Tools They Need to Control Their Budgets.

Grow the Pie: 42nd is No Climate to Do Business In

Why Old Trucks Are Worth More

Although typically a fan of liberal policies and government-driven solutions Bob Kerr has decided that he doesn't like the outcome of car taxes on old vehicles:

"It's obvious that small towns need to raise money," [David Shepherd] says.

Still, he finds the tax bill he received in September a mysterious piece of work. It seems to create something out of nothing.

The tax bill on his truck from the Town of Hopkinton is $96. It is not a bill that will mean major cutbacks on Dutch Hill Road. But it is a bill strangely out of sync with previous bills.

Last year, the tax bill on his old truck was zero, nothing, nada.

"Where does that value come from?" he asks.

Ah, there's the question. A truck gets a year older, a little more settled on its front end, and yet its official value goes up.

There are two culprits, here. The first is the cessation of the state's reimbursement of towns for the taxes that they would otherwise charge on the first $6,000 of a vehicle's value. The remedy for that problem, it seems to me, is for the David Shepherds of Rhode Island to involve themselves with local government and rearrange the circumstances that lead the town to require the money. Pushing those tax dollars through the State House only obscures the financial pictures.

The second is the increased value of used cars. Kerr quotes a woman from the Hopkinton tax assessors office opining that "a lot of people aren't buying new cars, so the second-hand ones become more valuable." What this misses is that Kerr-idol President Obama and the Congressional Democrats created a program that gave people incentive to bring in older vehicles and buy newer ones and that required those older vehicles to be destroyed. That reduced the supply of old vehicles (for parts as well as in whole), and increased the value of those that had not been traded in.

Perhaps Bob should send a copy of his column to the White House.

How Tax Cuts Increase Employment

Perhaps with the "Bush tax cuts for the rich" in mind, a recent Providence Journal editorial takes on the "belief" that cutting "companies' or individual proprietors' taxes" will lead to job growth:

The incentive to hire more people comes when demand for a company's goods and/or services increases. Then, with the expectation that higher revenues will mean higher profits for owners, big bonuses for senior managers and so on, more people get hired to meet demand.

With declining inflation-adjusted salaries, vast consumer debt, globalization (which drives down U.S. wages) and more and more use of technology to reduce staffing, it's difficult to see where demand-spawned hiring will come from. A better educated and healthier populace, and better national physical and educational infrastructure, would make America more globally competitive, thus helping to create wealth — and so boosting demand. But many Americans, apparently, would prefer more tax cuts rather than pay to address what's above (let alone deal with the deficit) — although 30 years of income-tax cuts don't seem to have improved middle-class standards of living; they have fallen.

There's an interesting conceptual double standard to the editors' argument. On the one hand, the only job growth that they'll apparently tally for jobs attributable to tax cuts is that which comes directly from the benefiting company using its additional funds to hire more people. On the other, expending public revenue on general environment-setting things such as education and infrastructure is thought to be a better approach. Personally, I think both should be done: taxes should be cut, and a greater percentage of government dollars should go to the basics. But on the narrower question, the essay seems to me to miss some important considerations.

First of all, job growth isn't entirely a reactive response to increasing demand. Dynamic companies have to innovate and expand, taking risks on new lines of businesses or additional products. That takes an investment in personnel who aren't serving a consumer base that's already in the store.

Second of all, and more importantly, easing taxes helps to clear the route — and increases the financial incentive — for those who don't already own and run companies to break off and do so, competing for the same customers or offering offshoot goods and services. When they do so, they not only open up the jobs that they'd previously held, but they begin to require new employees to populate their ventures.

Lastly, it's curious that the editors don't appear to see the effect of taxation on "salaries, vast consumer debt, [and] globalization." Lower taxes allow people to keep more of their salaries, some of which they can use to pay off their debt, or avoid getting into debt in the first place. Watching the taxes that float away in my paycheck, bump up my mortgage payment, and increase the cost of goods and services that I buy, I'm acutely aware that they come to more than the delta between what I make and what I need to make to begin moving from borrower to saver. With respect to globalization, the greater the taxes associated with each American employee (payroll and income), the more expensive the workforce becomes, and the more incentive the business has to look for alternatives.

I know, I know. The Projo editors are only talking about the taxes of Americans who aren't in my financial straits. But their position bespeaks an entire mentality that, like taxation, tends to apply across the economic spectrum.

Creating Pants on Fire Out of Truth

Sunday's PolitiFact correctly rates as "true" RI Democrat Senator Sheldon Whitehouse's statement that "the law... permits companies that close down American factories... to take a tax deduction for the costs associated with moving the jobs to China or India or wherever." But in its headline, in its presentation, and in an expanded quotation from Whitehouse, the article restates the argument in such a way as to drift into "pants on fire" territory.

The headline in the print edition of the Providence Journal is "Businesses do get tax incentive for 'offshoring.'" Reporter Eugene Emery rephrases the question as whether "the U.S. tax code actually offer[s] an incentive for firms to engage in such 'offshoring.'" And an expanded quotation shows Whitehouse stating that "loopholes in the tax code... reward American companies for moving American jobs overseas."

One needn't enter the debate about whether and what the United States should do about the loss of jobs to lower-cost workers in other countries to note that the rephrasing of the question is significantly deceptive. As the initial quotation states, businesses can deduct "for the costs associated with moving," but:

Robert E. Scott, senior international economist with the Economic Policy Institute, a liberal-leaning think tank that deals with issues of concern to low- and middle-income workers, confirmed that relocation expenses are deductible and that existing tax law makes no distinction between whether a company moves part of its operations to another state or to another country.

In other words, the code doesn't create an incentive to move, it just doesn't create a disincentive to do so. That's a very different dynamic. Were the U.S. government actively encouraging companies to leave our shores, the public reaction would rightly be greater than if tax law merely allows the usual adjustment for revenue spent on business-related activities.

The incentive to offshore is actually that labor is much less expensive overseas, and that merits a different response than pursuing a species of protectionist policy. I'd suggest endeavoring to increase the rights and expectations of those foreign workers and encouraging Americans toward more profitable careers.

Dog Bites Man, Low-tax states attracting more people

Americans for Tax Reform (H/t) report:

A study by Americans for Tax Reform compared states gaining and losing Congressional seats in the decennial reapportionment process and found that states gaining seats had significantly lower taxes, less government spending, and were more likely to have “Right to Work” laws in place. Because reapportionment is based on population migration, this is further proof that fiscally conservative public policy spurs economic growth, creates jobs, and attracts population growth.

...The average top personal income tax rate among gainers is 116 percent lower than among losers. The total state and local tax burden is nearly one-third lower, as is per capita government spending. In eight of ten losers, workers can be forced to join a union as a condition of employment. In 7 of the 8 gainers, workers are given a choice whether to join or contribute financially to a union.

What Chafee Means by "Harmful"

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.

Balance Is Unexpected for a Reason

Much is being made of Rhode Island's unexpected budget balancing. Here's Kathryn Gregg in the Providence Journal:

After meeting on and off over several days, the top financial advisors to the House, the Senate and the governor, determined that revenues are running about $16.7 million ahead of expectations when the General Assembly signed off on this year's state budget last June which, when coupled with an end-of-year surplus from last year, gives the state some welcome elbow-room this year.

And Ted Nesi has more:

[House spokesman Larry] Berman credited the balancing act to higher tax revenue, lower spending, and a surplus left over at the end of last year. "It is also good sign that revenues are running slightly ahead of projections, showing that the economy is turning around slowly," he said.

Of course, the largest factor in this "good news" is the windfall of federal dollars that has helped our state government avoid the really tough decisions that it's going to have to make when that money dries up. (You know, that "stimulus" money that has arguably contributed to the continuing economic malaise.) Another factor has been the state's willingness to push expenses down to cities and towns without easing its requirements (via mandates and regulations) to spend money.

That said, this is a prime example of an issue that frustrates me with regard to my tight schedule. My gut's telling me that there must be more — perhaps having to do with tax code changes that effectively raised taxes on productive and economically active Rhode Islanders. An article that Projo reporter Neil Downing published today supports that conclusion:

For example, the total amount of personal income tax withheld — mainly from paychecks — increased by 7 percent for the first four months of the fiscal year, and by 9 percent in October alone, said state Tax Administrator David M. Sullivan. Those figures indicate that more people are working, he said. (The state's unemployment rate, while still high, has been gradually dropping in recent months.)

But some other figures suggest economic softness in some spots.

