— Taxation —

April 17, 2013


Union Rules and "Unique System" Drive Up Overtime for State Government Community Living Aides

Justin Katz

Suzanne bates has another state-payroll-related investigative report on the Ocean State Current, this one covering a job titled "community living assistant."

These are high-school-educated employees with average regular pay below $36,000, who've been able to triple their pay with overtime and other salary enhancements, topping out near $130,000. Their job entails helping the residents of group homes, with at least two CLAs watching over four to six patients on a 24-hour basis. Obviously, there's apt to be downtime.

Especially notable, in this case, is the role of union rules in driving up the overtime costs. A decade ago, the department attempted to introduce "floaters," who could cover shifts at more than one of the facilities. The union objected that the strategy wasn't fair. On the other hand, senior CLAs can effectively "float" around the state... as long as they're doing it for overtime.

As we continue to sort through the outrageous spending for which so of Rhode Islanders' income is confiscated through taxes, Suzanne's doing a great job of filling in the picture of how the game works.

Read here.


April 13, 2013


Redistributive Property Taxes: Who's in the Providence Crosshairs?

Justin Katz

The way property taxes work, in Rhode Island, revaluations are little more than a way of redistributing the tax burden, and in Providence, a shift from taxing buildings to taxing land has repercussions for a number of recent issues, from the Superman Building to legislation affecting the entire state.

Continue reading on the Ocean State Current...


April 12, 2013


Property Tax Assessments

Patrick Laverty

Based on some Twitter chatter this morning, I learned that the property tax assessment letters are going out today in Providence. The citizens of our capital city are learning what value their homes and land will be taxed at. There is always some confusion as to what this means.

First, the city should be using a value that they think is the current fair market value for the land and the building on it. This should be approximately what the property would sell for on the open market. I've seen many times when these aren't even close, especially in my own town and my own property. I tried selling mine for nearly $30,000 less than the assessed value and I couldn't even get an offer. My solution to this would be to require the town or the company doing the assessing to purchase the property at this assessed price, if the owner is willing to sell, within 30 days. I'm guessing the property values would be set much more closely to what is realistic at that point.

But what do these values mean? If your assessed value goes down, does that mean your property taxes will go down too? Not likely and in most cases, they'll actually go up. They go up because the town still needs (or thinks it needs) additional revenues every year. Employees get raises, services and goods like electricity, heating oil, natural gas, are all things that cost more.

The way a city derives your tax bill is actually in two pieces. Neither piece means anything by itself. It's a combination of the assessed value and the tax rate. According to RILiving.com, the last property tax rate for non-commercial property was $31.89 per $1,000 of assessment. If your property is assessed at $300,000, simply mutiply that $31.89 by 300 and you get your property tax bill of $9,567 per year. However, Providence does offer a homestead exemption. This means if the property is your primary residence, Providence cuts that bill in half. Well, unless you're the Governor, then you can live anywhere you want and still get the homestead exemption.

Seems pretty straightforward. The town has their rate, does their assessments and that's their revenue. This would seem to be a problem if the property values drop at all. That would mean less revenue for the city, right? Nope. The cities actually do these calculations in reverse. In a way that might not really make sense. First they figure out how much money they need for everything they want to do and everything they want to support. Next, they take the total assessed value, divide one by the other and the result becomes the tax rate.

In a nutshell, your assessed value going down really doesn't mean anything at all. You need to take both values, assessment and the tax rate into effect. Because the city doesn't want to have a decrease in revenues along with the decrease in assessed value, they will in turn either increase the tax rate, lower or eliminate the homestead exemption or some combination of both.


February 16, 2013


UPDATED - Providence: 8th Highest Residential Tax Burden in the Country (Commercial Taxes Even Worse)

Monique Chartier

Funny that this should pop up now. (Major H/T Michael Graham. By the way, welcome back to the air, Michael. We missed you.)

It's the reason that I haven't shared the enthusiasm [link added] for the ... um, fiscal "achievements" of Mayor Taveras' tenure, genuinely nice guy though he is. His pension reform, as tepid as the state's, has only succeeded in locking Providence taxpayers into the eighth highest taxes in the country. Block Talk Editor Jenna Bromberg reports.

The tax burden of taxpayers living in different parts of the United States varies due to differences in state and local income taxes, property taxes, sales taxes and automobile taxes. So how does your city stack up?

Drumroll please…

The top ten cities* with the highest tax burden for a hypothetical family of three making $50,000 in 2011:

#10 Boston, MA

Paul Revere made his famous midnight ride on horseback here — but today, trading in the horse for a car of your own would cost $303 in taxes per year. The total tax burden for our hypothetical family in Boston sits at 12.2%, or about $6,125 annually.

#9 Burlington, VT

Vermont’s largest city, home to the very first Ben & Jerry’s, was ranked by Forbes as one of the prettiest towns in America — and we’re sure its 42,500 residents agree. But at a 12.3% tax burden ($6,150 per year), it’s #9 on our list of the most taxed cities in America.

#8 Providence, RI

The city of Providence is known for its historic and cultural attractions; it was first settled in 1636 by Roger Williams and was one of the original Thirteen Colonies. As of the 2010 census, 178,042 people lived within the city of Providence — and our hypothetical family paid $6,034 in taxes in 2011. $3,876 was property tax alone.

Yes, undoubtedly, backing down a substantial tax burden cannot be carried out in one term. But let's save the praise for when the burden is lessened, not just stabilized - especially when "stabilized" means assuring our position on yet another undesirable Top Ten List.

ADDENDUM

That, of course, is the residential tax rate. We would be remiss if we did not note that Providence's commercial tax rate - second highest in the country - is even higher. When do we start addressing both of these absurdly high burdens?

[Monique is Editor of the RI Taxpayer Times newsletter.]


February 13, 2013


02/13/13 - Senate Finance Committee, Sakonnet River Bridge Tolls

Justin Katz

Justin writes live from the Senate Finance hearing on repealing the Sakonnet River Bridge toll.

Continue reading on the Ocean State Current...


January 30, 2013


When the Insiders' Cut Comes First

Justin Katz

Even if you've disagreed with everything I've ever written, take a moment to ponder the thinking on display in this Kathy Gregg article. It's about a study from the left-wing Institute on Taxation & Economic Policy finding that Rhode Island places a high tax burden on lower-income families.

Continue reading on the Ocean State Current...


January 16, 2013


Hm. Maybe the Status Quo Option Will Work for RI

Marc Comtois

Offered entirely tongue in cheek...I think.......Anyway, it looks like Governor Patrick is going to propose a series of tax hikes that could end up making Rhode Island look good in comparison (shhhhh, don't tell anyone!):

According to Boston.com, Patrick listed possible revenue sources including:

Raising the gas tax from 21 cents to 51 cents per gallon
Raising the sales tax from 6.25 percent to 7.75 percent
Raising the state income tax to 5.66 percent from 5.25 percent
Levying a vehicle miles-traveled tax at 2.4 cents per mile
New, emissions-based vehicle title and registration fees could raise $175 million
A payroll tax on workers in regions with transit service could raise $140 million to $207 million

Of course, my guess is that our leaders oft-stated goal of trying to be more like Massachusetts will finally take hold once these proposals get through!



Legislation Under the Radar - Mo' Money for the General Fund

Justin Katz

I'm going through all legislation as it's introduced to the Rhode Island General Assembly, and the Center for Freedom & Prosperity will be putting out a real-time Freedom Index — essentially a watch list — in a couple of weeks. That'll have the collection of good and bad within the think tank's scope.

Card check? Check. Master lever? Yup. Mail ballots for lazy voters? Uh-huh. General Assembly term limits? Absolutely.

But in keeping with yesterday's post about overly discreet legislation concerning Bryant's taxes, I'm not able to resist mention of bills that I find intriguing, including those that are of interest because of the way they're presented.

Continue reading on the Ocean State Current...


January 15, 2013


Burying the Legislative Lead

Justin Katz

Most legislation introduced into the General Assembly comes with a brief summary that appears with references to the bill — most visibly on the various pages of the legislature's Web site. Sometimes the descriptions are misleading; sometimes they're just confusing. (Usually, they're pretty good, assuming one understands the lingo of policy.)

Today, Representatives Thomas Winfield (D, Smithfield, Glocester) and Gregory Costantino (D, Lincoln, Smithfield, Johnston) submitted legislation with a description that puts a superficial effect first and excludes the most significant purpose of the bill from the locations where it would be most easily spotted.

Continue reading on the Ocean State Current...


December 27, 2012


GOP and Sales Taxes

Patrick Laverty

It seems the RI Republicans in the State House might be finally stumbling on to an idea they can hang their hats on. Eliminating the state sales tax. Granted, it's one that they may be simply saying "me too" on as the RI Center for Freedom and Prosperity suggested this back in June. However, that's the whole point. The reason for places like this Center is so they come out with reasoned and researched ideas and then the legislature can decide which ones make sense and move them forward.

This type of idea is exactly the kind of bold thinking that the GOP needs to jump on. This is the party that can't even come up with a unified platform, but if they could forget about all the silly internal bickering they seem to get involved with and rally around an idea like this and sell it to the people of the state, from the leadership to every town committee, it's something that they could possibly see advanced.

Some are having difficulty understanding how eliminating the sales tax can help the state after about $880M of revenue is brought in through this tax. Even if businesses were to boom with the elimination of the tax, a trillion dollars multiplied by zero percent is still zero. But, if you need any evidence in seeing what a lower sales tax can do, look no further than Attleboro and Seekonk. It's no coincidence that so many stores are sitting right on Rhode Island's borders. If Rhode Island were to go to zero sales tax, we'd gradually see these stores move across the border and into the state.

But how would the state cope with the loss of the $880M in lost sales tax revenue? Well, for one, it's not that much, it's only about half of that when you don't count the gas tax, tobacco tax and meals tax that would remain in effect, according to the actual report on the Center's site. They also claim somewhere between 50 and 70% of the lost revenue would be reclaimed on the increased business presence in the state and the additional income tax revenues. If you have more business, you have more jobs and with more jobs, you have more income tax. The Center advocates for the remaining 30-50% to be made up through cuts to the state's services and even eliminating about $7M just by downsizing the state's tax collectors and tax enforcement agents.

I believe that many perceived and real problems go away when people have a job and have income. If we have businesses in the state, people will have jobs, people will have money, people will buy homes in the state, property values will finally increase and municipalities will be able to turn around many of their financial woes.

Finally, here is an idea that the state Republican party can actually get behind, do the work and get all the numbers. Make an intelligent and reasoned case to the people of the state, put on an election-like campaign blitz and then let others explain why we should all pay 7% on top of the cost of goods. Even better, this would get people to stop shopping in Massachusetts and keep the money in Rhode Island, for Rhode Island.


December 8, 2012


Mortgaging the Economy

Justin Katz

Marc Comtois highlights another fascinating glimpse into the reasoning behind policy ideas that he and I agree are, well, in error. I'm speaking of this paragraph from Slate's Matthew Yglesias:

... I'm especially enthusiastic about the mortgage part. Suppose homeowners in expensive coastal cities couldn't deduct their mortgage interest, what would happen? Well, what would happen is that prices would fall. But nothing more dramatic than that. All the deduction does is encourage further bidding up of the price. In a normal market, that bidding up of the price might lead to additional construction. But the main reason those blue metro areas have such expensive houses is that zoning doesn't allow demand to be matched with supply. No matter how expensive Georgetown or Harvard Square or Park Avenue gets they're not demolishing the existing structures and replacing them with much larger ones. So you'd get some extra tax revenue this way with no real change in the amount of underlying economic activity.

Look, I've been known to make statements about the effects of policies that are arguably over-confident, but at this level of detail, human behavior has a definite x-factor of which policymakers (and policy-propounders) should beware.

Continue reading on the Ocean State Current...


December 5, 2012


Stop Spending

Marc Comtois

As Michael Barone points out, historically, no matter the tax rate, tax receipts have almost never eclipsed 20% of GDP. The only time they did (20.5%) was in 2000 just before the dotcom bubble burst. Here's the chart:

taxgdp.jpg

Source: Economic Report of the President 2012, Appendix B, Table B-79, p. 412.

As Barone explains:

In the Obama years, federal receipts have hovered at 15 percent of GDP.

That's just because tax rates are too low, Obama backers reply. Just raise the rates on high earners and the problem will be solved.

Actually, high earners don't make enough money to close the current budget deficit. You'd need to raise taxes on middle-income earners too.

But we have had higher income tax rates in most of the years since World War II. What history and Table B-79 show is that even much higher rates -- like the 91 percent marginal rate on top earners imposed from the 1940s to the 1960s -- have never produced federal receipts higher than 20 percent of GDP.

Why is that? As the late Jack Kemp liked to say, when you tax something, you get less of it. When the government took 91 percent of what the law defined as adjusted gross income over a certain amount, not many people had adjusted gross income over that amount.

According to a Congressional Research Service study, the effective income tax rate on the top 0.01 percent of earners in the days of nominal 91 percent tax rates was only 45 percent. Others have pegged it at 31 percent.

In the 1970s, when the top rate on wage and salary income was 50 percent and 70 percent on investment income, high earners spent much of their time and energy seeking tax shelters. The animal spirits of capitalists, to use John Maynard Keynes' term, were directed less at productive investment and more at tax avoidance.

Any serious economic plan has to reduce spending to below 20% of GDP because receipts just aren't going to get above 20% of GDP. But no one is interested in being serious.

ADDENDUM: And, for the umpteenth time, any proposed spending "cuts" aren't cuts at all, just a reduction in the projected amount of increased spending.


November 28, 2012


Things We Read Today (36), Wednesday

Justin Katz

Threats to the economy (cliffs and debts); RI lagging again (yawn); dependors and dependees; Social Security a problem; and a civil right to the war zone frat party.

Continue reading on the Ocean State Current...


November 21, 2012


To Starve or Gorge the Beast?

Marc Comtois

"[W]e've got to reduce spending before we can reduce taxes. Well, if you've got a kid that's extravagant, you can lecture him all you want to about his extravagance. Or you can cut his allowance and achieve the same end much quicker. But Government has never reduced. Government does not tax to get the money it needs. Government always needs the money it gets." ~ Ronald Reagan

Hence was born the idea of "starve the beast," a conservative core belief if ever there was one. But is it true? As explained in a recent column by Andrew Ferguson, economist (and libertarian) William Niskanen didn't think so.

Beginning in 2002, Niskanen published a series of papers and op-eds about tax cuts and spending increases that turned conventional conservative wisdom on its head....If we wanted a smaller government, he said, we would have to raise taxes....Niskanen, looking over 25 years of budget data, noticed something about STB ["Starve The Beast" ~ ed.]: It didn’t work. In fact, attempts to starve the beast by tax cuts seemed to lead to increased federal spending.

Niskanen looked at both spending and taxes as a percentage of GDP. On average, he found, if federal revenues declined by 1 percent, federal spending increased by 0.15 percent. When revenues rose, on the other hand, relative spending decreased. A further study in 2009 by another Cato economist, Michael New, came to the same conclusion after the gluttonous administration of George W. Bush. Under Bush and his mostly Republican Congress, new benefits like subsidized Medicare drugs and increased federal education spending followed on the heels of large tax cuts.

Niskanen’s explanation for the failure of STB was straightforward, a conjecture based on standard economics: When you cut the price of something, demand for it will increase. Lowering taxes without lowering benefits meant that taxpayers were getting the benefits at a discount. The government made up the true cost with borrowed dollars that future taxpayers would have to repay. There was a big difference, Niskanen said, between a kid on an allowance and the federal government: The government has a credit card with no debt limit. {emphasis added}

That last--the ability of government to write checks on credit--was overlooked by STB advocates.
[E]arly advocates of STB had counted on something that never materialized. They had assumed that as the debt piled up to finance annual budget deficits caused by free-flowing benefits, public outrage would force politicians to restrain spending without raising taxes. Yet we’ve had the deficits and the borrowing, in amounts that would have left Friedman and Reagan agog; what’s been missing is the outrage.
People aren't outraged because they don't feel the immediate pain of increasing government because the money for government expansion is either borrowed or paid for by increasingly fewer individuals. So around 50% of the population feels no pain (they don't pay income taxes) while a majority of the rest pays relatively minimal amounts. And a lot of that pain is left to future generations. This aligns with Niskanen's reasoning for why higher tax rates lead to lower spending:
“Demand by current voters for federal spending,” he explained, “declines with the amount of this spending that is financed by current taxes.” When you make them pay for government benefits out of their own pockets, in other words, voters will want fewer of them. The journalist Jonathan Rauch put Niskanen’s point more pithily: “Voters will not shrink Big Government until they feel the pinch of its true cost.”
Yet, as I mentioned, not everyone shares the tax burden evenly in our progressive income tax system. So, perhaps a flat tax would prove or disprove Niskanen's theory, but it's doubtful that will happen any time soon.