For example, cumulative personal income-tax collections came to $322.6 million, up 4.8 percent compared with the same period a year ago. But that was largely on the strength of increases in the first three months of this fiscal year. In October, personal income-tax collections slipped 4.8 percent compared with the same month a year ago.

The parenthetical note about the slowly decreasing unemployment rate misses the point that fewer people are actually working. Folks are just giving up their job searches, driving down the rate of people who are trying to be employed, but aren't. The summer boost in income tax withholding could have indicated a real jump in summer tourism income, or something similar, but it also could have included a boost in withholding based on changes in tax credits and deductions that the General Assembly had recently passed.

News consumers are used to getting the tailored pronouncements of government officials, perhaps mixed by journalists (working with limited space) with a couple of broadly stated opinions from opposing factions. What we need is to see the numbers dollar-by-dollar and aligned with specific policies and decisions.

A Sign of Things to Come

Rhode Islanders should expect more of this:

It may be a sign of a bad economy, but some businesses are balking at a plan to charge fees for placing business logos on the blue highway signs at exits for food, gas and lodging. ...

The $1,200 per-sign fee, which went into effect on Nov.4, applies to any business posting a logo on a highway sign; state transportation officials have since proposed a reduced rate of $300 a year per sign for the 72 businesses that already have permits to post their logos on the highway signs, according to Rocchio.

The businesses paid to install the signs, and now the Dept. of Transportation wants them to pay fees (1) just in case they are knocked down and (2) to hire enforcement bureaucrats to catch any such businesses that aren't complying with regulations having to do with handicap access and public availability of bathrooms and phones. In short, it's another way for the government of Rhode Island to squeeze benefits.

DOT Managing Engineer Robert Rocchio magnanimously points out that "no state or federal regulation requires" the signs to exist (in the Projo paraphrase), and the new fee matches that charged in Massachusetts. Rocchio misses the point: Each state must figure out its mixture of charges and benefits, and the relevant question at any given point is which direction it's heading. This is a new imposition on productive Rhode Islanders who need to lure every through-state driver they can to boost our local economy.

As I began by saying, we should expect more policies like this. Rhode Island's "leaders" have no new ideas, and Rhode Islanders keep electing them to office.

Smokers for Fiscal Health

The ProJo reports that the percentage of smokers in Rhode Island has gone from 22.4% of the population in 1999 to 15.1% in 2009. They identify this downward trend as coincidental to the indoor smoking ban and ever-increasing cigarette taxes. Imagine: increased taxes can act as a disincentive. Of course, if Rhode Islanders truly had the best interest of their state in mind, they would continue to smoke as much and recruit other smokers to the cause. We need the revenue to pay for programs!

But there is some hope in the ProJo piece: apparently there hasn't been as much of a decrease in smoking amongst lower educated, lower income earners, the unemployed and the uninsured. With the current state of the state and with today's economy, the number of people in those demographic cohorts should increase and the tax revenue along with it! So don't be a quitter: smoke for our state's sake!

Lincoln Chafee Promises that the General Assembly Will Pass His Tax Increase. But Do Current General Assembly Members Agree That He Can Speak on Their Behalf?

I also had the opportunity to ask a sitting General Assembly member running for re-election, State Senator Frank Maher (R-Charlestown/Exeter/Hopkinton/Richmond/West Greenwich), what he thought of independent gubernatorial candidate Lincoln Chafee speaking for the General Assembly by saying...

"If the governor is leading the way on the tax increase, the General Assembly is going to go along," Chafee said. "That's the governor's leadership. They're going to go along."

Senator Maher responded that...

I find it interesting that Senator Chafee feels confident enough to speak so positively about the General Assembly supporting his proposed tax increase when he has no idea what the outcome of the elections are going to be.

Hopefully I will have the opportunity and the pleasure to be re-elected on Tuesday. Should I have the pleasure of returning to the State House, I can think of no reason why I would support any tax increase of any kind to resolve our current fiscal difficulties.

Thank you for the opportunity to answer this question. I wonder if my union financed and endorsed opponent would answer the same way.

Welfare queens and their pimps: Why the November 2 election matters

They come in all shapes and sizes.

Don't like any of them. Yes, indeed, not then and not now (and now).

The labels or times may change but not the fundamental issue that any government big enough to give you all you want is big enough to take it all away. More on bizarre incentives created by campaign finance reform, where the focus is on the symptoms but not the root cause, and crony capitalism, where the big and powerful feed at the enlarged government trough at the expense of those who lack comparable resources to buy favors.

If we truly treasure liberty in America, then next Tuesday's vote is the first major step toward reclaiming it. Our freedom is never safe, especially when there is a bloated government filled with politicians and bureaucrats who don't recognize and honor the core principles of our Constitution.

ADDENDUM #1:

How about some "old-time" reflections that are actually substantive and suggest a different view of America and public policies?

A Call to Action: Responding to Government Being Neither Well-Meaning Nor Focused on the Public Interest; be sure to follow the links

American Exceptionalism

"Who You Gonna Call?" The Little Platoons

Lawrence Reed on Seven Principles of Sound Public Policy

Challenging the increasing momentum toward a nanny state

Summing it up -

Roger Pilon from a 2002 Cato Institute publication, as quoted in the American Exceptionalism link:

We are all created equal, as defined by our natural rights; thus, no one has rights superior to those of anyone else. Moreover, we are born with those rights, we do not get them from government - indeed, whatever rights or powers government has come from us, from "the Consent of the Governed." And our rights to life, liberty, and the pursuit of happiness imply the right to live our lives as we wish...to pursue happiness as we think best, by our own lights...provided only that we respect the equal rights of others to do the same. Drawing by implication upon the common law tradition of liberty, property, and contract...its principles rooted in "right reason"...the Founders thus outlined the moral foundations of a free society…

In the end, however, no constitution can be self-enforcing. Government officials must respect their oaths to uphold the Constitution; and we the people must be vigilant in seeing that they do. The Founders drafted an extraordinarily thoughtful plan of government, but it is up to us, to each generation, to preserve and protect it for ourselves and for future generations. For the Constitution will live only if it is alive in the hearts and minds of the American people. That, perhaps, is the most enduring lesson of our experiment in ordered liberty.

Marco Rubio.

ADDENDUM #2:

The bottom line from 2006:

I hope the Republicans lose control of the House of Representatives in tomorrow's election.

...My disgust with the Republican Congress is intense...

...it is a time to focus on the big picture:

The current Republican party needs some time in the wilderness in order to rediscover its currently lost connections to beliefs in limited government, to the defense of freedom and ordered liberty. Hopefully, they can find some new leaders with principles in time for the crucial 2008 elections.

And what could be better for the American people than to see the House be led for two years by a bunch of left-wing lunatics, to experience a sampling for 2 years before 2008 of what little the Democrats can offer during a time when our country is engaged in a world war with Islamic fascists dedicated to destroying America.

The overriding problem here is we have two political parties who stand for nothing but either the retention or gaining of political power for the sake of power itself...

Well, the Democrats under Obama have indeed stood for something, an overbearing statism largely disconnected from principles of liberty and the rule of law. So we have belatedly tried the left-wing lunatic model for the last 2 years. Let's now send those statists packing on November 2 and hope the Republicans learned something during their time in the wilderness.

The bottom line in 2010 is that until enough people get serious about dismantling much of the engorged government and returning rights to the people, none of this will amount to more than rearranging chairs on the USS Titanic.

But that doesn't have to be our future, if we have the will and courage as a nation to chart a new course.

ADDENDUM #3:

Scott Rasmussen:

...This isn't a wave, it's a tidal shift—and we've seen it coming for a long time. Remarkably, there have been plenty of warning signs over the past two years, but Democratic leaders ignored them. At least the captain of the Titanic tried to miss the iceberg. Congressional Democrats aimed right for it...

But none of this means that Republicans are winning. The reality is that voters in 2010 are doing the same thing they did in 2006 and 2008: They are voting against the party in power.

This is the continuation of a trend that began nearly 20 years ago. In 1992, Bill Clinton was elected president and his party had control of Congress. Before he left office, his party lost control. Then, in 2000, George W. Bush came to power, and his party controlled Congress. But like Mr. Clinton before him, Mr. Bush saw his party lose control.

That's never happened before in back-to-back administrations. The Obama administration appears poised to make it three in a row. This reflects a fundamental rejection of both political parties.

More precisely, it is a rejection of a bipartisan political elite that's lost touch with the people they are supposed to serve. Based on our polling, 51% now see Democrats as the party of big government and nearly as many see Republicans as the party of big business. That leaves no party left to represent the American people.

Voters today want hope and change every bit as much as in 2008. But most have come to recognize that if we have to rely on politicians for the change, there is no hope. At the same time, Americans instinctively understand that if we can unleash the collective wisdom and entrepreneurial spirit of the American people, there are no limits to what we can accomplish...

Elected politicians also should leave their ideological baggage behind because voters don't want to be governed from the left, the right, or even the center. They want someone in Washington who understands that the American people want to govern themselves.

Angelo Codevilla on America's ruling class - and the perils of revolution.

From two liberal Democrats comes these critical words about Obama:

... In a Univision interview on Monday, the president, who campaigned in 2008 by referring not to a "Red America" or a "Blue America" but a United States of America, urged Hispanic listeners to vote in this spirit: "We're gonna punish our enemies and we're gonna reward our friends who stand with us on issues that are important to us."

Recently, Obama suggested that if Republicans gain control of the House and/or Senate as forecast, he expects not reconciliation and unity but "hand-to-hand combat" on Capitol Hill.

What a change two years can bring.

We can think of only one other recent president who would display such indifference to the majesty of his office: Richard Nixon.

We write in sadness as traditional liberal Democrats who believe in inclusion...

Indeed, Obama is conducting himself in a way alarmingly reminiscent of Nixon's role in the disastrous 1970 midterm campaign. No president has been so persistently personal in his attacks as Obama throughout the fall. He has regularly attacked his predecessor, the House minority leader and - directly from the stump - candidates running for offices below his own. He has criticized the American people suggesting that they are "reacting just to fear" and faulted his own base for "sitting on their hands complaining."...

We are also disturbed that the office of the president is mounting attacks on private individuals, such as the founders of the group Americans for Prosperity. Having been forged politically during Watergate - one of us was the youngest member of Nixon's enemies list - we are chilled by the prospect of any U.S. president willing to marshal the power of his office against a private citizen.

The president is the leader of our society. That office is supposed to be a unifying force. When a president opts for polarization, it is not only bad politics, but it also diminishes the prestige of his office and damages our social consensus...

Or, as Charles Krauthammer wrote:

...In a radio interview that aired Monday on Univision, President Obama chided Latinos who "sit out the election instead of saying, 'We're gonna punish our enemies and we're gonna reward our friends who stand with us on issues that are important to us.' " Quite a uniter, urging Hispanics to go to the polls to exact political revenge on their enemies - presumably, for example, the near-60 percent of Americans who support the new Arizona immigration law.

This from a president who won't even use "enemies" to describe an Iranian regime that is helping kill U.S. soldiers in Afghanistan. This from a man who rose to prominence thunderously declaring that we were not blue states or red states, not black America or white America or Latino America - but the United States of America.

This is how the great post-partisan, post-racial, New Politics presidency ends - not with a bang, not with a whimper, but with a desperate election-eve plea for ethnic retribution...

David Harsanyi points out how Obama has a lack of faith to trust the American people and is implementing processes that only magnify the power of the nanny state.

Arthur Brooks and Paul Ryan offer an alternative view:

As we move into this election season, Americans are being asked to choose between candidates and political parties. But the true decision we will be making—now and in the years to come—is this: Do we still want our traditional American free enterprise system, or do we prefer a European-style social democracy? This is a choice between free markets and managed capitalism; between limited government and an ever-expanding state; between rewarding entrepreneurs and equalizing economic rewards.

We must decide. Or must we?

In response to what each of us has written in the preceding months, we have heard again and again that the choice we pose is too stark. New York Times columnist David Brooks (no relation) finds our approach too Manichaean, and the Schumpeter columnist in The Economist objected that, "You can have a big state with a well-functioning free market."

Data support the proposition that Americans like generous government programs and don't want to lose them. So while 70% of Americans told pollsters at the Pew Research Center in 2009 they agreed that "people are better off in a free market economy, even though there may be severe ups and downs from time to time," large majorities favor keeping our social insurance programs intact. This leads conventional thinkers to claim that a welfare state is what we truly want, regardless of whether or not we mouth platitudes about "freedom" and "entrepreneurship."

But these claims miss the point. What we must choose is our aspiration, not whether we want to zero out the state. Nobody wants to privatize the Army or take away Grandma's Social Security check. Even Friedrich Hayek in his famous book, "The Road to Serfdom," reminded us that the state has legitimate—and critical—functions, from rectifying market failures to securing some minimum standard of living.

However, finding the right level of government for Americans is simply impossible unless we decide which ideal we prefer: a free enterprise society with a solid but limited safety net, or a cradle-to-grave, redistributive welfare state...

More and more Americans are catching on to the scam. Every day, more see that the road to serfdom in America does not involve a knock in the night or a jack-booted thug. It starts with smooth-talking politicians offering seemingly innocuous compromises, and an opportunistic leadership that chooses not to stand up for America's enduring principles of freedom and entrepreneurship.

As this reality dawns, and the implications become clear to millions of Americans, we believe we can see the brightest future in decades. But we must choose it.

Google on Taxes: Do as I Contribute, Not as I Do

[O/T preamble: though I made a petty point of changing my computer's home page to Bing following upon Google's dalliance with the Chinese government - no evil there - I have to admit that, maddeningly, Google still has the best search engine.]

A July analysis in US News and World Report indicates that, of all computer and internet companies, Google funneled the highest percent (75%) of its 2010 campaign contributions to democrat candidates.

Yet Bloomberg this week reported that at 2.4%, Google has achieved the lowest overseas tax rate in the tech sector. This is especially eye-opening juxtaposed with the US corporate income tax rate of 35%.

The problem is not that $3.1 billion over the last three years was "diverted" to private investors (i.e., retained by Google) from the US and other governments due to Google's savvy application of tax codes. On the contrary; I'll be the last to argue that the unhealthy revenue addiction of any government should be treated with ever more taxes. It's that Google is so obviously two-faced: on the one hand, energetically maneuvering to reduce its own tax bill while, on the other, deploying resources so as to inflict tax-happy elected officials on everyone else.

Pick a corporate philosophy on taxes and stick to it: either (shudder) pay a 35% corporate income tax and contribute to dems or exploit tax loopholes and find something else to do with those contributions. The mix-n-match, hooray-for-me-too-bad-for-you approach isn't cutting it.

Welcome to Rhode Island, Now What Are You Doing Here?

Anywhere but Rhode Island, this would be unbelievable. Rhode Island taxpayers who filed for the six month extension to pay their taxes may have to pay up to 25% of their owed amount in additional fees plus 18% interest on the overdue amount (in comparison to the 5% interest that the federal government charges):

The error stems from the original extension granted because of the severe spring flooding. Rhode Island taxpayers were permitted to pay their taxes and file their returns on May 11 instead of April 15. Those who sought a six-month extension were inadvertently given six months from May 11 instead of April 15.

[URI economist] Lardaro says it's another case of the state not being business friendly. "It not only is an indication of that but also sends a signal that 'We're not business friendly and proud of it,'" Lardaro said.

This response is just too typical of the Rhode Island mindset:

But Ed Mazze, a professor of business administration at the University of Rhode Island, disagreed, saying the state should not be blamed for the situation. He says accountants and their clients should have known better. “If they’re not smart enough to call the state and ask if there is an extension, then shame on them,” Mazze told GoLocalProv.

Hey, maybe you're not smart enough to live in our state. Why on Earth would you think that a six month extension would add six months to the date on which you actually were supposed to pay your taxes?

Of course, I'll grant that we've allowed our government to operate as it does raises the question of whether we deserve what we get. But still: we've got people on the public payroll whose job it is to find recipients of public assistance funds. Welfare programs have been known to advertise. Would it have been too difficult, given the unique circumstances of a catastrophic flood during tax season, to send out a notice ensuring that those who filed for extensions understood the dates involved?

Helping Small Businesses by Making Their Lives Harder

It's as if, even when they're claiming to be legislating on behalf of small businesses, Obama and the Democrats can't resist binding small businesses:

But under a little-publicized provision in the bill, mom-and-pop owners of triple-deckers, duplexes, condos and other such rental real estate will have to obtain the names, addresses and federal tax identification numbers of many of their snowplow operators, electricians, painters and other such service providers.

If the landlord pays such a contractor a total of at least $600 for the year, the landlord will generally have to issue that contractor a special tax form, called a Form 1099 (or "ten ninety-nine" by tax professionals). The landlord will have to list on the form the amount the contractor was paid for the year, and send a copy of that form to the IRS.