Ferguson's article brought some critiques of Niskanen's ideas. Noah Glyn offers up another reason for why government spending decreases when tax revenue increases:

[It's] the business cycle. As the economy grows, people earn more so they pay more in taxes; conversely, when the economy enters a recession, government revenue plummets. During recessions, however, the public relies on increased government spending, in the form of Medicaid, food stamps, and other transfer payments. (This can go the other way, too: Some state and local governments have used economic growth to justify increasing promises to government employees’ pension plans, but those costs typically come much further down the line.)
This is buttressed by Ramesh Ponnuru's important, technical point and "thought experiment":
Let’s say we still had the Clinton-era tax rates and a (smaller but still quite large) long-term debt problem. Wouldn’t we be debating an increase in tax rates to a higher level than we are now? That seems to me pretty likely. The baseline from which we’re negotiating would be higher, perceptions of what’s tolerable would be higher, expectations of tax rates would be higher. On the Niskanen theory there would be a countervailing effect: In the interim the tax cuts caused spending to be higher and thus moved the spending baseline higher. But Niskanen didn’t find that a dollar of tax cuts were associated with a dollar of spending increases; he found that a 1 percent reduction in revenue over GDP was associated with a 0.15 percent increase in spending over GDP. So the countervailing effect would be smaller.
Jonah Goldberg adds:
I always liked Niskanen’s argument, even if I didn’t quite find it persuasive. One thing that always bugged me about it which, to my surprise, Ferguson doesn’t mention, is the implicit assumption that Americans behave like rational economic actors with regard to what they get from government....The American species of homo economicus has been paying hundreds of billions to get rid of poverty for decades, what do we have to show for it? Poverty rate in 1975: 26 percent. Poverty rate in 2010: 26 percent. What a great return on the investment. Federal spending on education? Ahem...For reasons, good and bad, voters don’t treat tax dollars the way they do their own dollars. They don’t demand quality. They don’t demand accountability. They don’t push for efficiency. Many people think the government should spend money as if it comes from someplace other than the wallets of citizens and that what we get for it should be graded on some spiritual, emotional, philanthropic or metaphysical curve. How we spend for X so often seems to matter more than how much X is actually delivered.
Yet, as Patrick Brennan argues, re-stating Niskanen's implicit premise, the missing demand for government quality is because so many have so little stake in the game.
People might be a lot more likely to start caring about where their tax dollars go (whether the ends are efficient and whether the money comes back to them) when those taxes are really substantial, broad-based, and they actually have to pay them.
Brennan also compares U.S. expectations for government services to that of Europeans:
If you live in a society where, as Jonah pointed out Arthur Brooks has argued, the state is considered the main conduit for meeting societal needs and caring for the poor and vulnerable, you’ll care more about how well government works and whether it can care competently for you, and that’s a cultural matter. But it’s also important to homo economicus, because Leviathan has taken most of his paycheck, and he now has to hope, and should ensure, that government will provide for society at large, the poor and vulnerable, and even him at times, and do so as efficiently and competently as possible.

There are obviously other explanations for these differences: Charlie Cooke has lamented to me on many an occasion that in Britain, the conversation about almost all government policies ends up being debates over efficacy of programs, not whether the programs should exist in the first place. Leaving aside the financial constraints Britain and elsewhere are now experiencing, if you don’t have a constitution with enumerated federal powers, a truly conservative and independently minded political movement, etc., you’re going to spend more time on making government work, not on making it smaller, and that’s for other reasons than I’ve just proposed.*

Regarding the last, many conservatives (well, at least me) believe that a smaller government is one that is easier to make workable!

==========================
* Brennan expounded on the point later in the post: "It’s difficult to assess my thesis inasmuch as big government and the cultures that give rise to it have other negative effects on efficiency, so it’s possible citizens subject to a huge government and a regressive tax code get a more efficient government than they would if they didn’t have higher expectations than free-riding Americans, but still not a very efficient one. It’s been suggested, in fact, that it’s highly efficient yet regressive taxation (like light capital taxation, competitive corporate-tax rates, consumption taxes, etc.) that’s allowed places such as France and Scandinavia to have functional economies despite the burdens of absurdly large governments; perhaps it’s also the relative efficiency and usefulness of their government spending programs, and not just their tax system, that’s allowed them to manage as well. Thus again, economic preferences force the hand of citizens and politicians in a completely government-dominated society but not in one like America."


October 24, 2012


Things We Read Today (26), Wednesday

Justin Katz

Mainly on government's bad incentives: bad housing spending in Providence, unlearnable spending lessons for the governor, stimulus corruption, and Medicaid reform.

Continue reading the Ocean State Current...


October 10, 2012


Cato Gives Governor Chafee a D in Fiscal Policy

Justin Katz

In a white paper out yesterday from the Cato Institute, Governor Lincoln Chafee (as the chief executive of the Rhode Island government) received a score of D for fiscal policy.  His score of 41 is based on spending, revenue, and tax changes that he proposed and/or that were implemented under his watch from January 2010 to August 2012, and marks him as the seventh worst governor for fiscal policy.

Continue reading on the Ocean State Current...


September 28, 2012


Tiverton Toll Meeting Shows Rhode Islanders Have to Stop Fighting Fire with Paper

Justin Katz

Last night, I attended the first organizational meeting for the Tiverton branch of Sakonnet Toll Oppostion Platform (STOP), a cross-community effort to stop the state of Rhode Island from placing a toll on the Sakonnet River Bridge.  If I was skeptical about the ability of residents to prevent the tolls before, I'm pretty well convinced that the people of the East Bay will not be able to stop them, now.

The audience consisted of approximately fifty residents, from a broad variety of local groups and interests — many most often seen in heated attacks against each other over the usual slate of issues that face the town.  Even though the only state-level official in the room was Sen. Walter Felag (D, Bristol, Tiverton, Warren), the opportunity should be there, in other words, for some effective leaders to draw on the strengths of the different groups to affect state-level lawmakers.

Instead...

Continue reading on the Ocean State Current...


September 24, 2012


Even a 100% Tax on Millionaires Wouldn't Close Federal Deficit

Marc Comtois

"Even if the government took all of the income earned by those who have an after-tax income of $1million or more, the amount of revenue generated would fall far short of eliminating the deficit."

More related charts here.


September 20, 2012


House Makes it easier for Buffet, billionaires to pay down Federal debt

Marc Comtois

The House of Representatives--on a bi-partisan voice vote--passed the "Buffet Rule Act", which allows anyone to voluntarily pay more in taxes.

Under the legislation, which would still need Senate approval, taxpayers could check a box on their taxes and send in a check for more than they owe to the IRS.

"If Warren Buffett and others like him truly feel they're not paying enough in taxes, they can use the Buffett Rule Act to put their money where their mouth is and voluntarily send in more to pay down the national debt, rather than changing the entire tax code to inflict more job-killing tax hikes on hard-working Americans," said Rep. Steve Scalise, the Louisiana Republican who wrote the bill....Current law already allows taxpayers to send money to pay down the debt, but Republicans said that process is onerous. Under their new plan, taxpayers would have an easy option on their tax returns allowing them to pay more.

Under Republicans' legislation, the money would go directly toward reducing the debt.


September 3, 2012


Things We Read Today, 1

Justin Katz

One thing I've learned, in years of blogging, is to be wary of proclaiming new regular features.  Yet, I've been finding myself at the end of each day with a browserful of tabs of content on which I'm inclined to comment.

So, as interest and time allow, I'll publish quick-hit posts containing commentary that is somewhere between a tweet and a full-on blog post.

Continue reading on the Ocean State Current...



Leaning Against the Privileged Place of Investments

Justin Katz

Readers shouldn't be surprised to hear that I'm largely in agreement with Peter Ferrara's "Obama's Accelerating Downward Spiral for America," but he happens to voice one bit of center-right common wisdom with which I have growing disagreement:

There is no secret or magic as to how to turn around these declining incomes.  Increased investment in business expansion and start ups increases demand for labor, which drives up wages.  That investment buys new tools and capital equipment for workers, making them more productive, which provides the cash flow to increase wages.

Increasing investment results from reducing the tax rates on investment, which enables investors to keep a higher percentage of what they produce, increasing incentives for investment.


My resistance to this suggestion — notwithstanding Ferrara's positioning of it as a statement of the obvious — has three sides.

Continue reading on the Ocean State Current...


August 27, 2012


Note To GoLocalProv: RI "Rich Pay Less In Income Tax" = Third Highest Income Tax Rate In Country

Monique Chartier

GoLocalProv's Dan Lawlor has a column today in which he attempts to causatively link Rhode Island's top income tax rate to our unemployment rate.

In 1997, during a boom economy in RI- remember the Renaissance? - the top income earners had a 27.5% income tax rate. Our jobless rate was 5.3%.

Ah, but then, in 2010, according to Dan, we hit the skids, both in unemployment and top tax rate-wise.

In 2010, the General Assembly and Governor Carcieri reduced the top income tax rate from 9.9% to 5.99%. The state's sales tax remained at 7%. Our unemployment rate was 11.6%.

Uh huh. Two years later?

Top income earners now pay 5.99% in income taxes. Our jobless rate is 10.8%.

And the conclusion (according to Dan)?

Our tax policy has basically been that the rich pay less in income tax, and we all pay more in property and sales tax.

We could at this point ask if perhaps ALL of Rhode Island's taxes aren't too high and if this situation isn't most likely a direct result of too much spending on the state and local level. But we'll stick to what Dan wrote, only, if it's okay with Dan, we're going to overlay some context, a.k.a., facts.

By the way, H/T RIGOP StrikeForce Co-Chair Mike Napolitano for highlighting this column. About the 27.5% income tax rate of the 1990's, Mike points out in comments under Dan's column that Rhode Island's income tax was calculated quite differently than it is today.

In fact, that rate was not based on the taxpayer’s income but on the taxpayer’s entire federal income tax liability. In other words if a taxpayer paid $100 in federal income tax they in turn paid $27.50 to the state of Rhode Island. The rate was piggybacked on to the federal rate and not on their wages.

So comparing 1997's 27.5% income tax rate to today's 5.99% rate is not valid at all because the former was a piggy back rate. (Imagine a state income tax that was 27.5% of your income. By the second year of such a rate, Rhode Island literally would no longer exist as a state.)

Now, with regard to Rhode Island's current top income tax rate of 5.99%, let's mosey on over to the Tax Foundation and click on the Rhode Island page.

Rhode Island's personal income tax system consists of three brackets and a top rate of 5.99%, kicking in at an income level of $129,900. Rhode Island's income tax system closely adheres to the federal income tax code. Among states levying personal income taxes, Rhode Island's top rate of 5.99% is the 3rd highest nationally.

Follow up question for Dan. Under his theory, how much higher would we have to make Rhode Island's top income tax for unemployment to start going back down? Obviously, it would have to go from number three nationally to number one. But by how much would we have to overshoot the current highest rate to get back to a decent unemployment rate?

Off topic ADDENDUM: To prove that I am not merely out to pick on GoLocalProv with this post, permit me to direct you to their very good story today about the star of that video released Saturday by the ProJo.

The man seen in an undercover video telling a campaign staffer for Congressional candidate Anthony Gemma that he could deliver mail ballot votes in exchange for $500 per week received a $103,000 taxpayer-funded loan for a restaurant from the city of Providence in 2004, GoLocalProv has learned.

Remember that Mr. Ramirez allegedly secured mail ballots for the David Cicilline campaign in a prior election. Now, who was mayor of Providence in 2004 when Mr. Ramirez' business secured this loan and who might have been feeling grateful for Mr. Ramirez' assistance to his campaign? Gosh, I'm trying to think ...


August 24, 2012


When I Grow Up, I Wanna Be a Crony

Marc Comtois

I can't confirm if this was filmed in Rhode Island or not (h/t):

"I'm gonna fight for MY piece of the taxpayer pie."

"What's a crony?"

"It's like having a best friend who gives you other people's stuff."

"We take care of our friends."

"We get to spend taxpayer money any way we want."

"Why be a taxpayer when I can be a tax spender?"

Yup, it had to be filmed here, right?


August 10, 2012


Legislative Votes For and Against Tolls on the Sakonnet River Bridge

Justin Katz

Rhode Islanders, mainly from the East Bay, have organized a protest at Clements Market in Portsmouth, this afternoon, against tolls on the Sakonnet River Bridge. The hope is that the language that the General Assembly passed into law, this session, as Article 20 of the budget bill (7323Aaa) can be reversed.

That article and the budget to which it was attached were on the agendas of the RI House and Senate on June 7 and June 11, respectively. (The links are to the Ocean State Current's liveblogs, so readers can see who said what during debate.) In the Senate, Article 20 came up for a vote when Sen. Louis DiPalma (D, Little Compton, Middletown, Newport, Tiverton) proposed an amendment to remove it from the bill.

In the House, several amendments were raised and voted down to modify the article to make it less burdensome on local residents. The following table shows how the votes went in both chambers. The House voted on the article in three parts: Section 4, transferring the bridge's title to the RI Turnpike and Bridge Authority and authorizing tolls; parts of Section 3, authorizing the authority to maintain the bridge and set up tolls; and the rest of the article.

The votes below reflect the first vote, which is most explicit about tolls, but the article is written such that tolls would have been likely if any part of it passed. However, the only differences for the other two votes were that Baldelli-Hunt voted in favor of the language of Section 3, and Messier voted against the rest of the article.

Continue reading on the Ocean State Current...


July 19, 2012


Rhode Island To Offer Tax Amnesty

Monique Chartier

Governor Chafee's spokeswoman, Christine Hunsinger, confirmed this morning that one of the items in the FY2013 budget was a tax amnesty program. It will run from September 2 to November 15, 2012 and will apply to state taxes including income, sales, use, and unemployment insurance. Note that while monetary penalties and prosecution will be waived (for qualified applicants), interest would still be owed, albeit at a reduced rate.

More details from the CCH division of Wolters Kluwer Law & Business.

The program provides amnesty from penalties and from civil or criminal prosecution for any tax imposed under Rhode Island law and collected by the tax administrator for any taxable period ending on or before Dec. 31, 2011.

Amnesty will be granted only to those taxpayers who apply on or before Nov. 15, who have paid the tax and interest due or who have entered into an installment payment agreement as a result of financial hardship.

Amnesty will not be granted to taxpayers who are under any criminal investigation or are a party to any civil or criminal proceeding pending in federal or Rhode Island court for fraud in relation to any state tax imposed.

As for how to apply, there appears to be nothing yet on the RI Division of Taxation's website; it is early. I left a message with an official at the Division of Taxation asking him how interested taxpayers would get started. When he calls back, I will post an update.

UPDATE

The Division of Taxation has advised that, as the start date of the program approaches, information will be made available on the Division's website for interested applicants.


July 17, 2012


A Decade of Moving Next Door

Justin Katz

I've been following taxpayer migration data for years, but in a haphazard way. A new study that I've coauthored for the RI Center for Freedom & Prosperity finally gave me the opportunity to review all fifteen years of available data from the IRS.

The picture — from the 2003 beginning of what can only be described as an exodus — is frightening. After accounting for the tens of thousands of Rhode Islanders who moved to other states and other taxpayers who moved in the opposite direction, Rhode Island lost 24,455 households, with $1.2 billion of annual income (not inflation adjusted). More conspicuously, a net 3,406 taxpayers moved right across the border, to abutting counties in Massachusetts and Connecticut, taking with them $254.5 million in annual adjusted gross income (AGI).

Continue reading on the Ocean State Current...


July 10, 2012


Small Business Getting the Screws

Marc Comtois

While President Obama attempts to frame the lapse of the "Bush tax cuts" in 2013 as a supposed return to the norm--with plenty of help from the media, who have accepted the premise that the extension of current tax rates are actually revenue "losses" should they be "extended"--he also recognizes that it would be political suicide to let that happen in toto. So he has come up with a plan to "extend" the "Bush tax cuts" another year for individuals making less than $200,000 and businesses making less than $250,000. According to the President, anyone making more will be taxed at the rate "we were paying under Bill Clinton." Not quite according to the Wall Street Journal:

[President Obama] ignores his ObamaCare tax increase of 0.9% on top of the current 2.9% Medicare tax, plus a new 2.9% surcharge on investment income, including interest income.

That's an additional 3.8% surcharge on investment income, and added to the Bush expirations would take the capital gains rate to 23.8% from 15% today, and the dividend tax rate to about 45% from 15%. In Mr. Obama's economic world, tax cuts for middle-class "consumption" are good, but low rates to spur saving and investment are bad. This makes no sense because consumption is ultimately the product of saving and investment.

How does this affect small business?
The President dismissed all of this as merely affecting 3% of small business owners. But that includes tens of thousands of the most productive, fastest-growing small businesses—those most likely to hire workers amid a national jobless rate of 8.2%.

Congress's Joint Tax Committee—not a conservative outfit—estimates that in 2013 about 940,000 taxpayers will have enough business income to meet Mr. Obama's tax increase threshold. And of the roughly $1.3 trillion in net business income, about 53% will get hit with the higher tax rates.

This is because millions of businesses report their income as sole proprietors and subchapter S corporations that file under the individual tax code. So Mr. Obama wants these businesses to pay higher tax rates than the giant likes of General Electric or J.P. Morgan. Does that qualify as "tax fairness"?

No, but the President--and the Federal Government--aren't as friendly to small business as they'd all like us to believe and it's nothing new, as the U.S. Small Business Administration reports:
The federal government last year fell short of its “small business” contracting goals for the eleventh straight year, a streak that stretches back to the first year of the George W. Bush administration. Federal agencies awarded contracts worth $91.5 billion to small companies in fiscal year 2011, equal to 21.7% of all prime government contract dollars awarded. Despite ongoing efforts to boost small business contracting, 2011 saw a drop of 6.5% from the 2010 total of $97.9 billion, which represented 22.7% of prime contract dollars. With a goal of 23%, however, the government came up short in both years, according to data released by the Small Business Administration (SBA).

The government also failed to hit its contracting goals for businesses owned by women or service-disabled veterans, as well as for those located in traditionally underserved and underemployed regions of the country.
Couple the above with the way regulations are stacked against small-businesses, as Jay Carney explains in his analysis of a new policy paper arguing against corporatism (and for truly free markets) by Matt Mitchell, senior research fellow at George Mason University's Mercatus Center:
Politically favored businesses of course benefit from direct subsidies (think agribusiness) and government loan guarantees (think Solyndra and Boeing), but Mitchell makes the important point that regulation itself creates a privileged class.

Regulation often acts directly or indirectly as a barrier to entry. The conservative and libertarian media have documented this anecdotally -- Philip Morris supported and is benefiting from Obama's tobacco regulation, for instance, because the rules allow it to lock in its dominant market share.

This is not an idea held by just free-market think tanks, either. Carney continues:
For instance, liberal activists Ralph Nader and Mark Green wrote in the Yale Law Journal that the "regulatory system undermines competition and entrenches monopoly at the public's expense." Mitchell in this section also cites Alan Krueger, who now heads Obama's Council of Economic Advisers.

In the Obama era, as Democrats and the media try to paint deregulation as some sort of dangerous sop to big business, Mitchell's notion of "regulatory privilege" is a crucial tool for dismantling the old narrative that regulation protects the public. Mitchell uses a colorful image to make his case: Bruce Yandle's "bootleggers and Baptists."

Illegal booze smugglers, Yandle wrote, "support Sunday closing laws that shut down all the local bars and liquor stores. Baptists support the same laws and lobby vigorously for them. Both parties gain. ..."

Between regulation and higher taxes, it's no wonder that small-business owners feel like the screws are being put to them.



Rhode Island Is Not Delaware - Why Not?

Patrick Laverty

I've been sitting on this article for a few days because I couldn't think of the best way to write about it. I guess in many ways, it's just so obvious that there isn't a whole lot to say. I'll just throw it out there.

On June 30, the NY Times published the article: How Delaware Thrives as a Corporate Tax Haven. The focus of the article seems to be the tax dodging and the criminal aspects of it. Some states, like Pennsylvania, get angry about Delaware's business-friendly tax laws and claim that Delaware robs them of their tax revenues.

State lawmakers in Pennsylvania are now trying to close the loophole, arguing that their state is being robbed of its tax dollars. Of particular concern is that many companies involved in drilling for natural gas in the Marcellus Shale region of Pennsylvania are, in fact, incorporating in Delaware instead.

“Delaware is an outlier in the way it does business,” said David E. Brunori, a professor at George Washington Law School and an expert on taxation. “What it offers is an opportunity to game the system and do it legally.”

Exactly, they do it legally. At least one state has set up an environment that is business-friendly to the point that many US corporations will actually seek it out to put an office there and pay tax dollars there. Even international entities will set up shop in Delaware due to their tax laws.

“Companies choose our state and we are proud of it,” said Richard J. Geisenberger, Delaware’s chief deputy secretary of state and its leading ambassador to business. “We spend a lot of time in the United States and traveling internationally to let people know that Delaware is a great place to do business.”

I'm sure some will turn up their nose at being "business friendly." It must come at the expense of everyone else, right? If you're going to be friendly to businesses, someone has to pick up the tax bill and the only alternative there is the lowly taxpayer. So let's take a look at Delaware's tax rates, especially in comparison to Rhode Island, using the Tax Foundation's numbers: DE RI

State Indiv. Income Tax Top Rate Corporate Income Tax Flat Rate Sales Tax Property Tax Per Capita Taxes Paid to State Per Capita Unemployment rate
Delaware 6.75% 8.7% 0% $712 $2,432* 6.8%
Rhode Island 5.99% 9% 7% $2,019 $3,290* 11%

*Total paid to the state is for 2009

According to those numbers, the residents of Delaware pay less in taxes and have an unemployment rate that's just a little bit more than half of Rhode Island's. Even better, they don't have a sales tax, so that will also attract residents of neighboring states into Delaware for puchases. Like I said earlier, this sort of thing is just so obvious, what else is there to say?


June 29, 2012


It's a Tax on Your Body

Justin Katz

Unless I missed some language, the Supreme Court's ruling on ObamaCare shirks the responsibility of explicitly defining exactly what sort of tax Congress has imposed and how similar taxes might be structured in the future. Still, a thread can be followed.

Having just read through the tax-related sections of the ruling, and although the logic is as incoherent and slave to convenience as any I've ever read, it seems to me that a straightforward conclusion can be drawn.

First, on the incoherence: The health insurance mandate is apparently not a tax for determining the standing of the suit, but it is a tax to save the law. It's not a capitation tax — "a tax that everyone must pay simply for existing" — for the purpose of evading the constitutional requirement that such taxes be apportioned by state, but it's like a capitation tax for the purpose of evading precedent that prevents taxation from being used as stealth regulation. Bob and weave; whatever form it has to take to pass each obstacle.

However, in writing his opinion, Supreme Court Chief Justice John Roberts makes a big deal about the fact that people with no income tax burden do not have to pay the tax: "It does not apply to individuals who do not pay federal income taxes because their household income is less than the filing threshold in the Internal Revenue Code." Later, he likens it to a tax incentive.

The only way all of this makes coherent sense (which may be too high a standard for the highest court, granted) is if one takes the ruling a step farther to determine what sort of tax it is. I'd propose that the ObamaCare tax is effectively a capitation tax or a property tax on one's body.

Continue reading on the Ocean State Current...


June 27, 2012


Residential Property Tax Burdens in Rhode Island Municipalities

Carroll Andrew Morse

For reference from an upcoming post, but also interesting in its own right...

This table shows the residential property tax levy in each Rhode Island municipality, as a percentage of aggregate income in that municipality, as reported by the census bureau.

The details of residential property tax levy, involving the separation of residential from commercial property taxes (and treating apartment and mixed property tax classifications as residential, since much of that tax will be passed along to residential tenants), fire-district taxes and car-taxes, is explained here.

Community income in this chart is a single figure available from the Census Bureau's American Community Survey. This is a slightly different from the method I used last time where I presented this chart, where I multiplied per-capita income by total population figures taken from the ACS. Both methods give similar results.

The biggest gap in this chart is that the percentage of income paid in property tax in communities with many second vacation homes is inflated, since the income from non-residents is not included in the denominator.

As always, I'm open to further adjustments that can be made to these figures.

CommunityEstimated Residential
Tax Levy (2011)
2010 ACS Aggregate
Household Income (2010)
%
New Shoreham$7,548,403$44,124,50017.1%
Westerly$60,068,382$721,805,6008.3%
Charlestown$22,344,774$278,517,6008.0%
Jamestown$18,226,276$238,357,1007.6%
Barrington$52,531,961$751,029,5007.0%
Smithfield$44,556,739$637,479,2007.0%
Narragansett$41,330,974$598,013,0006.9%
Hopkinton$17,371,823$260,645,5006.7%
Glocester$20,367,277$307,319,0006.6%
Tiverton$32,555,171$493,782,2006.6%
Foster$10,126,928$155,949,2006.5%
Cranston$140,031,603$2,159,795,1006.5%
North Providence$55,663,407$877,310,0006.3%
East Greenwich$40,943,187$651,042,0006.3%
South Kingstown$59,666,885$960,168,6006.2%
Little Compton$9,690,006$156,354,2006.2%
Scituate$18,898,836$314,783,9006.0%
Warren$18,903,276$318,957,3005.9%
Richmond$14,284,170$241,437,6005.9%
Coventry$59,892,348$1,028,785,8005.8%
North Smithfield$22,118,882$380,866,9005.8%
Portsmouth$41,832,221$720,966,5005.8%
Newport$48,915,879$843,900,1005.8%
Burrillville$25,001,269$432,281,8005.8%
Middletown$31,522,496$548,112,8005.8%
Warwick$142,107,199$2,493,240,3005.7%
North Kingstown$57,562,579$1,034,986,4005.6%
West Greenwich$11,254,689$202,598,5005.6%
Johnston$40,940,330$749,941,0005.5%
Providence$187,919,289$3,489,797,5005.4%
Exeter$12,546,640$247,293,6005.1%
East Providence$64,344,891$1,280,295,6005.0%
Cumberland$55,052,263$1,098,496,1005.0%
Pawtucket$74,151,943$1,487,635,0005.0%
Lincoln$37,704,656$762,295,1004.9%
Woonsocket$38,789,267$812,621,3004.8%
Bristol$32,574,555$701,069,2004.6%
West Warwick$33,739,187$763,230,6004.4%
Central Falls$9,700,424$269,642,6003.6%

June 7, 2012


Who's Flying Now? (And Why?)

Marc Comtois

Ted Nesi posted an interesting graphic from the Tax Foundation that shows that:

Rhode Island posted the 18th-fastest growth in high-income taxpayers between 1999 and 2009.

While the total number of Rhode Island taxpayers grew by just 4% during that period, the number with adjusted gross incomes above $200,000 jumped 63%, for a net gain of 58.9% at the top end, the biggest in New England.

This prompted the NEA's Pat Crowley to chime in with a by-now familiar bit of rhetoric:
Vindication once again. The “flight of the earls” myth that was used as a justification to cut taxes on the elite in the middle part of the last decade is, once again, shown to be untrue.
Well, as I responded, whether you believe in the "flight of the earls" theory or not (and setting aside that it's a bit of a strawman set up by Crowley anyway), the Tax Foundation chart and data doesn't really prove or disprove it at all because the data only compares the beginning and end of a time period in which RI cut the capital gains tax and enacted the flat tax (around 2006), which were aimed at keeping/attracting high earners. It’s just as possible that the "earls" were "flying" until the 2006 reforms and then we saw an influx. We’d have to see yearly data to more accurately determine causation/correlation. So let's do that.

First, even though what follows is a more robust way to look at the trend of higher income taxpayer migration, it is by no means comprehensive. It doesn't take inflation into account (though, as the Tax Foundation points out, their percentages are relative so that affect is mitigated in their analysis), which is why the relative increase in $200K wage-earning households when comparing 1999 to 2010 may be exaggerated. Additionally, the multitude of effects that the economic recession has had on wage-earners aren't adequately accounted for in this simplified manner.

I turned to the IRS's Statistics on Income data from 1999-2010 and tallied up the number of + $200K taxpayers. (Yes, I thought I'd look at 2010, too).

RIover200K.JPG

Further, thanks to a timeline provided by Justin, we can compare the implementation of tax policies that were meant to impact high wage earners.

2002: capital gains tax phase-out passed to begin in 2007
2006: flat tax reduction begins
2007: capital gains tax phase-out begins with 2/3 reduction; then it's frozen
2010: capital gains tax increased to personal income level
2011: Flat tax rate reduction frozen

Keeping these dates in mind, let's look at the effects on + $200K wage-earning households. In 2000 there were 9,013 such taxpayers and this dropped to 8,259 in 2001, which, if memory serves, may have helped serve as an impetus for the tax policies that followed.

In 2002, when the capital gains tax phase-out was passed (to go into effect in 2007), the number of + $200K wage-earners went up to 8,500. From 2003 thru 2005, the numbers continued to increase, from 9,252 to 10,798 in 2004 to 12,376 in 2005. In 2006 the flat tax reduction begins and the climb continued to 13,387. In 2007, the capital gains tax phase-out begins with a 2/3 reduction of the previous level and the total + $200K wage-earning households climbed to 14,737. That year the General Assembly voted to freeze the capital gains tax (so the other 1/3 reduction did not occur) and the number dropped to 13,475 in 2008 and 12,416 in 2009. In 2009, the capital gains tax was set to be increased by matching it to personal income level in 2010. The number of households earning over $200K dropped to 11,117 in 2010. In 2011 the Flat tax rate reduction was frozen and we'll have to wait to see what happened.

When looking at the data for both "upper" middle-class and (I guess) "regular" middle-class, it looks like there is no relation between these tax policies and the number of wage earners.

RI100-200K.JPG
RI50-100K.JPG

For myself, I've been more of a "flight of the squires" kind of guy than "flight of the earls", believing that it's the middle-class who is suffering--and fleeing Rhode Island--more than the wealthy. As the above charts show, maybe that's wrong.

What I think this does show, however, is that there is a link between capital gains and flat tax policies and the impact they have on the number of high wage earners. During the time that these taxes were reduced, the number of + $200K wage-earners increased. After these taxes were frozen or raised, the number of + $200K wage-earners decreased.

ADDENDUM: The freeze/increase occurred before the economic downturn of 2008/2009 and, it looks like, the "earls" were already fleeing. It also looks like a lot of the "earls" became, um, "counts"(?), as the number of upper middle class wage earners seems to to be continually increasing, perhaps because some earls stayed in RI but dropped an income category. Also, the upper middle class is also being continually refreshed by regular middle class wage-earners moving up. In other words, it's important to remember that these classifications don't necessarily cover the same households.


May 19, 2012


What Is The Point Of Tax Credits?

Patrick Laverty

A state will offer tax credits in order to incentivize a certain behavior that they wish. The holder of those credits then then use them to offset their own tax liability to the state. I have a friend who earns tax credits in various states by building affordable housing. Sometimes, his tax credits exceed his tax bill, so those credits become useless. Except, the state does allow the credits to be transferred. He'll then sell those earned credits to another business for cash and for less than the value of the credits. It's win-win-win. My friend wins because he gets cash, the other business wins because they're getting discounted money in the form of the credits and the state wins in that they get the affordable housing they desire.

Rhode Island has gotten into this game as well with the RI Film and TV Office. The state wanted to incentivize movies and television shows being made in Rhode Island, so they hand out tax credits for filming in RI and hiring Rhode Island businesses and citizens.