When hiring workers, in this way, businesses are acting as consumers, not as contractors; it's not as if they charge renters a markup on top of handyman bills. But to clueless Democrats (and not a few establishment Republicans, I'm sure), anybody who profits from any activity is a target for taxes or assistance in collecting taxes. It will now be that much more difficult for Americans to start business operations involving rental properties and to hire tradesmen and workers to maintain them.

On the margins, the decision of whether to hire somebody or to do repairs one's self will tip toward the latter. There will also be increased incentive to hire off-the-books tradesmen rather than small operations that are striving to follow the rules. Finally, although the news report explains that the government hopes to recoup $2.5 billion in taxes over the next decade, by this move, it seems not to be questioned what the real cost to affected businesses will be.

The only rational justification for this move, that I can see, is that the government is trying to fund its incompetent stimulus programs by squeezing the private sector so that it doesn't have to shave its own programs. The problem is that even tax-cheating small businesses contribute to the economy, while government is all absorption.

Democrat PR as Editorial

Perhaps it shouldn't seem odd, but it's still discouraging to see the editorial board of the state's major daily paper offer up partisan spin as an unsigned editorial. Consider:

The GOP argues that extending the tax cuts for the affluent is good for small business, which creates most new jobs. The Democrats, pointing to dismal wage and job-creation data since the first of the big Bush tax cuts went into effect, in 2001, say that boosting the economy by expanding middle-class purchasing power would be the best approach. It would, they assert, help small firms by bringing in more customers.

Read that again. The argument is that:

1. The tax cuts have not worked since 2001, but that keeping some of them will work now.
2. Keeping taxes exactly the same as current levels is "expanding... middle-class purchasing power

Whoever penned that paragraph should be embarrassed and angry at the rest of the editorial board for not pointing out that only one who is completely submerged in Demorat Kool-Aid could fail to see its illogic. Or try this:

Perhaps Mr. Boehner fears that the Democrats might force him into a corner as favoring the well off in the election campaign over the next few weeks. The Ohioan complains that the Democrats are conducting "class warfare" on this matter.

Except that Republicans appear to be winning on the issue:

Sen. Ben Nelson, D-Neb, made clear last week that he supports extending all of the Bush tax cuts, particularly in a bad economy, but on Monday he went further. Nelson told reporters he would be willing to join Republicans in crafting a bipartisan bill that does just that and even left open the possibility of supporting a GOP-led filibuster of any measure that stops short of a full extension.

Nelson said he does not expect to have to filibuster anything, however, as he does not expect his leadership to bring foward a bill that leaves out the well-to-do.

Meanwhile, Independent Democrat Joe Lieberman, who has said he supports extending all of the tax cuts, as well, told reporters he is not prepared to join Republicans in opposing a bill that only extends tax cuts for the middle class. ...

Several other Democrats in the chamber have come out publicly in opposition to letting tax cuts for the wealthy expire, and a number of others are known to be in that camp, as well.

And one more from the Projo editorial:

Consider that investment income, not earned income, is a major source of money for many better-off people. They pay a 15 percent capital-gains tax on their investments while people working for them might be paying an income-tax rate twice that on their wages.

Considering that the percentage of Americans paying no income tax at all is nearing 50%, including household incomes up to $51,000 per year, complaints against a 15% rate have a little less bite. For some perspective, 15% of $250,000 is $37,500, which begins to near the threshold at which those of us at the lower end begin paying taxes at all. I'm not supporting the rich over the working class with this point, just encouraging fair rhetoric and clear thinking.

To the current crop of Democrats (on and off the editorial board), not raising taxes is actually a cut, and taxation can never be high enough on disfavored groups of Americans.

Even During Painful Time, the Urge to Redistribute

To be fair, Kenneth Rogoff does maintain some balance:

While tax cuts enhance long-term productivity, expanding the government sector is hardly a recipe for economic vitality. There are surely many useful activities for the government to undertake in a market economy, but a frenzied orgy of stimulus spending is not conducive to rational discussion of what they should be. And of course, there again is the matter of the soaring national debt.

The problem comes with the reasons that Rogoff dislikes the tax-cutting solution. First, he argues against increasing public debt, which should only require that tax cuts be coupled with reductions in government spending.

A second problem with tax cuts is that they might well have only a limited impact on demand in the short run, with the private sector hoarding a significant share of the funds to repair badly over-leveraged balance sheets.

Here, Rogoff merely chooses to ignore human nature. Private sector entities with "over-leveraged balance sheets" will "hoard" until they feel secure, whether tax cuts help them to do so or not. They will also continue to be reluctant to hire and expand businesses, and by continuing to confiscate their resources through taxation, the government will only prolong this healing process. Moreover, Rogoff's central theme is that economic recovery is going to take "many years."

So, given the long-term recovery, why not go with a long-term solution? That's Rogoff's third and most mystifying reason for disliking tax cuts:

By some measures, nearly half of all Americans do not pay any income tax already, so cutting taxes skews an already very unequal income distribution. Deferred maintenance on income equality is one of many imbalances that built up in the U.S. economy during the pre-crisis boom. If allowed to fester, the political consequences could be severe, including trade protectionism and perhaps even social unrest.

Continued high unemployment and economic uncertainty won't cause social unrest? Rogoff should look around. Easing government confiscation from the half of the population that actually pays for it is unfair because the others contribute not at all? That's a truly remarkable sentiment; apparently it is the role of government to take from productive Americans merely for the sake of taking. And what's this about "maintenance of income equality"? I'd prefer maintenance of a bustling economy with plenty of opportunity for those willing to seek it. A moment's thought should lead any reasonable person to the conclusion that it's better to advance though others profit more than to wallow in stagnation.

Because he takes off the table tax cuts that would allow the private sector to repair itself at a more rapid pace, Rogoff winds up suggesting that the Federal Reserve should buy up government bonds and private debt. That means "printing money," which means inflation. I'm not a Harvard economist, by any means, but my understanding is that inflation would make it more difficult to pay off debt, generally. Thus, those who benefit from government handouts and who manage to sell their debt to the Fed would benefit at the expense of those — most likely throughout the broad economic middle — who must continue to pay off the same amount of debt with dollars that are individually less valuable.

Somehow, the question seems to come back to this: Is the redistribution of wealth worth continued all around hardship for everybody who isn't politically connected? It would seem to be one uberclass or another.

Barely "Factual"

The Providence Journal's still-new PolitiFact feature, with the market-hook Truth-o-Meter has generally been worth a perusal and sometimes a thorough read, although I've thought the journalists behind it could shoot for bigger targets much of the time. For today's review of a statement by state rep. and congressional candidate John Loughlin (R., Tiverton), though, they seem to have drifted a bit — claiming that a statement on the economic benefits of tax cuts was "barely true." Here's the statement that PolitiFact fact checked:

After Ronald Reagan cut taxes in 1981 the U.S. enjoyed "exponential growth."

Before looking at the substance of the claim, we need to adjust PolitiFact's parameters:

Taken literally, "exponential" refers to growth at an ever-increasing rate, as when something doubles, then triples, then quadruples. The economy during the Reagan years did no such thing.

Actually, it would be more accurate to suggest that the literal meaning of "exponentially" is not so much a reference to continual, unceasing growth, but to growth that is so large that it is best expressed in terms of exponents (x-squared and such). The growth of the economy in 1982 was actually recessionary, but in 1983, according to PolitiFact, it was 4.5%, and in 1984, it was 7.2%. Especially considering that nobody actually means "exponential growth" literally in public discourse, it isn't unreasonable to suggest that such growth fits the bill.

But the more important question is whether the statement is accurate by non-literal standards. PolitiFact offers two arguments in the negative. First, journalist Eugene Emery notes that growth thereafter "returned to a fairly typical 3 percent and 4 percent, which (while healthy) isn't exponential by any standards. Second, he points out that Reagan's 1981 tax cut was followed by tax increases, of various forms, in 1982, 1983, 1984, 1986, and 1987. He then asks Loughlin why "he mentioned only Reagan's tax cut and not the subsequent increases."

Perhaps if he hadn't been in a gotcha frame of mind, the journalist would have looked at the prima facie nature of his own question, particularly after he'd heard the following from a professional economist:

We asked Edinaldo Tebaldi, an assistant professor of economics at Bryant University, about the timing. He said it takes one to three years "to fully see the benefits of tax cuts."

In summary, Reagan (in concert, of course, with the rest of the federal government) cut taxes in 1981, and two and three years out, the economy grew. He then allowed taxes to increase, and after the same lag, the growth moderated. By the terms of the Projo's own fact-checking team, the evidence would indeed support the statement that tax cuts offer a very significant boost to the economy.

How Central Falls's Property Tax Rate Nearly Doubled Year Over Year

There's been some question, in the comments sections, about differing tax rates reported for property in Central Falls. John Hill explains what happened:

Last year, the total value of residential, commercial and industrial real estate in the city was just under $685 million. The new valuation, based on sales figures from the past year, was $411.6 million, a loss of $273 million, or 40 percent.

The drop in the value of taxable real estate meant the city had to increase the 2010-2011 tax rate just to generate the same amount of revenue as last year. Last year, the property-tax rate was $10.78 per thousand of assessed value; this year it went to $19.22 per thousand.

State receiver Mark A. Pfeiffer, who oversees the city's municipal finances, announced last week a 10-percent increase on top of that, to $21.14.

This is one of those ambiguities of taxation that comes up from time to time. Is the amount that you are taxed, for your property, better thought of in context of the rate or of the amount? Most RI towns treat your property essentially as a share in the government's cost and tax you according to your share more than directly according to the value of the asset that they're taxing. Personally, I think that slyly saddles homeowners with all of the risk for local property values, insulating municipal governments from the effects that their own policies can have thereon. But given all of the other things wrong with the way government operates in this state, it's not really worthy of a crusade.

A Slash with a Fake Sword

I think it's pretty clear, from Ed Fitzpatrick's Tuesday column that the Deepwater deal has put Republican general treasurer candidate Kerry King in an awkward position, but a tangential parenthetical from Fitzpatrick offers unfortunate indication that the tax-change scheme has succeeded in accomplishing one thing while saying another:

King, a retired life-insurance executive, began an Aug. 6 news release by saying, "I am not a fan of the government loaning money to businesses for any reason. We have banks to do that." But, he said, we wouldn't need to guarantee loans if we elected "pro-business candidates" who did things like lower taxes. (He didn't mention that state leaders just slashed the top personal income tax rate from 9.9 percent to 5.99 percent.)

What Fitzpatrick doesn't mention is that the 9.9% rate was a paper-only kind of a thing, in light of the now-evaporated flat tax (on top, recall, of the elimination of the favorable capital gains tax reform). What the General Assembly did, essentially, was to freeze the flat tax at its previous rate (although it was scheduled to drop to 5.5%) and effectively increase taxes on upper-working and middle class Rhode Islanders.

It's very disheartening to see such a maneuver succeed so spectacularly within the mainstream media common knowledge.

Taxed to Prosperity

Arthur Laffer asks a good question: "Whoever heard of a country taxing itself into prosperity?"

When President Kennedy cut the highest income tax rate to 70% from 91%, revenues also rose. Income tax receipts from the top 1% of income earners rose to 1.9% of GDP in 1968 from 1.3% in 1960. Even when Presidents Harding and Coolidge cut tax rates in the 1920s, tax receipts from the rich rose. Between 1921 and 1928 the highest marginal personal income tax rate was lowered to 25% from 73% and tax receipts from the top 1% of income earners went to 1.1% of GDP from 0.6% of GDP.

Or perhaps you'd like to see how the rich paid less in taxes under the bipartisan tax rate increases of Presidents Johnson, Nixon, Ford and Carter? Between 1968 and 1981 the top 1% of income earners reduced their total income tax payments to 1.5% of GDP from 1.9% of GDP.

Given the inevitable relationship between taxes and the economy, it's difficult to tease out the effects of taxes as compared with the overall expansion and contraction of the economy, but as Laffer points out, even Sen. John Kerry's boat proves that the wealthy have great incentive to change their behavior in response to the incentives of taxation — even if that change only involves paying an accountant to place a particular dollar amount in one column as opposed to another.

To save the economy — and the government — elected leaders at all levels should cut taxes (adjusting spending as preparation) and encourage economic growth. The economy should come before the government. It's that simple.

Of Rates and Levies

This intra-conservative debate in East Providence points to one of those issues that tends to slide under residents' awareness:

[Mayor Joseph] Larisa is now trying to solidify tax limits by putting language into the city's Home Rule Charter. Charter amendments have to be approved by voters in a referendum, while ordinances are approved — and can be repealed — by a council majority. ...

But Bill Murphy, spokesman for the East Providence Taxpayers Association, said the charter language isn't identical to the ordinance and the changes, although "subtle," are a "step in the wrong direction."

Larisa has changed the limit from one on the total tax "levy" to one on the tax rate.

I've noted before that, in Tiverton, those who set policy treat the tax rate as entirely incidental to the levy, while in Providence, the change in tax rate has been a major fight. On one hand, focusing on the rate more closely aligns with the meaning of the tax; you're paying based on what your property is worth, and if you property values decrease you have less wealth and should therefore pay less. On the other hand, focusing on the levy insulates the town from downturns in the market, but it also prevents the town from taking upturns in the market as well as the fruits of economic development as an excuse to grow — which could become a huge problem when the market contracts or the tax base decreases.

For the record, I'm with Murphy, on this one.

Taxman as Enforcer

Randy Barnett has been following litigation in response to the individual mandate of the healthcare legislation that the Democrats rammed through Congress. Noting that the Obama administration's reliance on a claim of Congress's taxation power proves that arguments against the legislation's claims of Commerce Clause authority were never "frivolous," Barnett explains that the law, itself, relies on the now-challenged self justification. In other words, for the Supreme Court to uphold the mandate, it would have to "look behind that characterization during litigation to ask if it could have been justified as a tax."

Even so, Barnett doesn't think the tax power argument will fly with the current Supreme Court (emphasis added):

Now, of course, the Supreme Court can always adopt these two additional doctrines. It could decide that any measure passed and justified expressly as a regulation of commerce is constitutional if it could have been enacted as a tax. But if it upholds this act, it would also have to say that Congress can assert any power it wills over individuals so long as it delegates enforcement of the penalty to the IRS. Put another way since every "fine" collects money, the Tax Power gives Congress unlimited power to fine any activity or, as here, inactivity it wishes! (Do you doubt this will be a major line of questioning in oral argument?)

But it gets still worse. For calling this a tax does not change the nature of the "requirement" or mandate that is enforced by the "penalty." ALL previous cases of taxes upheld (when they may have exceeded the commerce power) involved "taxes" on conduct or activity. None involved taxes on the refusal to engage in conduct. In short, none of these tax cases involved using the Tax Power to impose a mandate.

Of course, some not-insignificant portion of ObamaCare supporters ultimately believe that Congress does have unlimited power over individuals. It's encouraging to know, therefore, that there are folks with the interest and resources to fight on our behalf.

The Illusion of an Improving Tax Structure

A while back, I pointed out (see the addendum) that what looked, at first, to be an economic improvement — the increased percentage of wealthy people in Rhode Island — turned out to be evidence of the contrary. The percentage improved because the non-wealthy left the state in such great numbers while the decreasing flat tax and capital gains tax maintained our population at the high end.

It seems likely to me that such less-encouraging factors explain the tax-related findings of the Rhode Island Public Expenditures Council (PDF), which Marc mentioned here. From the Providence Journal summary:

From 1998 to 2008, individual income tax collections, as a share of personal income, declined by about 7 percent, sales tax collections increased by less than 1 percent, and property tax collections increased by almost 4 percent.Simmons says the increasing reliance on the property tax in recent years can be attributed, in part, to the state’s decision to cut state local aid for education during the economic recession.

That forced communities to make up revenue losses through a combination of trimming expenses and raising the property tax — its only other major funding source besides state aid.

The silver lining is that Rhode Island's property tax grew at a slower rate than the national average of about 8 percent.

Because these calculations are made based on total income and population, in the state, and since our local economy has been struggling, while population has decreased, and since the General Assembly hasn't actually cut the tax, the sales tax revenue result is likely attributable to declining consumer confidence and increasing incentive to shop out of state, where sales tax is lower. On the income tax front, those who pay in the mid-range brackets have been leaving and out of work, while the tax on the upper range has been decreasing. That Rhode Island entered the recession ahead of the rest of the nation probably facilitated our "improvement" by this measure even more.

This puts a different light on the property tax question. Sure, the immediate cause was the cut in state aid, but the decrease in revenue from state-level taxes has surely been a prior cause (along with excessive spending and an unwillingness to cut state budgets to the necessary degree). That the growth in property taxes was slower than the national average need indicate only that Rhode Island was already closer to the threshold that residents could bear, and since the decrease in tax revenue for the state hasn't corresponded an increase, but rather followed from a decrease, in discretionary income for residents that threshold has, at best, remained stagnant.