According to Ted Nesi, 38 Studios has applied for $12M in film tax credits for this year and has also submitted an application for $8.7M in credits for last year. So how in the world is 38 Studios going to justify applying for these tax credits? Are they going to get into the movie or television business now? The Film Office's definition of a motion picture does include video games, but only for theatrical or television purposes. I don't know that the definition fits.

If for some reason the state grants these requests, the only logical use for them is to sell them. Go back to the original scenario I described. A state wants a certain outcome, they incentivize it, someone grants the outcome and ends up with a surplus of credits in some instances. That's not what's seems to be happening here. It appears that 38 Studios would be applying for the tax credits for the sole purpose of selling them. If they plan to make a movie or television show and film it in RI with RI businesses and citizens, then great, give them the credits. If the sole purpose is to sell them, then no, the applications should not be approved.

During Governor Chafee's press conference yesterday, he also said that he will be proposing a bill that would cap the amount of tax credits to a single source at $5M. That's just in case you were wondering how the Governor felt about the state handing 38 Studios all this money.

I think if Chafee wants to go the distance on this one, add in that the credits cannot be transferred. Or, if that's too draconian, add in a provision that they cannot be transferred unless some portion of them (at least 50%?) have already been used by the requestor. To me, that makes perfect sense. It fits the original intended purpose of tax credits.

Bottom line, make a film or disallow the applications.


April 30, 2012


Businesses Go Where Taxes are Lower

Patrick Laverty

Businesses will set up shop where the tax laws are more favorable to them.

And in other news, water is wet. Maybe it would seem obvious to most that people will be motivated by lower tax rates. However, if you listen to some on the left, especially locally, this isn't true. But how do you argue it when it comes straight from the horse's mouth?

“We set up in Luxembourg because of the favorable taxes,” said Robert Hatta, who helped oversee Apple’s iTunes retail marketing and sales for European markets until 2007.
A New York Times article today "How Apple Sidesteps Billions In Taxes" tells much of the story and explains some of the various ways that Apple has chosen various places around the world to open offices, strictly due to the favorable tax laws. One of their offices has as few as twelve people assigned to it, but records revenues of one billion dollars a year.

It's not just international either. The California company even plays states off against each other.

Apple’s headquarters are in Cupertino, Calif. By putting an office in Reno, just 200 miles away, to collect and invest the company’s profits, Apple sidesteps state income taxes on some of those gains.
California’s corporate tax rate is 8.84 percent. Nevada’s? Zero.
If this can happen in a state as large as California, where 200 miles to Reno is considered "nearby", then can the same happen here where a 200 mile radius can land you in any of seven different states? Of course it can. It does! But yet, we still have those on the left who want to continually increase tax rates on businesses and further drive them away from Rhode Island.

It's also interesting to see the outrage against Apple for paying so little in taxes or paying it to foreign countries or a state other than California, where they're headquartered. The NYT spoke with DeAnza College President Brian Murphy, as DeAnza is a nearby neighbor in Apple's hometown of Cupertino.

But the company’s tax policies are seen by officials like Mr. Murphy as symptomatic of why the crisis exists.

“I just don’t understand it,” he said in an interview. “I’ll bet every person at Apple has a connection to De Anza. Their kids swim in our pool. Their cousins take classes here. They drive past it every day, for Pete’s sake.

“But then they do everything they can to pay as few taxes as possible.”

I'd have a question for Mr. Murphy and anyone else who criticizes Apple for legally paying as few taxes as possible. Do you take the standard deduction on your tax return? Do you have children and claim them as a deduction? Do you take the mortgage interest deduction? Do you take charitable deductions or any other kinds? If so, what's the difference? Each of those are "loopholes" within the US tax law that we all legally take advantage of. Apple and many other corporations are merely doing the same.

If we don't like the loopholes, then we should close them. Work with those in Washington who make the tax laws and get them changed. In the meantime, let's see this for what it is, proof that businesses will go where the tax laws are favorable and at the same time ask ourselves, "How's business in Rhode Island?"

(h/t Ted Nesi)


March 8, 2012


Cities & Towns Appear Unwilling to Sign Onto Meals Tax Fools Bargain

Marc Comtois

As reported by the ProJo, many, many people testified before a House panel that was convened to discuss the new meals (and other) taxes being proposed by Governor Chafee. Purportedly, the money will be sent back to cities and towns, which caused the legislators to make an interesting observation.

Lawmakers, meanwhile, noted that no city or town officials testified in support of the tax plans, even though a significant chunk of the revenue would benefit their communities....“I found that pretty amazing,” House Finance Committee Chairman Helio Melo, D-East Providence, said afterward of the lack of support from cities and towns.
Perhaps, just perhaps, cities and towns realize that this is a twofold fools bargain. What good is a raise in a tax if it can't be collected because its added cost caused the local business to close or move? And whose to say the money that is supposedly earmarked for cities and towns won't just end up elsewhere in the black hole of Rhode Island government?

Maybe a third reason is that they know every business is against it, so it's not a very politically popular stance to take, either. Well, for most people anyway:

The only person to testify in favor was Kate Brewster, executive director of the Economic Progress Institute, which advocates for policies affecting the poor.
...and never met a tax increase they didn't like. 'Nuff said.


March 5, 2012


Why RI Is Driving Out the Hushions

Justin Katz

Jennifer Hushion submitted an op-ed to the Ocean State Current explaining why the City of Cranston and the state of Rhode Island are pushing her family toward the door:

The economic climate in Rhode Island — and specifically Cranston — is why we are considering leaving. It’s not that we are necessarily against higher taxes; we are against higher taxes when we receive so little in the way of services. Even more important to us than our current situation is the outlook for the future. Unfunded pension commitments and budget deficits are burying Cranston, and my family only sees the situation getting worse. ...

I can understand why one might think that those who make over $250,000 are 'rich.' We have worked very hard and are grateful for what we have, but the math is undeniable. Spend 30% of taxable income on private education because of local schools’ inadequacy, pay another 10-15% in state property and income taxes, put another 15% away for a retirement that is slipping away, and being “rich” means driving an 11-year-old car and postponing badly needed household repairs.


March 4, 2012


Tax Surprise Time

Patrick Laverty

It's tax time again and people are sitting with their 1040 and Schedule A and 1099 and W2 and all the other fun hoops the IRS makes you jump through. This year, it took me a minute but I was reminded of a little change to the RI tax code last year that very few people noticed.

Last June, with the fiscal mess the General Assembly was dealing with, they cooked up new ways to bring in revenue. One of those being to hold on to even more of our money. I normally get a pretty small refund from the state. My goal each year is to have both my tax returns end up as close to zero as possible. I don't want to have to pay anything more, but I don't want to give the government an interest-free loan either. However this year, we had no choice. The state decided that I can't afford to get back what I'm owed from the state. Or something. They've been withholding even more from each paycheck than they have in past years, even though they've already been withholding enough to result in a refund in past years.

On the face of it, it's a pleasant surprise to get a bigger refund than usual, but at the same time that money never should have been withheld from me in the first place. The state knows how much I need to pay them and I've been doing it just fine each year. Yet last year I needed to have even more withheld?

What the state did was give themselves an interest-free loan all year. If I missed my tax payments by the amount that Rhode Island missed their withholding, there'd be penalties involved. Interest added. But there's no interest in the other direction. Why?

Plus, there's the dumb economics of it. Let's say RI was withholding $40 a month too much from my paycheck. Let's also say I make the average salary and just to pick numbers out of the air, let's say there are 400,000 people working (eliminating the unemployed, retirees and underage). Just doing some back-of-the-napkin math, that's $1.6 million that the state has taken out of the economy each month or nearly $20 million over the last year. Does that make much sense? Our economy didn't need $20 million to be pumped in? I guess if they look at it selfishly and could get even a 2% return on that money, the state got a free $400,000 for simply holding on to it all year, only to give the $20 million back now. Not a bad deal, I guess.

Happy tax season.


February 24, 2012


The State of Local Taxation in Rhode Island, Measure II

Carroll Andrew Morse

How do amounts paid by municipal residents, in the form of local taxes, relate to how much their local governments have to spend?

Here is the answer for Rhode Island's cities and towns with the local tax levies measured in terms of percentage of income above a community's aggreggate poverty threshold...

lsplot2.jpg



The State of Local Taxation in Rhode Island, Measure I

Carroll Andrew Morse

How do amounts paid by municipal residents, in the form of local taxes, relate to how much their local governments have to spend?

Here is the answer for 38 Rhode Island cities and towns (New Shoreham is way off in the direction of the upper right-hand corner) with the local tax levy measured as a straight percentage of community aggregate income...

lsplot1.jpg



Revenue per Resident in Rhode Island Municipalities

Carroll Andrew Morse

While the percentage measures used in the previous posts provide initial insights into the question of willingness and ability to pay with regards to local taxation, the total picture requires looking at an absolute measure of what each RI city and town has available to spend, since the cost structure for local services is not a linear function of local income. For example the fact that per-capita income in North Providence is 80% of what it is in Foster does not mean that North Providence can provide the same services for 80% of what they cost in Foster.

Revenue from five sources for fiscal year 2011 (with the exception of the fire levies, noted below) is included in this table:

  1. The real property levy from all sources; residential, commercial and industrial.
  2. State non-education aid, which includes PILOT payments and the state car-tax reimbursement.
  3. Fire-district levies from all sources (using the 2010 data).
  4. Local car-tax levies.
  5. State education aid.
Local levy figures (including the fire district figures) are from the annual statements compiled by the Division of Municipal Finance. State aid figures are taken Rhode Island's publicly available state budget documents.

The amounts in each of the five categories for each city/town are below the fold, in Table 4.

Results are ranked using the sum of the five revenue sources per-capita...

Community Revenue From All
Considered Sources
Population Estimated Revenue
per Resident
New Shoreham $8,569,119 1,051 $8,153
East Greenwich $48,431,608 13,146 $3,684
Jamestown $18,984,613 5,405 $3,512
Barrington $56,539,329 16,310 $3,467
West Greenwich $19,504,001 6,135 $3,179
Charlestown $24,593,699 7,827 $3,142
Westerly $71,429,766 22,787 $3,135
Middletown $49,407,769 16,150 $3,059
Foster $13,860,749 4,606 $3,009
Newport $73,014,485 24,672 $2,959
Portsmouth $51,175,543 17,389 $2,943
Hopkinton $23,912,807 8,188 $2,920
Little Compton $10,196,191 3,492 $2,920
Narragansett $45,773,136 15,868 $2,885
North Kingstown $75,786,657 26,486 $2,861
Warwick $234,713,634 82,672 $2,839
Glocester $27,639,056 9,746 $2,836
Smithfield $60,184,769 21,430 $2,808
Central Falls $53,669,511 19,376 $2,770
Richmond $21,284,730 7,708 $2,761
Providence $488,555,304 178,042 $2,744
Lincoln $57,568,015 21,105 $2,728
Scituate $27,473,139 10,329 $2,660
Burrillville $41,749,102 15,955 $2,617
Exeter $16,680,553 6,425 $2,596
Cranston $207,593,421 80,387 $2,582
Warren $27,196,787 10,611 $2,563
Tiverton $39,471,890 15,780 $2,501
Coventry $85,874,992 35,014 $2,453
North Smithfield $29,330,391 11,967 $2,451
South Kingstown $74,173,165 30,639 $2,421
North Providence $75,579,151 32,078 $2,356
East Providence $108,554,357 47,037 $2,308
Woonsocket $93,586,294 41,186 $2,272
West Warwick $65,936,808 29,191 $2,259
Cumberland $73,274,936 33,506 $2,187
Johnston $62,572,597 28,769 $2,175
Pawtucket $154,046,441 71,148 $2,165
Bristol $48,178,255 22,954 $2,099

Now, to put this all together...

Continue reading "Revenue per Resident in Rhode Island Municipalities"


February 23, 2012


Residential Taxation in Rhode Island Municipalities, Part 2

Carroll Andrew Morse

In the previous post on local resident taxation in Rhode Island, there is a group of distressed communities (and Bristol?) at the bottom of the percentage-of-resident-income levied list. The clustering raises a question worth addressing of whether total income is the appropriate basis for measuring the taxation level in very poor communities.

The argument for adjusting the straight percentage is that there are certain fixed costs to human existence that are at least as important as paying your taxes and that taxation should be measured against what's left after basic necessities have been taken care of. The argument against is that an adequate adjustment has already built into a percentage metric, i.e. 5% of Central Falls' income would rank equally to 5% of New Shoreham's income on the straight-percentage list, even though it means much less money from Central Falls, and a further adjustment will open the divergence even wider.

I will calculate one version of a additional poverty adjustment, and present it along with the straight percentage measures going forward.

The Federal government annually calculates poverty thresholds based on family size. The Census Bureau's American Community Survey for 2010 includes a 5-year-based estimate of the number of households by number of household members in each RI community. Combining these two data elements, the amount of aggregate income needed to reach the Federal poverty threshold in each community can be estimated. Subtract that figure from the total estimated income in a community, and the result is estimated income above the poverty threshold.

The aggregate poverty thresholds alongside total community income for each Rhode Island community are listed below the fold in Table 3.

Using income-above-poverty-threshold as the percentage denominator does noticeably change the rankings. Pawtucket and Woonsocket, in particular, move up from the bottom of the list, though West Warwick and Central Falls stay about where they were...

Community Estimated
Residential Taxes
Est. Community Income
Above Poverty Threshold
%
New Shoreham $7,548,403 $43,156,924 17.5%
Westerly $60,068,382 $572,176,124 10.5%
Charlestown $22,344,774 $228,566,907 9.8%
Jamestown $18,226,276 $201,536,359 9.0%
Narragansett $41,330,974 $483,824,656 8.5%
Hopkinton $17,371,823 $205,331,075 8.5%
Smithfield $44,556,739 $540,793,934 8.2%
North Providence $55,663,407 $677,191,804 8.2%
Tiverton $32,555,171 $396,244,079 8.2%
Glocester $20,367,277 $248,135,004 8.2%
Barrington $52,531,961 $648,026,956 8.1%
Cranston $140,031,603 $1,731,101,472 8.1%
Warren $18,903,276 $242,159,186 7.8%
Foster $10,126,928 $130,700,587 7.7%
Scituate $18,898,836 $255,536,328 7.4%
Coventry $59,892,348 $816,146,172 7.3%
Richmond $14,284,170 $196,708,025 7.3%
Warwick $142,107,199 $1,962,582,789 7.2%
South Kingstown $59,666,885 $824,990,949 7.2%
East Greenwich $40,943,187 $567,021,673 7.2%
Little Compton $9,690,006 $134,548,069 7.2%
Providence $187,919,289 $2,645,403,886 7.1%
Burrillville $25,001,269 $352,665,391 7.1%
Middletown $31,522,496 $446,713,652 7.1%
Pawtucket $74,151,943 $1,067,974,255 6.9%
Johnston $40,940,330 $590,829,955 6.9%
Woonsocket $38,789,267 $563,406,119 6.9%
Portsmouth $41,832,221 $619,570,326 6.8%
Newport $48,915,879 $727,564,232 6.7%
North Kingstown $57,562,579 $859,563,071 6.7%
North Smithfield $22,118,882 $333,768,892 6.6%
East Providence $64,344,891 $996,042,498 6.5%
West Greenwich $11,254,689 $175,003,296 6.4%
Exeter $12,546,640 $203,667,786 6.2%
Cumberland $55,052,263 $905,804,162 6.1%
Lincoln $37,704,656 $640,511,273 5.9%
West Warwick $33,739,187 $574,321,052 5.9%
Bristol $32,574,555 $577,082,755 5.6%
Central Falls $9,700,424 $174,284,570 5.6%

So now we have half of a story: how much do local governments collect from their own residents, measured in two different ways. Next we'll add the other half, and look at how much governments have to spend on their residents...

Continue reading "Residential Taxation in Rhode Island Municipalities, Part 2"



Residential Taxation in Rhode Island Municipalities, Part 1

Carroll Andrew Morse

Everything up until now has basically been the prologue. Now on to the real thing.

Commercial property tax revenue is a relatively small portion of how RI municipalities generate their funds. The major part of the story involves residential tax revenue plus state aid.

An important quantity that needs to be taken into consideration, usually entirely neglected in Rhode Island taxation debates, is the degree that communities actually tax their own residents to pay for local services. Presently, the measures of "tax effort" that the state uses for various bureaucratic purposes (including calculation of the education aid "funding formula") seem to lump residential and commercial taxation together, meaning that a community can inflate its appearance of "tax effort" by raising taxes on commercial properties. There is a fairness issue here tied directly to an economic one -- if a community makes short-sighted decisions that run a bunch of businesses out of town because of high commercial tax rates that keep residential taxes low, is that community then entitled to demand that the state make up the difference in some kind of "funding formula"?

Data is available for painting a better picture of what is happening on the residential side. In terms of residential tax levies in each RI city and town, 3 components will be considered:

  1. "Residential" real property levies, provided by the RI Division of Municipal Finance for the year 2011, with the usual caveat that apartments and mixed-used properties which can officially be classified as commercial will all be treated as residential.
  2. Fire-district levies in communities where they occur, using the most recent data available from the Division of Municipal Finance from the year 2010 and that I will just move forward for the purposes of this particular analysis. I believe that fire levies are applied to both commercial and residential properties in the places where they are used, so the official figures will be pro-rated by the percentage of residential valuation.
  3. Car-tax levies, provided by the Division of Municipal Finance for the year 2011

(See Table 1, below the fold)

The U.S. Census Bureau American Community Survey provides mean income data for all 39 Rhode Island cities and towns, based on a 5-year data span (and I can hear the skinflint pseudoconservatives shrieking: What? We spent money to pay for 39 estimates. We should consolidate everything, and then we'd only have to pay for 1 estimate).

(See Table 2, below the fold)

Based on those numbers, local taxation in Rhode Island can be calculated in terms of the income of local residents. There are some interesting variations in the results.

Community Estimated
Residential Taxes
Estimated
Community Income
%
New Shoreham $7,548,403 $50,670,812 14.9%
Westerly $60,068,382 $723,623,972 8.3%
Charlestown $22,344,774 $280,245,735 8.0%
Jamestown $18,226,276 $238,128,085 7.7%
Narragansett $41,330,974 $589,639,012 7.0%
Barrington $52,531,961 $750,732,990 7.0%
Smithfield $44,556,739 $660,901,200 6.7%
Hopkinton $17,371,823 $258,085,760 6.7%
Glocester $20,367,277 $310,049,498 6.6%
Tiverton $32,555,171 $501,504,180 6.5%
Foster $10,126,928 $159,648,566 6.3%
East Greenwich $40,943,187 $650,450,934 6.3%
Cranston $140,031,603 $2,230,900,024 6.3%
North Providence $55,663,407 $896,195,164 6.2%
Little Compton $9,690,006 $158,047,920 6.1%
Warren $18,903,276 $313,342,830 6.0%
South Kingstown $59,666,885 $990,620,148 6.0%
Scituate $18,898,836 $321,459,138 5.9%
Richmond $14,284,170 $244,582,548 5.8%
Coventry $59,892,348 $1,038,550,254 5.8%
Portsmouth $41,832,221 $732,059,511 5.7%
Middletown $31,522,496 $553,331,300 5.7%
Warwick $142,107,199 $2,515,047,584 5.7%
North Kingstown $57,562,579 $1,030,596,746 5.6%
Burrillville $25,001,269 $451,319,085 5.5%
Newport $48,915,879 $883,701,696 5.5%
North Smithfield $22,118,882 $410,133,024 5.4%
West Greenwich $11,254,689 $213,215,790 5.3%
Johnston $40,940,330 $778,402,833 5.3%
Exeter $12,546,640 $242,627,275 5.2%
Providence $187,919,289 $3,691,700,870 5.1%
East Providence $64,344,891 $1,310,121,561 4.9%
Cumberland $55,052,263 $1,121,847,892 4.9%
Lincoln $37,704,656 $777,803,670 4.8%
Pawtucket $74,151,943 $1,534,520,064 4.8%
Woonsocket $38,789,267 $833,687,012 4.7%
Bristol $32,574,555 $711,183,782 4.6%
West Warwick $33,739,187 $771,810,040 4.4%
Central Falls $9,700,424 $290,465,616 3.3%

We're not done yet (hence the "part 1" in the title of this post), but I will make two immediate comments:

  1. A major factor that's missing that's really needed to complete this analysis for Rhode Island is the contribution made by summer residents. In effect, in communities that have a large number of summer homes, there is more property value than residents, which makes the final percentage appear higher than it should. A strong case can be made for backing that number out to calculate the percentage of year-round resident income that is collected in local taxes.
  2. We've got a couple of more posts to go, to contribute to a fuller understanding of the revenue side in each RI city and town...
Continue reading "Residential Taxation in Rhode Island Municipalities, Part 1"

February 22, 2012


Commercial Property Levies by Rhode Island Municipality

Carroll Andrew Morse

The next local tax table is a little more concrete than the previous two and their somewhat amorphous bases of "valuation" per resident. The table presented here is a list of Rhode Island communities, ranked by the amount of commercial and industrial property tax levy per resident. Again, the amount of "commercial" revenue attributed to "apartments" and "combined" use properties, as reported to the state's Municipal Affairs Office, where most of the cost is passed on to residential renters, has been removed from the figures.

And again, there is scant evidence that the City of Providence is being forced to work with an unreasonably low amount of property tax revenue from commercial and industrial sources due to tax exempt property within city limits...

Community 2011 Com & Ind
Prop. Tax Levy
Population Com & Ind
Rev / Resident
West Greenwich $4,980,923 6,135 $812
Warwick $58,802,556 82,672 $711
New Shoreham $620,655 1,051 $591
Lincoln $12,364,301 21,105 $586
Providence $99,836,045 178,042 $561
Scituate $5,704,885 10,329 $552
Middletown $8,731,200 16,150 $541
Newport $12,853,970 24,672 $521
Smithfield $10,196,186 21,430 $476
East Greenwich $5,650,568 13,146 $430
West Warwick $12,504,505 29,191 $428
Johnston $12,231,284 28,769 $425
East Providence $18,994,556 47,037 $404
Cranston $32,293,301 80,387 $402
North Kingstown $7,909,636 26,486 $299
Woonsocket $10,678,058 41,186 $259
North Smithfield $2,956,222 11,967 $247
Westerly $5,584,407 22,787 $245
Warren $2,512,512 10,611 $237
Pawtucket $16,468,956 71,148 $231
North Providence $7,160,107 32,078 $223
Coventry $7,525,842 35,014 $215
Portsmouth $3,607,447 17,389 $207
Narragansett $3,030,702 15,868 $191
Richmond $1,446,315 7,708 $188
Burrillville $2,934,771 15,955 $184
Foster $843,037 4,606 $183
Cumberland $5,936,890 33,506 $177
South Kingstown $5,368,927 30,639 $175
Central Falls $2,428,000 19,376 $125
Barrington $2,007,183 16,310 $123
Exeter $752,776 6,425 $117
Tiverton $1,787,720 15,780 $113
Hopkinton $924,978 8,188 $113
Bristol $2,583,927 22,954 $113
Glocester $943,014 9,746 $97
Little Compton $211,991 3,492 $61
Jamestown $326,121 5,405 $60
Charlestown $420,655 7,827 $54

Combining the levy table with the valuation table raises a basic tax sanity question: Providence obviously achieves its high commercial levy ranking through the use of a high-tax rate, e.g. East Providence has more commercial and industrial property tax value within its city limits, but generates less tax revenue, because of a lower tax rate.

The forward-looking question is what the ultimate purpose of getting more money from the tax-exempts is. Ultimately, should Providence be looking to lower its extremely high commercial tax burden with new revenue from the tax-exempts, or is there really a long term advantage is being a community that has high commercial property-tax rates and that taxes non-profits like no one else does? Or are these two separate policy questions (and is money not fungible)?

Newport, interestingly, is one community on the other side of this dynamic. They are an outlier at the top of the list in terms of commercial property available for taxation, but they keep their commercial tax rates relatively low, but still generating a relatively large commercial levy. Is this a factor that should be counted for or against Newport, when they wants more state aid, or to be subsidized by Portsmouth and Middletown in some sort of "consolidation" scheme?


February 21, 2012


Commercial Property Assessments by Rhode Island Municipality, Plus PILOT Payments

Carroll Andrew Morse

Furthering the discussion from both Justin's post on Providence and Brown University, and my post from last week on commercial and industrial property values in Rhode Island municipalities, bear in mind that Providence is already receiving state support, nominally related to some of its tax-exempt properties. Providence receives on the order of $20 million per year in state funds through the PILOT program, described in the state budget as follows...

Legislation creating this program requires the State of Rhode Island to reimburse cities and towns for property taxes that would have been due on certain types of real property that are exempted from taxation by state law. This includes property owned by nonprofit educational institutions, nonprofit hospitals, or any state owned hospital, veteran’s facility, or correctional facility.
Cranston received about $4 million per year from this program in fiscal year 2011 and no other Rhode Island community received more than $1 million in FY2011.

Given the City of Providence's commercial tax rates, the $19 million dollar PILOT subsidy is equivalent to being able to tax about a half billion dollars worth of additional commercial property.

For every RI city and town, the additional commercial property assessment that would have been needed to generate their PILOT subsidies can be calculated...

Community FY2011 State
PILOT funds
2011 Local Com
Tax Rate
C&I Prop. Value
Covered by PILOT Funds
Providence $19,097,871 $36.75 $519,669,959
Cranston $4,239,850 $30.39 $139,514,643
Warwick $957,595 $26.53 $36,094,798
Newport $833,229 $13.76 $60,554,433
Bristol $580,241 $12.43 $46,680,692
North Providence $456,364 $30.85 $14,792,998
Smithfield $429,064 $15.85 $27,070,284
Pawtucket $377,406 $24.54 $15,379,218
Woonsocket $134,688 $36.14 $3,726,840
South Kingstown $124,230 $14.51 $8,561,682
Westerly $110,040 $9.74 $11,297,741
East Providence $91,188 $22.25 $4,098,337
Burrillville $66,573 $16.15 $4,122,167
Barrington $48,984 $17.95 $2,728,914
Central Falls $19,158 $33.23 $576,562
East Greenwich $7,599 $17.49 $434,477
North Kingstown $5,803 $17.26 $336,211
Foster $417 $17.58 $23,720
Cumberland $109 $15.34 $7,106

...and added to the actual commercial/industrial tax base, to yield an "effective" commercial/industrial tax base for each community.

With PILOT funds taken into consideration, Providence rises to near the top of the list of Rhode Island's urban areas, roughly tying East Providence, when ranked in terms of an effective tax base on a per-resident basis. (And note that using local commercial tax rates skews the results to Providence's advantage, since an equivalent subsidy will translate to less taxable value in a high-tax community compared to a lower-tax one)...

Community2011 Com&Ind
Assessed Prop. Value
C&I Prop. Value Covered
by PILOT Funds
Effective Com&Ind
Prop Value
PopulationEffective C&I
Value/Resident
New Shoreham $130,939,920 $0 $130,939,920 1,051 $124,586
Newport $934,154,749 $60,554,433 $994,709,182 24,672 $40,317
West Greenwich $212,634,500 $0 $212,634,500 6,135 $34,659
Smithfield $643,292,510 $27,070,284 $670,362,794 21,430 $31,282
Middletown $478,133,706 $0 $478,133,706 16,150 $29,606
Warwick $2,216,473,370 $36,094,798 $2,252,568,168 82,672 $27,247
Westerly $573,347,700 $11,297,741 $584,645,441 22,787 $25,657
East Greenwich $323,074,200 $434,477 $323,508,677 13,146 $24,609
Lincoln $499,566,954 $0 $499,566,954 21,105 $23,671
East Providence $853,687,753 $4,098,337 $857,786,090 47,037 $18,236
Providence $2,718,570,863 $519,669,959 $3,238,240,822 178,042 $18,188
North Kingstown $458,263,940 $336,211 $458,600,151 26,486 $17,315
Johnston $494,193,192 $0 $494,193,192 28,769 $17,178
Cranston $1,062,342,644 $139,514,643 $1,201,857,287 80,387 $14,951
Portsmouth $259,361,400 $0 $259,361,400 17,389 $14,915
Narragansett $225,330,972 $0 $225,330,972 15,868 $14,200
North Smithfield $167,491,298 $0 $167,491,298 11,967 $13,996
Warren $146,246,352 $0 $146,246,352 10,611 $13,783
Scituate $141,574,476 $0 $141,574,476 10,329 $13,707
South Kingstown $369,939,495 $8,561,682 $378,501,177 30,639 $12,354
Burrillville $181,718,900 $4,122,167 $185,841,067 15,955 $11,648
Cumberland $387,020,200 $7,106 $387,027,306 33,506 $11,551
Little Compton $39,773,100 $0 $39,773,100 3,492 $11,390
Bristol $207,878,241 $46,680,692 $254,558,933 22,954 $11,090
Foster $47,954,300 $23,720 $47,978,020 4,606 $10,416
West Warwick $298,922,040 $0 $298,922,040 29,191 $10,240
Richmond $78,348,600 $0 $78,348,600 7,708 $10,165
Coventry $345,856,734 $0 $345,856,734 35,014 $9,878
Pawtucket $671,106,617 $15,379,218 $686,485,835 71,148 $9,649
Exeter $56,010,100 $0 $56,010,100 6,425 $8,718
North Providence $232,094,220 $14,792,998 $246,887,218 32,078 $7,696
Woonsocket $295,463,687 $3,726,840 $299,190,527 41,186 $7,264
Tiverton $113,794,995 $0 $113,794,995 15,780 $7,211
Barrington $111,820,800 $2,728,914 $114,549,714 16,310 $7,023
Jamestown $35,409,500 $0 $35,409,500 5,405 $6,551
Charlestown $46,429,900 $0 $46,429,900 7,827 $5,932
Hopkinton $47,827,200 $0 $47,827,200 8,188 $5,841
Glocester $38,302,758 $0 $38,302,758 9,746 $3,930
Central Falls $73,070,759 $576,562 $73,647,321 19,376 $3,801

The list once again unavoidably brings us to the question that the urban chauvinists refuse to consider: Is there any real justification for demanding that significantly more non-residential "value", for taxation or for other in purposes, be available to Providence than to other densely populated Rhode Island communities like Pawtucket, Cranston or North Providence?

Indeed, if you forgo the assumption that the most populous place is a region must automatically become the place where everybody wants to go for everything, and then compare Providence to its surrounding communities, Providence seems to have done very well for a non-tourist urban area in terms of the amount of commercial property within the reach of its tax assessor. Certainly, in terms of commercial and industrial tax revenue collected, there are only a few places in Rhode Island doing better, at least in the short term. That will be the subject of the next chart...


February 16, 2012


Placing Providence's Property Tax Burden in a National Context

Monique Chartier

Further to Andrew's post, Providence's very high property taxes undoubtedly result from a combination of two critical factors. One, at least, was eminently controllable and, therefore, avoidable.

The first is that 40% of the city's real estate is tax exempt. The second factor contributing to its very high property taxes, and the one that could have been avoided, has been decades of elected officials formulating and/or affirming (i.e., passing along) seriously irresponsible budgets - budgets that appear to have completely disregarded the first factor and its implications to revenue.

Below are the national rankings of Providence's property tax rates. It is difficult to see where there is room to increase them. In fact, the city clearly needs to go in the opposite direction.

Residential Tax Rate: 7th highest
[As of 2009. Source: The US Census.]

Commercial Tax Rate: 2nd highest

[As of 2010. Ranking of US urban cities by the Minnesota Taxpayers' Association and the Lincoln Institute of Land Policy.]

February 15, 2012


Commercial Property Assessments by Rhode Island Municipality, as a Measure of the Impacts of Tax-Exempts on Providence

Carroll Andrew Morse

To what degree is governing the City of Providence hampered by the existence of tax-exempt property within its boundaries? One way to begin answering this question is to start with readily available fiscal-data. Each year, all Rhode Island municipalities report tax assessment and levy information to the Division of Municipal Finance in the state’s Department of Revenue, with results separated into residential and commercial/industrial categories.