Rhode Island, "Haven....for tax-skirting luxury yacht owners" Like John Kerry

As first reported by the Boston Herald:

Sen. John Kerry, who has repeatedly voted to raise taxes while in Congress, dodged a whopping six-figure state tax bill on his new multimillion-dollar yacht by mooring her in Newport, R.I.

Isabel - Kerry’s luxe, 76-foot New Zealand-built Friendship sloop with an Edwardian-style, glossy varnished teak interior, two VIP main cabins and a pilothouse fitted with a wet bar and cold wine storage - was designed by Rhode Island boat designer Ted Fontaine.

But instead of berthing the vessel in Nantucket, where the senator summers with the missus, Teresa Heinz, Isabel’s hailing port is listed as “Newport” on her stern.

Could the reason be that the Ocean State repealed its Boat Sales and Use Tax back in 1993, making the tiny state to the south a haven - like the Cayman Islands, Bermuda and Nassau - for tax-skirting luxury yacht owners?

Cash-strapped Massachusetts still collects a 6.25 percent sales tax and an annual excise tax on yachts. Sources say Isabel sold for something in the neighborhood of $7 million, meaning Kerry saved approximately $437,500 in sales tax and an annual excise tax of about $70,000.

The senior senator’s chief of staff David Wade denied the old salt was berthing his boat out of state to avoid ponying up to the commonwealth.

“The boat was designed by and purchased from a company in Rhode Island, and it’s based in Newport at the Newport Shipyard for long-term maintenance, upkeep and charter purposes, not tax reasons,” Wade told the Track.

Considering Unemployment

Having followed the work of Providence Journal reporter Neil Downing for years, now, I'm confident that it was not a deliberate omission, but I can't help but wonder why a particular factor contributing to economic malaise didn't make it into his recent article about unemployment:

In the current recession — which began in late 2007, and is now in its fourth calendar year — people are often out of work for 6 to 12 months — "if they're lucky to find a job," [URI Professor Edward] Mazze said; many are out of work for more than a year — or longer, he said.

The main reason, Mazze said, is that "no jobs are really being created." Partly because of high rates of foreclosures and consumer debt amid this recession, "businesses are afraid to spend because consumers are not spending," Mazze said.

Businesses and consumers both are facing uncertainty not only because of the depth of the recession but because we've got a "transformative" regime running the country. Massive public debt. Looming changes to healthcare requirements. Environmental regulations appearing inevitable, whether Congressionally enacted or administratively implemented. And the list goes on.

In such an environment, planning for as-yet prospective demand is even riskier than usual.

The Tax Burden Shell Game

The New York Times is the latest to bring attention to the "maverick" independent campaign for governor being run by Lincoln Chafee, specifically highlighting his call for an increase--and broadening--of the state sales tax.

[Chafee] would seek to eliminate a series of exemptions to the state’s sales tax, effectively raising the cost of food, clothing and other items by 1 percent — a proposal he says would raise $100 million more.

This would not seem like an especially radical idea, since it follows years of income and corporate tax reductions that would remain in place, and it means that $200 in school clothes would cost an extra two bucks....Whether or not more sales taxes make sense for Rhode Island (it would, after all, close only a quarter of the projected budget gap while adding to the burden of low-income families), the rarity of Mr. Chafee’s argument — and the fact that is comes from an independent — tells us something about the boxes in which both parties find themselves at the moment.

With that in mind, and with the news that RI taxpayers will be asked to foot even more of the state pension bill, we have the seemingly positive recent data published by RIPEC that explains that, over a 3 year period, Rhode Island has gone from 10th to 15th to 17th in the nation as far as overall tax-burden.

That reduction is thanks to income tax reform that has been implemented over the last few years--particularly the now defunct flat-tax option--such that Rhode Islanders now pay about the national average. Additionally, according to RIPEC, we also pay a lower than average percentage sales tax (79% per capita), which is presumably why it caught the eye of Sen. Chafee. The idea of broadening the sales tax to generate "more revenue" may seem like a small sacrifice--even a measly 1% as the Times suggests--and, as a consumption tax, it is arguably more fair. Further, it may even seem reasonable to take steps to bring the state sales tax in line with the national average.

Unfortunately, that's not the whole Rhode Island tax picture. RIPEC also reports that Rhode Islanders pay approximately 144% (per capita) the national average in property tax and 123% the national average in "intergovernmental revenues" (federal taxes that come back to the state). These last two explain the reason that conservatives take such a hard line on tax increases. Rare is the politician who will ask for a tax increase in one area while asking for a tax reduction in another. Sen. Chafee is no different. While he says property taxes are bad, he doesn't offer a plan for reducing them concomitant to his sales tax increase plan, other than the catch-all "economic development." (Well, no kidding--and how do high taxes help with that?).

Unlike Chafee, some of the gubernatorial candidates--Caprio, Robitaille, Moffit--are proposing cuts to the state budget. Of course the problem is, no matter who is the Governor, the real budgetary power at the state level lay in the hands of the General Assembly. The same General Assembly that has done barely enough to get by and are responsible for passing along some of the excess property tax burden onto the municipalities in the first place.

Further, unfunded state mandates aside, the municipalities are the ultimate arbiters of the property tax burden. Across the state, they've made cuts in fits and starts--nibbling at the edges with small, short-term concessions made in a few renegotiated contracts--while also relying on car tax revenue to fill gaps.

None of these entities have yet to truly address the structural economic problems we face, all of which are centered around the fact that we spend too much money on government at all levels. Remunerations--for government employees and government dependents--need to be reduced; expectations regarding the level of government services have to be lowered (and fewer required!); consolidation at the top. Don't fall for this bizarre shell game that shifts our tax burden from one category to another. Unless real reduction and reform is implemented--not the aforementioned nibbling or the one-time fixes so beloved by the General Assembly--we'll continue to bear the too-heavy tax burden we do, no matter what shell it's under.

Winning the Sales-Tax-Cutting Race

We keep hearing about the horrible prospect that Massachusetts is going to steal Rhode Island's gambling revenue if we don't win the race to build our own full-scale casinos, but what do you suppose would be the consequence, for RI, were the voters of MA to implement this?

The initiative would reduce the sales tax rate from 6.25 to 3 percent, a move that would cost the state up to $2.4 billion in annual revenue beginning Jan. 1.

Economy-wise, I'd wager that this is a far greater threat to Rhode Island than the casino competition. Of course, proponents of gambling and opponents of tax cuts are less concerned about the health of the economy than the health of state government. Indeed, the debate over the Massachusetts cut runs right along contemporary debates about just that division:

Millions of dollars were spent during the 2008 campaign by public employee unions and other opponent groups to defeat the initiative. ...

Opponents of rolling back the state's sales tax to 3 percent argue that such a large cut would put tremendous pressure on state lawmakers to reduce spending leading to widespread layoffs and cutbacks in services on which millions of people depend.

Note well that last word, "depend." The objective of big government is to make as many residents dependent as possible so that we'll all be afraid that our own dependency will hit the chopping block when the ruling class doesn't get its way.

"It will have a drastic impact on a whole range of services that the public expects from state and local government in Massachusetts -- local schools, public safety, human services, health care," said Michael Widmer, president of the Massachusetts Taxpayers Foundation. "The problem is this will take full effect in fiscal 2010 on top of a structural deficit in fiscal 2012 that could already be more than $2 billion. You're talking about a $5 billion hole in the 2012 budget."

For fiscal year 2009, Massachusetts's budget was $28 billion. Even if we assume that the tax decrease would lead to zero increase in transactions (thus mitigating the loss to state government), that number represents about 8.5% of the budget. There is surely that much fluff. And it's absurd to think that the actual decrease in revenue would not be much less.

Carla Howell, who is leading the charge is absolutely correct that "the only way to force lawmakers on Beacon Hill to eliminate wasteful spending is to take away their revenue streams." The problem is that the waste is more important to them than the services by which they hook residents, so they'll line up residents' dependencies — addictions — for cuts first. One can see this dramatically during local budget battles, and the principle holds at the state and federal levels, as well.

Expiring Tax Cuts=Tax Increases

Unless Congress and President Obama take action, the so-called Bush tax cuts will expire at the end of the year. Despite the rhetoric, it ain't just "the rich" who will be affected, folks. Here are a couple of the expiring cuts that will affect us "working class" people.

1) The tax brackets will go up from 10%, 15%, 25%, 28%, 33% and 35%, respectively, to 15%, 28%, 31%, 36% and 39.6%. Even if the bracket definitions are changed, that's still an increase for most of the workin' people.

2) People in the lowest two brackets (10% and 15%) pay 0% tax on investment profits. That will go up to 10% on long-term gains and 15% and 28% on dividends.

3) Married couples get twice the deduction of singles. Next year, this will fall to 167%. The marriage penalty is back.

The "Stimulus" in Miniature... or Hatchback

It appears that many residents' car tax bills will offer an early illustration of the consequence of the big-spending stimulus pursued by Congress and the White House:

A number of cars, which normally lose value each passing year, have increased in value this year as a result of several economic forces hitting the used car market. ...

"There are less used vehicles out there for people to buy," said [state Vehicle Value Commission Chairwoman Linda] Cwiek, who also is the tax assessor in North Kingstown. She placed blame for the short supply of used cars on the federal "Cash-for-Clunkers" program.

To stimulate a sagging automotive economy and to aid the environment, the federal program offered financial incentives to turn in older vehicles in favor of buying more fuel-efficient models. In all, the program removed 677,842 vehicles from the road and sent them to the shredder. That prevented them from entering the used-car market.

Not only does the government have to take money out of the economy to put money into it (even if it takes from the future), but distortions of the marketplace will ripple. In this case, the effect was exacerbated by the environmentalist lunacy of destroying the cars. Many of us observed at the time that the government was essentially paying out money to ensure that used cars would be more expensive.

On a broader scale, big government-initiated spending only works as a stimulus if the economy is already headed for a breakthrough. Softening the interim with public debt is a gamble that's best hedged, and Obama and the Democrats went all in, mostly in order to prevent government entities from having to contract.

ADDENDUM:

By the way, it looks as if I wasn't so unreasonable to question the General Assembly's change of law allowing vehicle assessments to go up for the purposes of taxation.

In Defense of Realistic Taxation

In defense of the Tea Party — in the broad movement sense — Fred Deusch of North Providence sums up the problematic thinking of those who advocate for progressive taxation:

Rhode Island has about 1 million people, but only 12,000 pay 41 percent of the state's taxes, according to Treasurer Frank Caprio. How much does Mr. Platt want from those 12,000? In a May 9 Commentary piece, Michael McMahon, former head of the Rhode Island Economic Development Corporation, wrote: "Montgomery County, Md., similar in size and population to Rhode Island, tried to balance its budget by increasing taxes on the top wage earners from 4.75 percent to 6.35 percent. This was supposed to generate $106 million of additional revenue. But many of the wealthy, who are very mobile, left town. Revenue actually fell by $257 million as the number of millionaire taxpayers declined from 7,989 to 5,529."

When the wealthy leave for greener pastures, whether from Maryland or in Rhode Island, who does Mr. Platt think makes up the for the loss in tax revenues? Answer: We all do.

As I've pointed out multiple times, for much of the last decade, Rhode Island's tax policies — the flat tax and the capital gains tax — appeared to be maintaining our base of wealthy residents, while high property taxes (to fund unrealistic contracts for public-sector unions) and the general hostility of our political culture to economic growth continued to drive out the working-to-middle class folks who wish only to build on that base of wealth in order to improve their own circumstances.

Now, the capital gains tax is back with a vengeance, and the flat tax has been eliminated through a clever "overhaul" that appears to make the income tax more progressive, in its real effects, not less. And nothing has been done to improve the lot of those who've been fleeing all along. As Mr. Deusch suggests, we're all going to pay the consequences... all of us, that is, who stay.

Can the New Fiscal Stabilization Act Be Used to Exceed the Rhode Island Property Tax Cap?

Monique asks a question about the state's new "fiscal stabilization" procedures...

In view of the fact that receivership involves entities that are bankrupt, i.e., that lack sufficient money to operate and/or pay their debts, did lawmakers identify the source that would fund these inexplicably inviolable contracts?

The division of municipal finance shall ascertain whether the budget for that fiscal year contains reasonable revenues from taxation and other sources to meet the appropriations and other amounts required by law to be raised, and the division of municipal finance shall report its conclusion to the director of revenue. If the director of revenue determines that the municipal budget as presented does not contain reasonable revenues from taxation and other sources to meet appropriations and other amounts required by law to be raised, the director of revenue shall certify this determination in writing...and notify the city or town that its tax levy has not been approved and that the city or town is not authorized to mail or otherwise transmit tax bills to city or town taxpayers. If the director of revenue has made the foregoing determination, the city or town shall prepare a revised budget for review and approval by the director of revenue.

45-9-15. Inconsistent provisions. -- Insofar as the provisions of this chapter are inconsistent with the provisions of any charter or other laws or ordinances, general, special, or local, or of any rule or regulation of the state or any municipality, the provisions of this chapter are controlling.

Tax Changes as Blatant Gimmick

John Kostrzewa is much more positive about Rhode Island's revamp of its income tax structure. I tend to see "revamp" in terms of a cosmetic makeover for a vampire. Kostrzewa apparently believes that's better than nothing:

... the origins of the plan to simplify the tax code and send a message outside the state that Rhode Island is serious about changing its reputation as tax hell stretch back to summer 2008.

That's when the Tax Policy Workgroup, the group of 21 accountants, lawyers, economists and other tax specialists appointed by Carcieri, began sweating out the details of a long-term strategic tax plan.

I'm sure many of the same points were made when the capital gains tax phase-out — now reversed — became law, or when the flat tax option was implemented. But as I've argued, this "revamp" appears to be little more than a means of stopping the flat tax in its tracks. But at least the cap-gains and flat tax efforts were an effort to introduce new cards, not to reshuffle the marked and sticky ones already on the table. When the governor's workgroup began with the principle of being "revenue neutral" the inevitability of scheming was built into the process.

Strange Agreement on Income Tax Changes

So, the revised income tax scheme is now law, and we'll soon enough find out whether it's actually beneficial or just shuffles some numbers around. I continue to be suspicious that it's just a roundabout way of freezing the flat tax with a positive spin. I'm also concerned that it further favors those who are less productive and less economically active, which puts me in an uncomfortable agreement with left-winger Peter Asen, of Ocean State Action:

Peter Asen of Ocean State Action, a coalition of community organizations and unions criticized the law, saying it does not do enough to help taxpayers. He said that some of the credits being eliminated, such as the mortgage-interest deduction, may hurt middle-class families.

As I've said, the flat tax and phasing-out capital gains tax had been maintaining Rhode Island's wealthy population, but the productive class (including, essentially, the middle and upwardly mobile working classes) has been fleeing the state. On top of which, Rhode Island's welfare system and tax code have actually being attracting those who would be an overall drain on our economy. This legislation appears to worsen the situation for productive working/middle class families (by eliminating itemization) and to worsen the expected situation for upper-income residents.

Consider this, from the folks at the Tax Foundation blog, which generally likes the new law (albeit tempering its praise with a list of other things the state should look at):

I should note that at the last minute, the proposal was made revenue-neutral by phasing out the standard deduction for high-income earners, a tactic also used in Utah and Maine recently. This results in a higher marginal effective tax rate than the statutory rate...

Tax Hikes and V Number 2

Not to kick off a beautiful Tuesday with gloom, but it seems inescapable. Environmental catastrophes, lingering war, emboldened terrorist states, and shifting demographics in the West that give those terrorist states reason for optimism about the future would each be bad enough, but the economy is what brings the world's problems to the front doors of every American. And on that topic, there appears to be an expanding feeling that recovery is not pending.

Indeed, Arthur Laffer foresees a likely scenario in which 2011 brings a second dip to the Great Recession:

Now, if people know tax rates will be higher next year than they are this year, what will those people do this year? They will shift production and income out of next year into this year to the extent possible. As a result, income this year has already been inflated above where it otherwise should be and next year, 2011, income will be lower than it otherwise should be.

Also, the prospect of rising prices, higher interest rates and more regulations next year will further entice demand and supply to be shifted from 2011 into 2010. In my view, this shift of income and demand is a major reason that the economy in 2010 has appeared as strong as it has. When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe "double dip" recession.

I hope he's wrong. Given everything else going on in the world, an economically depressed, socially dispirited United States will be an ineffective beacon during the dark days ahead.

Should We Be Willingly Fooled by the Tax Overhaul?