In the past, I've used the data collected and provided by the Municipal Finance Division to calculate the commercial/industrial tax-levy per resident in each RI city and town. However, with respect to the question of "tax opportunities" missed in Providence, this introduces at least one confounding factor. Because commercial tax-rates vary from community to community, the commercial tax levy measures both opportunities and what is made of those opportunities (for better or for worse). Since we are asking (at least for now) whether Providence is handicapped right from the beginning, before any incomes are earned or tax rates are set, we will go back one step further, to examine at how much commercial/industrial taxable property value is within each Rhode Island municipality, on a per-resident basis.

One technical note: In Rhode Island, taxes on apartments with more than five units and mixed residential/commercial properties are often classified as commercial. Since most, if not all, of the taxation levied on these properties will be passed along to residents, they will be considered residential and not commercial for this analysis. The Municipal Affairs Office collects assessment information that is detailed enough, in most cases, to allow the part of the official commercial levy due to class 3 (“apartment”) and class 4 (“combination”) properties to be determined and subtracted.

In the table below, the second column is a city or town's reported commercial/industrial tax levy for tax roll year 2011 with any portion due to class 3 or class 4 properties subtracted out. The third column is population from the 2010 census, and the fourth column is the amount of commercial/industrial property value per resident:

Community2011 Com&Ind Assessed
Prop. Value
PopulationVal/Resident
New Shoreham $130,939,920 1,051 $124,586
Newport $934,154,749 24,672 $37,863
West Greenwich $212,634,500 6,135 $34,659
Smithfield $643,292,510 21,430 $30,018
Middletown $478,133,706 16,150 $29,606
Warwick $2,216,473,370 82,672 $26,810
Westerly $573,347,700 22,787 $25,161
East Greenwich $323,074,200 13,146 $24,576
Lincoln $499,566,954 21,105 $23,671
East Providence $853,687,753 47,037 $18,149
North Kingstown $458,263,940 26,486 $17,302
Johnston $494,193,192 28,769 $17,178
Providence $2,718,570,863 178,042 $15,269
Portsmouth $259,361,400 17,389 $14,915
Narragansett $225,330,972 15,868 $14,200
North Smithfield $167,491,298 11,967 $13,996
Warren $146,246,352 10,611 $13,783
Scituate $141,574,476 10,329 $13,706
Cranston $1,062,342,644 80,387 $13,215
South Kingstown $369,939,495 30,639 $12,074
Cumberland $387,020,200 33,506 $11,551
Little Compton $39,773,100 3,492 $11,390
Burrillville $181,718,900 15,955 $11,389
Foster $47,954,300 4,606 $10,411
West Warwick $298,922,040 29,191 $10,240
Richmond $78,348,600 7,708 $10,164
Coventry $345,856,734 35,014 $9,877
Pawtucket $671,106,617 71,148 $9,432
Bristol $207,878,241 22,954 $9,056
Exeter $56,010,100 6,425 $8,717
North Providence $232,094,220 32,078 $7,235
Tiverton $113,794,995 15,780 $7,211
Woonsocket $295,463,687 41,186 $7,173
Barrington $111,820,800 16,310 $6,855
Jamestown $35,409,500 5,405 $6,551
Charlestown $46,429,900 7,827 $5,932
Hopkinton $47,827,200 8,188 $5,841
Glocester $38,302,758 9,746 $3,930
Central Falls $73,070,759 19,376 $3,771

Quick conclusions, not exclusive to Providence:

  1. Much to the dismay of folks who don't like suburbs for various reasons (whom Joel Kotkin would call "urban chauvinists"), a good way to generate commercial tax revenue seems to be through strip-mall/big box commercial development, e.g. as in Warwick and Middletown.
  2. West Greenwich and Smithfield seem to be doing well in collecting revenue for their residents to use from large employers, though the conditions that make this possible are no more generalizable to every community in Rhode Island than are conditions in New Shoreham and Newport.
  3. Compared to its neighbors like Johnston and East Providence, there is plausible evidence of a bit of a dent in Providence's available commercial revenue per resident (although Johnston is a beneficiary of the strip-mall dynamic). And East Providence is doing well, even though most of its big-box potential has been grabbed by Seekonk, MA.
  4. On the other hand, Providence, in 13th place on the list, does have considerably more commercial property to tax than do the neighboring communities of Cranston, North Providence and Pawtucket.

Moving from the table of numbers to the taxation and subsidy policy questions that are the reason for their creation suggests a question central to this issue despite being rarely a subject for explicit discussion. Is it a sign of a problem, when the largest city in a region doesn't have the most commercial revenue per unit, i.e. does it automatically mean that something is out of balance, because Providence doesn't have as much commercial revenue per resident to work with than does Middletown or Warwick?


January 29, 2012


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

Monique Chartier

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.


January 28, 2012


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

Monique Chartier

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.


January 25, 2012


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

Monique Chartier

... 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.


January 22, 2012


Car Tax Reform

Patrick Laverty

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."
That kind of cut will not happen in town budgets, so the difference will be recouped in property taxes. Unless the state adds another way to make that up, this could result in another example of the Assembly raising our taxes yet being able to claim that they didn't.

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.


January 17, 2012


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

Carroll Andrew Morse

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.


December 30, 2011


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

Carroll Andrew Morse

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.

Let me take this opportunity to remind readers that both during the 2010 Rhode Island Gubernatorial campaign, and immediately after the election, I asked Governor Chafee through his campaign/transition team if he would be willing to answer a set of questions that included this one...
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?

The response I received, the second time I asked, was...
We do not agree with the premise of these questions.


December 29, 2011


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

Justin Katz

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.


November 21, 2011


Pension Reform Bait-and-Switch to Block Broader Reform

Justin Katz

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.


November 20, 2011


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

Monique Chartier

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.


November 17, 2011


"Industry-Funded"

Patrick Laverty

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."
Why not ask those same parents whether they feel they should pay out of their own pockets for afterschool and summer learning programs. Because why? Because it is the same money! They pay the taxes to the state which then makes their tax money into the "state dollars". We don't currently have these programs so to pay for them, we'd need to raise taxes! People often don't realize this. It's like they think the money just magically appears. Oh don't worry, the government will pay for it! People, YOU ARE THE GOVERNMENT!

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.


November 14, 2011


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

Monique Chartier

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?


November 7, 2011


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

Carroll Andrew Morse

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.

In 1992, Senator Pell reiterated his support for adding a balanced budget amendment to the US Constitution, voting in favor of a non-binding sense-of-the-Senate resolution calling for its passage.

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.

Today, annual deficits run-up by the Federal government are much larger than the figure of $221 billion cited by Senator Pell in his explanation of his vote in favor of the 1986 balanced budget amendment. 2011 will be the third year in a row where the Federal deficit exceeds $1 trillion dollars, with no return to 1986 levels anticipated (in inflation adjusted dollars) in the next five years projected by the Office of Management and Budget.

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".


October 28, 2011


Car Tax Evaluation Committee: Typical?

Marc Comtois

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.


October 7, 2011


Governor Chafee May Push His Sales Tax Plan Again

Carroll Andrew Morse

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.


August 29, 2011


Car Tax Shame All Around

Justin Katz

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.


August 17, 2011


That's Why We Call the Tax "Progressive"

Justin Katz

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.


August 11, 2011


Property Tax Rates Don't Matter

Justin Katz

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

Justin Katz

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.


August 8, 2011


What Goes Up... Taxes

Justin Katz

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.


August 4, 2011


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

Carroll Andrew Morse

…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.

(The meaning of the award name has its roots at this link. And I don’t think this will become a true weekly feature, but given the strange logic regularly used by contemporary Democrats on all matters fiscal, you can’t rule the possibility out…)


July 31, 2011


History Will Begin to be Made this Week

Carroll Andrew Morse

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.
Central Falls is not sui generis; it is an advanced case of a situation faced by many cities and towns across the United States, and what happens with CF is going to contribute very visibly to a body of legal, policy and political knowledge about what to do and/or what to avoid when twenty-first century communities run out of money needed to pay for decisions made over preceding decades.

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."
If our politics keeps producing a large number of elected officials who believe that just because we have no money doesn't mean we're bankrupt, we're basically doomed.


July 22, 2011


The Senate Still Scamming

Justin Katz

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.


July 18, 2011


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

Carroll Andrew Morse

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.
...and ask why Borders' current ownership didn't simply show the publishers that they had raised their debt ceiling, so that everything could continue as before. After all, that's a solution good enough for the finances of the Federal government (in the minds of some), right?


July 5, 2011


Counterfactual alert: A Conservative Case for Raising Taxes?

Marc Comtois

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.}

Since starving the beast didn't work, how about over-feeding it?
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.
Yeah, not so sure this is gonna fly, but interesting.


July 1, 2011


Do Legislators Really Not Know How It Works?

Justin Katz

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

Justin Katz

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.


June 16, 2011


What We Expect from Our Leaders

Justin Katz

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.


June 10, 2011


Seeming Wise, but Raising Taxes

Justin Katz

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.


June 7, 2011


RIPEC's Chicken Acquiescence

Justin Katz

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.


June 3, 2011


Nobody on the People's Side

Justin Katz

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

Justin Katz

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.


May 31, 2011


A Simple Lesson in the Numbers

Justin Katz

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.


May 26, 2011


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

Carroll Andrew Morse

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.

The attitude reflected above, by the way, is why you should never trust the "financial efficiency is everything" crowd to run 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.


May 16, 2011


Not Still, but Still, 6 Percent

Justin Katz

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.


May 12, 2011


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

Carroll Andrew Morse

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...

Municipality Commercial/Industrial
Property Tax Levy
Population C/I Revenue
Per Resident
WestGreenwich $5,045,106 6392 $789
Warwick $59,352,130 84760 $700
Scituate $6,735,672 10853 $621
Lincoln $13,527,283 22049 $614
Middletown $8,604,403 16037 $537
NewShoreham $554,936 1035 $536
Newport $11,902,138 23467 $507
Providence $81,723,975 171909 $475
Smithfield $9,956,735 21205 $470
WestWarwick $12,266,274 29328 $418
EastProvidence $18,275,984 48570 $376
EastGreenwich $4,867,030 13337 $365
Cranston $29,217,892 80126 $365
Johnston $10,390,253 28613 $363
Pawtucket $19,759,204 71953 $275
Portsmouth $4,124,122 16892 $244
NorthKingstown $6,377,864 26654 $239
Westerly $5,545,175 23500 $236
NorthSmithfield $2,716,469 11545 $235
Warren $2,434,303 10897 $223
Foster $941,127 4539 $207
Woonsocket $8,329,958 43372 $192
NorthProvidence $6,271,449 32742 $192
Coventry $6,678,774 34935 $191
Narragansett $2,986,771 16492 $181
SouthKingstown $5,191,768 29195 $178
Richmond $1,267,676 7646 $166
Cumberland $4,747,695 34370 $138
Barrington $2,170,455 16339 $133
Tiverton $1,936,686 14905 $130
Exeter $793,216 6309 $126
Bristol $2,734,674 22306 $123
Hopkinton $931,608 8013 $116
CentralFalls $2,142,752 18716 $114
Glocester $974,415 10552 $92
Burrillville $1,320,805 16576 $80
LittleCompton $244,556 3526 $69
Jamestown $357,338 5473 $65
Charlestown $469,547 8081 $58

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.

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


Extra Revenue Has to Come from Somewhere

Justin Katz

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."

May 8, 2011


The Insanity of A Mileage Tax

Monique Chartier

... 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 ...)"]


May 4, 2011


Comparative Budgets

Justin Katz

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.


April 27, 2011


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

Carroll Andrew Morse

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%)...

When combined with the Governor's plan to lower the state's top-tier sales tax rate from 7% to 6%, the effect would be to keep the meal and hotel tax in Rhode Island at the same rate, meaning that Governor Chafee's tax slogan of "lower and broaden" does not apply meals or hotels, where there is no proposed lowering.


April 26, 2011


Time to Stop Being an Ostrich

Marc Comtois

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.
Rhode Island is #49, to be specific (only Washington, D.C. and New Mexico are worse. Maine--yes, Maine--is #1). What particularly seems to hurt Rhode Island are property taxes, especially the effective 5.36% tax on commercial equipment. (Massachusetts and Connecticut are at 2.71%).

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?


April 21, 2011


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

Marc Comtois

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)

If you have ideas for a better chart, De Rugy is taking suggestions.



Chafee Wants to Bite Charities and the American Flag

Justin Katz

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.


April 19, 2011


The Logic of Taking Your Money

Justin Katz

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.


April 17, 2011


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

Monique Chartier

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.


April 15, 2011


Do You Trust Me?

Marc Comtois

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


April 14, 2011


The Consistent(ly bad) Governor

Justin Katz

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

Marc Comtois

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.”
Actually, it's not too surprising given that PLDs* have been portraying tax cuts as "spending" for a while now. May as well be consistent.

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


April 13, 2011


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

Monique Chartier

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."

April 8, 2011


Taxing the Rich won't get you there

Marc Comtois

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.

Gee, now what? Maybe serious attempts at addressing ballooning entitlements should be listened to.



Chafee Assumes New Tax Plan is a Go

Marc Comtois

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.

On the other hand, House Finance Committee Chairman Helio Melo didn't sound like this was being fast-tracked, much less a fait accompli
[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.”

It's remarkable the sort of thing the Governor is optimistic about, isn't it? Sheesh.


April 5, 2011


Finding a Way to Build the Tax Wall

Justin Katz

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.


March 31, 2011


The Government Way: Doing Less with More!

Justin Katz

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.


March 30, 2011


Where's the Money Supposed to Come From?

Justin Katz

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.


March 28, 2011


Lamenting Taxes While Endorsing Taxers

Justin Katz

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.


March 23, 2011


The Macro View of Government Growth in Rhode Island

Carroll Andrew Morse

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.

graph1

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?

The answer at that time was...
We do not agree with the premise of these questions.



Thinning the Fuel Won't Create Efficiency

Justin Katz

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.


March 18, 2011


One Bad Tax Plan Shouldn't be Replaced by Another

Marc Comtois

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.

She's entirely correct. According to the revised text offered in H5740 (PDF):
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%).
Let's say, come May 2012, it's realized that the tax revenue just isn't coming in and before you know it, the reduction plan is "frozen" until such time as it is decided that the state can "afford" to implement it. Could never happen, right? The basic rule being that promised tax cuts are ephemeral while temporary tax hikes are permanent. Regardless, both ideas result in more taxation, not less, thanks to the "broadening." These aren't so-called revenue neutral plans, after all. They're meant to raise"revenue" instead of shrink government spending.


March 17, 2011


The Governor's Faith That You Don't Matter

Justin Katz

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"

Monique Chartier

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

Justin Katz

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


March 16, 2011


Drug Dealer... Not a Stretch for Rhode Island

Justin Katz

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.)


March 15, 2011


The Tax List

Justin Katz

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.


March 14, 2011


The Biggest Tax Increase... and on Whom?

Justin Katz

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

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

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

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

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

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


March 11, 2011


New Taxables

Marc Comtois

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.
Special deals? Naw.

Continue reading "New Taxables"

March 8, 2011


Open Thread: Combined Reporting, Good Idea or Not?

Carroll Andrew Morse

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.


February 22, 2011


Expanding the Sales Tax: Possibilities

Marc Comtois

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

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

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

Sales Tax
Connecticut6
*Florida6
Maryland6
Minnesota 6.875
New Jersey 7
New York4
Pennsylvania6
Rhode Island7
*Texas6.25
Vermont6
Wash. D.C.6

*No state income tax


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

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

Sales tax
Arizona5.6
California8.25*
Colorado2.9
Indiana7
Iowa6
Maine5
Massachusetts6.25
Michigan6
Nebraska5.5
**Nevada6.85
New Mexico5
North Dakota5
Ohio5.5
South Carolina6
**Washington6.5
Wisconsin5
**Wyoming4

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


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

Sales taxFood tax
Arkansas62
Georgia4*
Louisiana4*
Missouri4.2251.225
NC5.75*
**Tennessee75.5
Utah4.71.75*
Virginia52.5~
West Va.63


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


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

Sales Tax
Alabama4
*Hawaii4
*Idaho6
*Kansas5.3
Kentucky6
Mississippi7
*Oklahoma4.5
*~South Dakota4

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

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


February 17, 2011


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

Carroll Andrew Morse

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).
However, most of section 44-11 does not apply to certain corporations in Rhode Island, as spelled out in section 44-11-2(d)...
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.
Which means, I believe, that S-corporations are exempt from corporate income taxes, including the minimum, while C-corporations and limited-liability corporations (LLCs) have to pay them. (At least, that is what state tax-forms seem to indicate, where S-corps are referred to in a different section from the C-corps and the LLCs).

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.
Corporations however are prevented by section 44-12-1(b) from paying a double minimum tax...
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.
In other words, in cases of C-corps and LLCs that have an income tax liability greater than or equal to their calculated franchise tax liability, their income tax counts as their franchise tax too.

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.


February 16, 2011


Health Care "Reform" = IRS Expansion

Marc Comtois

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.
'Ware the Tanning Taxers!!!
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.
Phew, glad this is making things all so much easier. Just kidding (obviously)....But don't forget, according to the ProJo, this complication is all because of conservatives playing with the tax code.



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

Engaged Citizen

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.


February 15, 2011


In-State Tuition is Not Free!

Monique Chartier

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?


January 28, 2011


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

Justin Katz

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.


January 26, 2011


Drunk on Taxation

Justin Katz

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.


January 19, 2011


Up and Out, or Just Out?

Justin Katz

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.)


January 18, 2011


Giving Away the Store, or Maintaining a Base?

Justin Katz

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:

RI MA CT
% increase in $100,000-200,000 taxpayers 2002-2004 19.2 10.4 12.2
% increase in $200,000+ taxpayers 2002-2004 27.0 19.3 17.2
% increase in $100,000-200,000 state taxes 2002-2004 14.0 9.1 17.9
% increase in $200,000+ state taxes 2002-2004 26.0 34.5 30.9
% increase in $100,000-200,000 taxpayers 2002-2007 56.4 43.2 43.0
% increase in $200,000+ taxpayers 2002-2007 73.4 73.1 60.9
% increase in $100,000-200,000 state taxes 2002-2007 44.1 38.2 47.0
% increase in $200,000+ state taxes 2002-2007 64.2 124.4 104.0
% increase in $100,000-200,000 taxpayers 2007-2008 1.5 2.9 2.0
% increase in $200,000+ taxpayers 2007-2008 -8.6 -5.1 -4.0
% increase in $100,000-200,000 state taxes 2007-2008 5.8 8.0 8.6
% increase in $200,000+ state taxes 2007-2008 -4.0 -2.1 -2.4

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.)


January 17, 2011


Trends of the Decade

Justin Katz

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.


<$50,000 - $50,000-74,000 - $75,000-99,999 - $100,000-199,999 - $200,000+

(Click and hold an tax bracket to highlight its corresponding lines.)

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.)


January 7, 2011


The IRS Goes to Jail

Justin Katz

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.


January 4, 2011


Letting the Scam's Legislative Architect Run the Budget

Justin Katz

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.


January 3, 2011


Almost Like Another Ponzi Scheme

Justin Katz

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

Justin Katz

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.)


January 2, 2011


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

Marc Comtois

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.”

But then again...
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.

File under "Thanks Big Bro'!" Solution: Claim more exemptions than usual (if you still can, that is) and keep your money in your pocket to begin with. Thanks but no thanks, I prefer paying at the end instead of giving the State of RI a no interest loan for the year.


December 23, 2010


Policy Stasis as Economic Boost

Justin Katz

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.


December 21, 2010


Local Budgets and Generosity at Christmas

Justin Katz

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."


December 16, 2010


Tabulating Rhode Island's FY2011 Federal Earmarks

Marc Comtois

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.


December 15, 2010


Speaking of Being Rich...

Justin Katz

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.


December 14, 2010


Whose Taxes Will Change How

Justin Katz

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.


December 3, 2010


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

Marc Comtois

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.

According to the ProJo report, "The tax breaks cost the state nearly $10.1 million in fiscal year 2009, for example, according to the state Budget Office." Of course, that's "cost the state" insofar as you accept the faulty premise that the production would have come to RI without the tax incentive in the first place! In reality, the filming has generated both revenue and a convert:
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."
Hm. I guess the proof was in the "Body." (Sorry, couldn't resist). Too bad our political readers can't extrapolate from here and realize what would happen if you made broad-based, business friendly tax incentives instead of just ones that appeal to this or that niche.


November 29, 2010


Chafee's Aimin' to Give It

Justin Katz

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.


November 27, 2010


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

Monique Chartier

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


November 23, 2010


Why Old Trucks Are Worth More

Justin Katz

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

Justin Katz

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.


November 22, 2010


Creating Pants on Fire Out of Truth

Justin Katz

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.


November 17, 2010


Dog Bites Man, Low-tax states attracting more people

Marc Comtois

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.

That means more political power for those states, too.



What Chafee Means by "Harmful"

Justin Katz

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

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

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

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

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

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


November 16, 2010


Balance Is Unexpected for a Reason

Justin Katz

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.


November 15, 2010


A Sign of Things to Come

Justin Katz

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.


November 8, 2010


Smokers for Fiscal Health

Marc Comtois

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!


October 30, 2010


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?

Carroll Andrew Morse

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."
...with regards to a proposed expansion of the sales tax.

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.


October 28, 2010


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

Donald B. Hawthorne

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.


October 23, 2010


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

Monique Chartier

[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.


October 15, 2010


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

Justin Katz

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?


September 19, 2010


Helping Small Businesses by Making Their Lives Harder

Justin Katz

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.


September 18, 2010


Democrat PR as Editorial

Justin Katz

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.


September 10, 2010


Even During Painful Time, the Urge to Redistribute

Justin Katz

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.


September 5, 2010


Barely "Factual"

Justin Katz

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.


August 30, 2010


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

Justin Katz

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.


August 12, 2010


A Slash with a Fake Sword

Justin Katz

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.


August 5, 2010


Taxed to Prosperity

Justin Katz

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.


July 28, 2010


Of Rates and Levies

Justin Katz

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.


July 27, 2010


Taxman as Enforcer

Justin Katz

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.


July 26, 2010


The Illusion of an Improving Tax Structure

Justin Katz

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.


July 23, 2010


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

Marc Comtois

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.

Sure. Hey, I don't have a problem with RI being a tax haven for something, but this just shows the "good enough for me, but not for thee" mentality of our self-dubbed betters.


July 21, 2010


Considering Unemployment

Justin Katz

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.


July 20, 2010


The Tax Burden Shell Game

Marc Comtois

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.

In short, according to the Times, Democrats are boxed in because they don't want to risk their political lives on playing to "tax hike" type while Republicans have built an ideology (and many careers) on a hard-line stance against any tax increases.

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.


July 18, 2010


Winning the Sales-Tax-Cutting Race

Justin Katz

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.


July 8, 2010


Expiring Tax Cuts=Tax Increases

Marc Comtois

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.


July 6, 2010


The "Stimulus" in Miniature... or Hatchback

Justin Katz

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.


June 25, 2010


In Defense of Realistic Taxation

Justin Katz

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.


June 16, 2010


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

Carroll Andrew Morse

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?
Actually, in the new law, there are two-steps that precede the receivership stage. In the first stage, a fiscal overseer is appointed by the state. A mayor and/or city or town council retain most of their authority, but the state's Director of Revenue gets a final (non-overrideable) veto over the municipal budget...
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.
Note the bias in the phrasing of the law -- the potential problem is a lack of tax revenue to pay for mandated spending, never too much spending to be paid for by appropriated tax revenue.

More importantly however, the act also contains a declaration of its supremacy over all of the other laws of Rhode Island...
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.
So if this law supersedes all others, and if the Director of Revenue decides on a "reasonable revenue" amount that exceeds what can be raised under Rhode Island's property tax cap, does that then mean that the property tax cap becomes null and void? After all, it's not like the law is a contract or something.


June 15, 2010


Tax Changes as Blatant Gimmick

Justin Katz

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.


June 12, 2010


Strange Agreement on Income Tax Changes

Justin Katz

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...

June 8, 2010


Tax Hikes and V Number 2

Justin Katz

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.


June 7, 2010


Should We Be Willingly Fooled by the Tax Overhaul?

Justin Katz

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.


June 5, 2010


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

Justin Katz

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.

June 2, 2010


The Underlying Assumption of the Leftist Taxers

Justin Katz

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.


June 1, 2010


While Your Eye Is on the Tax Cutting Hand

Justin Katz

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.)


May 21, 2010


Ushering in Further Decline with Cutsie Tax Changes

Justin Katz

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 policy analyst, Russell Dannecker, advised legislators to "try to look for the unintended consequences."

With respect to the tax code, the problem begins right at the General Assembly's first statement of objectives. Requiring revenue to remain largely neutral means that necessary tax cuts in some areas have to be made up with tax increases elsewhere. Looking at the 9.9% top tax rate as the main culprit for detrimental perception of our tax climate focuses on a bullet point rather than the comprehensive list of ill-conceived policies.

As came up in recent conversation comparing Massachusetts and Rhode Island, the very progressivity of Rhode Island's tax system is central to its revenue and demographic problems, attracting those with low incomes and repelling those with middle-to-high. I'm not suggesting that Rhode Island should shift its tax burden suddenly onto its poorest residents. What the state government should do is cut taxes at the top and middle brackets and then cut spending as necessary.

I can't be alone in doubting the ability of the people who got us into our current budgetary mess to discern a careful path out of it.

ADDENDUM:

As pointed out by a commenter, I had misread part of the article. (It's been a very, very rough week.) I deleted the section related thereto.


May 19, 2010


When Taxation's Involved, Everything's a Sin

Justin Katz

One of my classes in high school did a unit of debating, and among the topics was the legitimacy of sin taxes. Something peculiar is in play when a government entity takes more of your money for your own good, and not surprisingly, the scope of taxable sins is apt to expand:

One week after a White House task force suggested that raising taxes on sugary drinks might help combat childhood obesity, Rhode Island's House Finance Committee will hold a hearing on a bill that would levy a new tax on soda.

The measure would make Rhode Island consumers pay a 5-cent tax on every soft drink they buy and 10 cents on each such beverage larger than 20 ounces.

Far be it from me to suspect the motives of our good legislators, but given the flow of this tax money, I can't help but recall that the state has been trying to cut its aid to cities and towns:

It is not clear how much money the proposed tax would raise, but the bill would funnel all such revenue to the city or town where the drink was sold. The resulting funds could be used to establish or maintain local recreational facilities, jogging paths and the like, [State Rep. Edith] Ajello [D, Providence] said.

May 18, 2010


Greener Taxation Grass Across the Border

Justin Katz

An interesting conversation took place in the comments section of my "Nothing to See Here" post, and this offering from Patrick is worth highlighting:

Let's look at facts now:

Using the numbers here, on the state's department of revenue web site:
https://dlsgateway.dor.state.ma.us/gateway/Public/WebForms/TaxRate/ReportTRApprovalPublic.aspx

And here at Riliving.com for RI's:
http://www.riliving.com/aboutrhodeisland/taxrates/index.aspx

East Providence: 15.43
Seekonk: 9.64
Rehoboth: 8.90

Woonsocket: 22.36
Wrentham: 12.22
Blackstone: 12.52

Pawtucket: 17.78
Attleboro: 10.09
N. Attleboro: 9.82

Tiverton: 14.35
Fall River: 8.06
Westport: 5.54

Those are all bordering towns. Why the difference? Rather than spewing your normal nonsense, I've provided you with facts and sources. Now explain it?

One commenter objected that Massachusetts has higher income tax, and that the state money is spread to municipalities, lower the need for property taxes. The analysis is complicated by the fact that Massachusetts' income tax rate is 5.3% of adjusted income, while Rhode Island breaks its rates up into progressive tiers: 3.75% to $32,550, 7% to 78,850, 7.75% to $164,550, 9% to $357,700, and 9.9% over that. And of course, there's RI's flat tax option, at 6.5%. In other words, Rhode Island's tax rate is only lower for folks at the bottom of the spectrum.

Another way to look at the comparison is through the prism of tax collections, and this chart (granted, from 2002) does show that Massachusetts collected $31.75 per $1,000 to Rhode Island's $25.83. This moves us away from the topic of comparative property tax rates, but it appears to be the case that Massachusetts collects more in income tax because it takes more from people at lower ends of the income spectrum.

Put differently, if you'd like to own a home and work hard to increase your income, you're better off in Massachusetts. If you're content to rent or to live in subsidized housing and earn a small salary, you're better off in Rhode Island. That may, we can suppose, have something to do with Rhode Island's dire economic condition.


May 15, 2010


So Future, Potential Tax Revenue (i.e., Private Income) Is and Has Been the Property of Public Labor?

Monique Chartier

Eight public labor unions filed suit Wednesday to stop the implementation of minor changes made last year to public pension eligibility guidelines. The basis cited for the claim is revealing.

Calling the changes a “taking of property without justification,” the unions are asking that the changes be declared unconstitutional, that lost benefits be restored and that the state pay for the unions’ legal costs.

The pension system consists of past and future contributions by employers and past and future contributions by employees, together to be amplified (hopefully) by investment instruments. However, as has been noted here and elsewhere, employer contributions have not been made as required; accordingly, the pension system is not sitting fully funded in a lock box. And even if it were, defining it as the property of current and future retirees still seems far from the mark.

The only way that the current Rhode Island pension system can play out as envisioned by the politicians who promised these pensions and then failed to properly fund them is via the appropriation, over many years, of a seriously non-feasible amount of taxpayer money. The only way that these eight labor unions can make the far-fetched case that public pensions are their "property", then, is if they are laying claim to the private sector funds that may or may not materialize over the next couple of decades in the pockets of taxpayers who may or may not even be here to surrender those funds.


May 14, 2010


Why the Federal Health Insurance Mandate Cannot Be Made Constitutional By Calling it Tax

Carroll Andrew Morse

Article I, sections 8 and 9 of the United States Constitution originally defined the taxing authority of the Federal Government...

(s8) The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States...(s9) No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.
This creates two classes of taxes 1) "direct" taxes, which must be apportioned according to the census and 2) "indirect" taxes, e.g. taxes on commercial activity, transactions, etc. The Sixteenth Amendment to the Constitution extended the Federal taxing power to allow unapportioned taxes on income...
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
Income has been defined broadly by the United States Supreme Court, in the case of Commissioner v. Glenshaw Glass, as "instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion".

Not purchasing insurance is not income under the Court's definition of income because the non-purchase of insurance is not "an undeniable accession to wealth" and therefore cannot be taxed under the Sixteenth Amendment's grant of authority. Nor can the non-purchase of something meet the criteria of being subject to a directly apportioned or indirect tax, meaning that nothing in the Constitution allows the Federal government to tax an individual's non-purchase of health insurance.

But the dubious constitutionality of the Federal health insurance mandate doesn't end with this significant problem.

Congress and the President could have, in a clearly Constitutional manner, used its taxation power to influence the purchase of health insurance by creating a tax-deduction associated with the purchase of health insurance. This idea was, in fact, proposed by officials like President George W. Bush and United States Senator Ron Wyden. However, Congress chose not to go this route.

Given the current Federal tax code, such a deduction would extend an advantage already enjoyed by corporate purchasers of health insurance to individual purchasers of the same products. But in choosing not to create an individual deduction, and opting for a tax on non-behavior instead, Congress chose a mechanism of dubious Constitutionality specifically for the purpose of preserving an advantage that some purchasers of health insurance, i.e. the corporate ones, have over others.

One of the most fundamental purposes of a Constitution is to prevent a government from taking arbitrary actions that would favor some over others. When Congress stretches beyond its clearly enumerated powers, with the specific intent of preserving government created-advantages for some over others, it doubly violates the Constitution's reason for being.


May 7, 2010


Get Those Taxes in Early, or The Refund May Be Late

Justin Katz

Here's a telling turn of events:

The state has delayed the payment of thousands of Rhode Island income-tax refunds because of cash-flow problems.

The delays involve more than 65,000 individual income-tax refunds, as well as some refunds of the state business-corporations tax, that were processed and ready to be issued in April.

State officials decided to hold back those refunds, totaling about $39 million, and release them over time.

The delays were disclosed on the fourth page of a six-page state revenue report issued Thursday.

The justification for the move is at least understandable: The state delayed the filing deadline because of the flooding calamity, and since people who are getting money back file early, while people who owe money file late, the cash flow is out of balance.