I'll tell you the honest truth: I really desire to play along and cheer the proclaimed income tax revision just passed by the General Assembly, but that "revenue neutral" thing gives the whole endeavor the feeling of a scam. Consider:

An analysis of the plan by Paul L. Dion, chief of the state Office of Revenue Analysis, showed the following:

• About 60 percent of resident taxpayers — 297,489 — will see a tax decrease, averaging $226 apiece.
• About 21 percent — 103,434 — will see no change.
• About 19 percent — 96,461 — will see a tax increase, averaging $654 apiece.

In the past decade, Rhode Island's flat tax reduction and (since-abandoned) capital gains tax phase-out have helped to maintain our base of wealthy taxpayers, but we've been bleeding what I've called "the productive class": motivated, upwardly mobile folks in the working and middle class range. So, the question of how many people will gain or lose according to the new policy is less important than the matter of which people will gain and lose. I lack the time for an analysis of my own, but the General Assembly's press release provides some clues:

The legislation would lower tax rates, simplify the system by reducing the number of tax brackets, exemptions and credits, eliminate itemizing and increase the size of standard deductions. It would go into effect Jan. 1, 2011, and it is estimated that it would save taxpayers whose adjusted gross income is less than $175,000 a total of about $4 million in 2011.

It would eliminate the flat-tax option for the highest earners, instead reducing the top marginal income tax rate from 9.9 percent to 5.99 percent. That amount would still make Rhode Island more competitive with neighboring states in terms of attracting high-earning taxpayers and help shake the state’s reputation as being unfriendly to high earners, but would not give the highest earners as low a rate as the flat tax would have eventually become if it were to continue being reduced, as it would under current law.

Notwithstanding the proclamations of folks (like Gary Sasse) whom one expects to be on the right side of such issues, it looks like the state government has mainly orchestrated a freeze of the flat tax with a positive spin. In other words, they've made the tax code more progressive.

And it may be somewhat worse than that. I'd be in favor of a flat, percentage-based tax that everybody pays and can figure out in minutes with a calculator, but disfavoring those who itemize, in favor of a standard deduction, would seem to turn against economic activity. At least to my experience, the years that I've itemized have all, first, been years during which I carried a mortgage (i.e., invested in the state by buying a house) and, second, made significant investments in the work that I do (i.e., buying tools for carpentry and equipment for writing).

The basic problem with focusing on the visible tax rates — as this legislation does as its central premise and objective — is that the families that can help to pull Rhode Island out of its death spiral will also be disproportionately likely to look past the headlines. To the extent that taxation makes a difference (and it isn't all-determining, to be sure), those who are wealthy and those who are most motivated to build wealth will take a moment to figure out whether they're among the 19% whose taxes are going up.

UPDATED: Every Which Way They Can Stick It to You Slyly

So, yeah, the General Assembly has managed to keep its hands pretty clean when it comes to raising taxes, but Rhode Islanders shouldn't expect to have more money in their pockets — at least not unless they get involved in local government right now. As we've seen, in Tiverton, the state bureaucracy is willing to be complicit in complete flouting of the law and regulations when it comes to local officials' desire to tax residents more.

Now, as Marc mentioned, yesterday, the General Assembly has removed almost all of the exemption that prevents towns from taxing the first $6,000 of your car's value, enabling town governments to increase taxes almost passively. In Tiverton, that means another $105.27 per year on cars valued over that amount.

But here's an interesting edit of the legislation, on the General Assembly's part:

The excise tax rates and ratios of assessment shall be maintained at a level identical to the level in effect for fiscal year 1998 for each city, town, and fire district; provided, in the town of Johnston the excise tax rate and ratios of assessment shall be maintained at a level identical to the level in effect for fiscal year 1999 levels and in no event shall the final taxable value of a vehicle be higher than assessed in the prior fiscal year, and the levy of a city, town, or fire district shall be limited to the lesser of the maximum taxable value or net assessed value for purposes of collecting the tax in any given year.

Inasmuch as there's no language restricting increased assessments to classics, it would appear that a town now has the ability to decide that your car is worth more than it was last year. Presumably if the mileage goes down or you remodel its kitchen.

ADDENDUM:

In the comments, John offers the explanation:

The language was changed because the taxable value of most cars will necessarily increase due to the lowering of the exemption. My $15,000 car would have a $9,000 taxable value with a $6,000 exemption. When the exemption drops to $500, the taxable value is increased to $14,500. Therefore, if the locals are to tax the vehicle at the higher "taxable value", the law needed to be amended.

The Underlying Assumption of the Leftist Taxers

In a review of some of the tax consequences of Obamacare, Grafton Willey conveys this bit of policy that one suspects underlies many of the assumptions of those who advance policies in the mold of nationalized healthcare:

Imposing a 3.8 percent "unearned-income Medicare contributions" tax on higher-income taxpayers. The 3.8 percent unearned-income Medicare contributions tax is imposed on the lesser of net investment income or the excess of modified adjusted gross income (AGI) over the threshold amount ($200,000 for single individuals or heads of households; $250,000 for married couples filing a joint return and surviving spouses; and $125,000 for married couples filing separate returns).

Neither the $200,000 nor $250,000 amounts are indexed for inflation. Modified AGI is adjusted gross income increased by the amount excluded from income as foreign earned income less deductions attributable to such income.

Net investment income includes interest, dividends, royalties, rents, gain from disposing of property from a passive activity and income earned from a trade or business that is a passive activity. In determining net investment income, investment income is reduced by deductions properly allowed to that income.

Net investment income does not include distributions from qualified retirement plans, including pensions and certain retirement accounts. For example, income from individual retirement accounts (IRAs), 401(a) money purchase plans, 403(b) and 457(b) plans would be exempt.

Some of the hardest work that I've ever done was the back-room labor involved in selling fish from a truck, and there were times, while hauling crates in the snow or cleaning putrid wooden boxes in the beating sun, that I marveled that it should be so difficult to earn $7 per hour and wondered what one could possibly do to "earn" the salaries of the wealthy. (For clarity: I look back on those days very fondly and came around to appreciating them even while they were in process.)

I don't offer that anecdote as a means of transforming economic ignorance into a populist cry. To the contrary: the notion of "earned income" is hopelessly subjective and, therefore, merely a dash of political rhetoric to justify confiscatory taxation. Consider the amount of money that President Obama has earned as an author. Personally, I love writing and undertake it as a compulsion and balm. But in the course of lugging a table saw up the narrow steps to the third floor of a Newport mansion, I might be inclined to challenge the assertion that Mr. Obama "earned" that money in the sense implied by the Medicare tax.

While Your Eye Is on the Tax Cutting Hand

Something just isn't adding up with the news out of the General Assembly about this supposed "tax overhaul." According to some details explained by Neil Downing, it looks like all taxpayers would make out pretty well under the Senate's version, although the rich and the single appear to get the best deal, relatively speaking. Those on the lower end of the scale would appear to do pretty well, also, with only middle-income families facing a question mark. The one possible trick toward which Downing points is that the flat tax would disappear, and although the new top bracket would equal the current flat tax, those expecting it to drop to 5.5% for next year would be disappointed.

The peculiarity — as distinct from the vague sense that something isn't right — emerges with a subsequent article:

But the plan cannot be approved as it stands because it would result in lower state tax revenue, forcing the state's budget out of balance, a top negotiator said. ...

But the plan would also implement other provisions to reduce taxes. As a consequence, overall, 61 percent of taxpayers would see a tax decrease, 18 percent a tax increase and 21 percent no change, according to Senate fiscal office figures.

But the plan would also reduce state tax revenues by about $11.5 million for the fiscal year that ends June 30, 2011 (and more in later years), Senate fiscal office figures show.

The key question is who the 18% seeing a tax increase would be, especially in light of the fact that they'd be taking the burden of 61%. The curious question is why such a big deal is being made of an $11.5 million shortfall. Personally, I'd like to see government revenue decreased by many times that amount, but if the goal is to pass something revenue neutral right away, it shouldn't be difficult to make that up.

Perhaps my RI-skepticism is too finely tuned, but if we see another General Assembly session come and go, in the next few weeks, without fruits from all of this hype, I'll be inclined to wonder what they were actually trying to distract us from. (Apart, of course, from the mountain collapsing beneath our feet.)

Ushering in Further Decline with Cutsie Tax Changes

Uh-oh.

Legislative leaders are poised to unveil a sweeping plan as soon as next week that would bring fundamental changes to the state's personal income tax system.

This may be one of the few times that I agree with a statement related to taxation coming out of the Poverty Institute, whose fiscal p