The adjustment does highlight the central fact of Rhode Island governance, though: the state is run so poorly that we're not in a position to absorb unexpected difficulties without disrupting basic operations, like returning tax money to people from whom the state took too much in its interest-free loan from workers' paychecks.


April 16, 2010


Dog Bites Man, Reed & Whitehouse Support More Taxation

Marc Comtois

There have been rumblings that President Obama was looking at pushing for a VAT (value added tax) to help pay for the growing government under his watch. While many people, including conservatives, have theorized about (and even supported) the institution of a VAT, they have done so with the idea that it would replace the current income tax system, not be a supplement to it.

To forestall the bubbling movement, Sen. John McCain submitted the following amendment (SA 3724):

It is the sense of the Senate that the Value Added Tax increase will cripple families on fixed income and only further push back America’s economic recovery.
The measure passed 85-13 (2 no-votes).

Among the 13 who voted against this simple declaration were Reed and Whitehouse. So, on the same day that citizens rallied across the country--and even in their own home state--RI Senators Reed and Whitehouse affirmed their support for taxing all Americans even more. Blind ideology knows no discretion, I suppose.


April 15, 2010


Tea Party!

Marc Comtois

bostonteaparty.JPG


April 13, 2010


The Nanny State Will Tax Your Skin

Justin Katz

Fellow blogger and Providence Firefighter/EMT Michael Morse and his wife sent an op-ed to the Providence Journal objecting to an Obamacare tax on tanning salons:

A small group will be the first to pay for national health-care reform, the first to put their hard-earned dollars into the system. Starting July 1, they will pay 10 percent more for a service that helps them feel better and look better and promotes healthy living.

You can’t tax sunshine, right? Think again. The indoor-tanning industry, mostly small-business owners, the majority of them women, has been singled out to provide funds for a program that claims to be equitable for all.

As they note, other skin-related professions avoided proposed taxes because of the size of their lobbies and the urge to protect people from themselves that has begun to creep from smoking to tanning (let alone eating fast food). For their part, the Morses dispute the ill effects of artificial tanning on health.

Personally, I think that's besides the point. It isn't the role of government to impose a healthy lifestyle on individuals, especially with matters of such long-term repercussions as exposure to light. We'd best get used to it, though. With the government intimately involved in our healthcare system — even more than was already the case — your every behavior is now a matter of interstate commerce.


March 31, 2010


Compounding Rhode Island's Pre-Existing Condition: Impact of Health Care Reform on the State Budget

Monique Chartier

So here's the deal. When "reform" kicks in, best estimates are that 50,000 people will be added to Rhode Island's Medicaid rolls. Amy Kempe at the Governor's office advises that, after federal matching funds go away, this will cost Rhode Island taxpayers $100-$150 million. Further, Ms. Kempe goes on to point out that

We also know that Medicaid is the 2nd largest budgetary expense, and the new law does little to control healthcare costs, so the Medicaid inflation rate could continue as it has.

So for planning purposes, we should pencil in the higher figure.

The budget deficit for 2011 is over $400 million. Four hundred million ($400,000,000) dollars in current state spending will have to be eliminated just to get to a break even budget. But, as difficult as that will be, our task will not be done at that point. If health care "reform" is not overturned, in four years, we'll need to find an additional $150 million annually.

Every member of Rhode Island's Congressional delegation voted for the health care reform bill. Voted for this additional substantial budget deficit. Voted to expand the second largest spending item in the state budget. Can we look to them for suggestions as to where to find this additional $150 million?


March 30, 2010


RISC's Open Eye Catches More Economy-Killing Taxes

Justin Katz

The Rhode Island Statewide Coalition has been making a concerted effort to peruse all of the legislation making its way through the General Assembly and recently unearthed this gem from Senator Charles Levesque (D., Bristol, Portsmouth), creating a Highway Maintenance and Public Transit Trust Fund, financed as follows:

... There is imposed a surcharge of forty dollars ($40.00) per passenger car and light truck to be paid by each car and light truck owner in order to register that owner’s vehicle and receive license plates. ...

... There is imposed on each company that is engaged in the refining or distribution, or both, of petroleum products and that distributes such products in this state a tax at the rate of three percent (3%) of its gross receipts derived from the first sale of petroleum products within this state ...

... There is an imposed on each company that imports or causes to be imported, other than by a company subject to and having paid the tax on those imported petroleum products that have generated gross receipts taxable under subdivision (b)(2) of this section, petroleum products for use or consumption by it within the state a tax at the rate of three percent (3%) of the consideration given or contracted to be given for such petroleum products if the consideration given or contracted to be given for such deliveries made during a quarterly period exceeds three thousand dollars ($3,000)

There really is no surprise in the fact that Rhode Island is wallowing at the bottom of the nation's economy. As I've said many times, public infrastructure is a legitimate function of government, and it ought to be the first thing funded by taxes that we already pay.



Big Business v. Big Government on Healthcare

Marc Comtois

Big Business learns that Big Government giveth and taketh away:

On Capitol Hill and in the White House on Monday, Democrats were fuming over a series of announcements that started Friday from Fortune 500 firms saying their bottom lines will take huge negative hits because of changes in tax law mandated by Obamacare. That hit in turn means lower profit projections. Caterpillar estimates, for example, that Obamacare will cost it $100 million; John Deere faces expenses of $150 million; 3M, $90 million; AK Steel, $31 million; Valero, $20 million. And then there's AT&T, which is marking its balance sheet down by a whopping $1 billion. All in all, the Wall Street Journal estimated a $14 billion haircut for these corporations.

Under post-Enron accounting rules, the corporations were required to revise their projections to account for the effect of Obamacare on their bottom lines. The effect is negative because Democrats, in their zeal to raise revenues and improve Obamacare's claimed effect on the federal deficit outlook, took away a tax break these companies needed in order to supply prescription drugs to their retirees. The tax subsidy, itself a government accounting ruse crafted in 2003 by the Republican Bush administration to dissuade corporations from dumping their retiree drug benefit programs on the then-new Medicare Part D, becomes taxable under Obamacare. Corporations are now being reminded of the harsh truth: What Big Government giveth, Big Government taketh away, too.


March 25, 2010


Feeding the Beast: General Assembly Looks to Take a Bite Out of Non-Profits

Marc Comtois

"Desperate times call for desperate measures", right? So now we learn that the RI General Assembly is looking at taxing non-profits to earn more "revenue." The method will be via suspension of the tax-exempt status by removing the sales tax waiver that non-profits receive (the GA isn't considering property taxes or taxing donations...yet). According to the Steve Peoples' story in the ProJo, this will effect 6,600 nonprofit organizations, including churches, hospitals, private schools, youth sports leagues, PTO's/PTA's and the YMCA among others.

It's obvious that the General Assembly has done a poor job of managing state revenue and has made poor choices in what it prioritizes for spending. I'm also sure there are those who will argue that hospitals and private schools and the larger non-profits that proliferate in this state can afford to be taxed. But what about the Parent-Teacher groups and sports leagues and any number of smaller non-profits? Many of these groups help fill the gaps caused by budgetary oversights and misplaced priorities that have trickled down from the General Assembly into our cities and towns.

For instance, with more education dollars going towards personnel costs, it is up to the Parent-teacher groups to pay for programs--field trips, assemblies, etc.--that once were funded by the school districts. In Warwick, youth sports leagues help keep Jr. High age kids on fields because Warwick schools don't offer organized sports. Levying the sales tax will leave less money to spend on an event at a school or available for financial aid to help a kid from a poor family play ball with his friends.

Then there are animal shelters and soup kitchens and hundreds of other small groups of people giving of their free time to do what they can to help the community. They didn't expect the government to help pay for things, but asked instead to be left alone and given a tax break in recognition of the good works they perform. These groups certainly didn't expect to be taxed for giving a helping hand. This really is shameful.


March 23, 2010


The Consequences of Fairness?

Justin Katz

I've been intending to look into arguments for a "Fair Tax," but they seem so unnecessarily complicated that I've continued to demur. In his usual manner of breaking such things down to the basics, Ramesh Ponnuru suggests that it sounds too good to be true because it is:

It is not at all clear that this 30 percent sales tax would raise enough revenue to eliminate income and payroll taxes. Brookings Institution economist William Gale has estimated that to replace current federal tax revenues, the tax rate would have to be 44 percent (or 31 percent the way the FairTaxers calculate rates: A $100 product would cost $144 after tax). Gale’s calculation assumed that nobody would evade the sales tax and that Congress would not narrow the tax base by, for example, exempting medical services from the tax. Relaxing those assumptions increases the rate required even further. ...

The middle class would also pay higher taxes. Under the FairTax plan, the federal government would give all legal residents of the U.S. a "prebate" to cover sales taxes on all purchases up to the poverty line. That would protect the poor (except for illegal immigrants; higher prices are supposed to induce immigrants to come legally so they can get their prebate). And the rich would pay less than they do now, since returns to investment typically are a large share of their income, and these would go untaxed. So if revenues are to stay the same, the middle class will have to pay more. If the change in tax policy increases economic growth, this effect will be mitigated — but it will take a very long time for it to disappear under any plausible assumptions. Governor Huckabee's claim that voters in all income groups would come out ahead while the federal government would raise the same amount of revenue as before is of course unsupportable.

As ever, problems arise whenever government seeks to determine fairness. In the intricacies by which politicians seek to persuade constituencies that they won't be harmed by changes that must ultimately have some effect on somebody, plenty of limited interests manage to insert advantages. It therefore strikes me as necessary to shrink government before manipulating taxation, rather than using taxation to (maybe) shrink government. Anything short of a frankly simple flat tax (or similarly straightforward approach) will quickly deteriorate in the current system of government.


March 14, 2010


Itchin' for Some Taxin'

Justin Katz

If you put your ear to the exterior walls of the State House, you might actually be able to hear the antiquated gears of the General Assembly's brains whirring a little harder to come up with a strategy for getting away with tax increases:

The plan was broadly outlined by Grafton H. Willey IV, co-chairman of the Rhode Island chapter of the Smaller Business Association of New England, an advocacy group for small businesses, and John C. Simmons, executive director of the Rhode Island Public Expenditure Council, a business-backed group that monitors the state’s finances.

Asked about the plan during a break at Tuesday's conference, DaPonte said that General Assembly leaders are "absolutely" talking about the possibility of revising the personal income tax.

With a variety of tax credits and other provisions, "Rhode Island [has] a very complicated tax code," he said. DaPonte said he is concerned not only about the system's complexity, but also about the personal income tax's top tax rate of 9.9 percent.

I don't know that I've ever read an article so thoroughly built around hints and insinuations, without any real indication of what "the plan" might look like. Of course, one doesn't need more than hints and insinuations to be concerned:

If the regular system's top rate were reduced, a flat tax "may not be necessary," DaPonte said. Costantino made similar comments last month.

This year the flat tax is 6%. One needn't be a professional political cynic to suspect that the likes of DaPonte will think that number is "not necessary" if the regular rate were, say, 8.5%.


March 11, 2010


Wanting More, Taxation Gets Less

Justin Katz

The Tax Foundation has looked at Amazon taxes and found the following:

Contrary to the claims of supporters, Amazon taxes do not provide easy revenue. In fact, the nation's first few Amazon taxes have not produced any revenue at all, and there is some evidence of lost revenue. For instance, Rhode Island has seen no additional sales tax revenue from its Amazon tax, and because Amazon reacted by discontinuing its affiliate program, Rhode Islanders are earning less income and paying less income tax.

Amazon taxes also do not "level the playing field" between brick-and-mortar and online businesses; the laws actually mandate disparate burdens on online businesses. Litigation over the constitutionality of Amazon taxes is ongoing, with scholars on the left and right disputing their wisdom and legality.

The report cites General Treasurer Frank Caprio's statement that the tax should be repealed "immediately" and provides a map showing Rhode Island as one of only four states with such a law. Once again, whatever the fairness of the policy, Rhode Island must stop being on the cutting edge of economic experiments that bleed our local economy.


March 9, 2010


Any Way to Tax the Productive

Justin Katz

A letter by Middletown Republican Town Committee Chairman Antone Viveiros in the Newport Daily News directs attention to H7563, submitted by Rep. Amy Rice (D., Portsmouth). The legislation would add the following language to Rhode Island tax law:

Opting out of the domestic production deduction. — All corporations doing business in the State of Rhode Island shall add back into their taxable income any amount deducted under the federal "domestic production deduction" also known as section 199 of the federal Internal Revenue Code. State tax forms shall be changed if needed in order to comply with this statute.

For the likes of Rice, it appears, ideology trumps economic wisdom. Even were it a principled correction to remove national tax reductions from the Rhode Island calculation, sucking money out of the productive segment of the state is plain lunacy in the current economy and in our current condition of civic deterioration. As Viveiros asks in closing:

Is this the way to create jobs?

Why won't the General Assembly majority cut spending, as we have? Do they have to, to get reelected? I'll leave those answers to you.


February 25, 2010


From the Garden to the Ocean

Justin Katz

One must suspect that Ed Achorn is link-seeking when his column addresses both state-government dependents and the state of my youth, New Jersey:

Ultimately, while the public-employee unions and other government-fed special interests keep fattening up, the middle class suffers from a loss of jobs and opportunity, and the poor suffer from a loss of charitable dollars. The quality of life goes down, as money to pay for vital government services disappears, leaving a state with poor roads and bridges, aging school textbooks, leaking roofs and canceled sports programs, while the politically connected demand the same plush benefits they have long received.

In the comments to my Sakonnet Times letter, a teacher is claiming that he can't possibly survive with a 5% cut. The disconnect from what the rest of us have been experiencing is palpable. There's just not much more my family can cut from its budget, and nothing more we can trim and still justify living in a state that won't recover from its economic slump for years to come.

We have to turn things around quickly, in Rhode Island, because the downward spiral is self-propelling; the faster it goes, the faster people will leave, and the faster it will go. It isn't a matter of whether public-sector employees can afford a cut. If current trends continue, the cities and towns and the state will find it more difficult to pay them every year.


February 23, 2010


The General Assembly as RI's All-Purpose Charity

Justin Katz

It's a small thing, perhaps, but then they're all small things, from a certain perspective. This is just too perfect an emblem of the government under which we're living:

All the funds raised for those three [charitable] purposes, listed on the "Rhode Island Checkoff Contributions" portion of the tax return, go directly into the state's general fund.

And they have since 1995.

The state uses the money however it wants, from plowing roads to paying the salaries of members of the General Assembly, which voted in 1995 to divert the money without telling taxpayers that it was no longer going toward the stated purpose.

Give this greedy beast nothing more than it can take by force. Apart from its catastrophic incompetence, the government of Rhode Island simply cannot be trusted.


February 11, 2010


Not One Dime But Many? President Obama Loses His Religion on the $250,000 Line of Demarcation

Monique Chartier

Remember this explicit statement that President Obama made almost a year ago?

if your family earns less than $250,000 a year, you will not see your taxes increased a single dime. I repeat: not one single dime.

Oops.

- President Obama says he is now "agnostic" about raising taxes on households making under $250,000 a year to help cut budget deficits, signaling a possible retreat from a campaign pledge.

In an interview with Bloomberg BusinessWeek on newsstands tomorrow, Obama said a presidential budget commission needs to look at all options for deficit reduction - including tax increases and cuts in spending on such programs as Social Security and Medicare.

"The whole point of it is to make sure that all ideas are on the table," Obama said. "So what I want to do is to be completely agnostic, in terms of solutions."

("Agnostic"? Is that a new euphemism for wavering on an iron clad promise?)

Let's see, he wants to give us lots of stuff, like universal healthcare and stimulus money and bailouts and unemployment benefits. But then, he's going to have to take more and more money from us to pay for all of this stuff. Wouldn't it be more straight forward to just not give us stuff and then allow us to keep more of our money?

Howie Carr made a good point this afternoon: will the press pounce on President Obama the way they pounced on President George "Read my lips" Bush?

In the meantime, on the subject of dimes, one of Howie's callers reminded him of this scene from "Blazing Saddles". [Warning: language.] Indeed, it looks like some of us are going to have to "go back and get a s******d of dimes".


February 3, 2010


RE: Phony Incentives and Real Disincentives

Marc Comtois

Justin correctly questions the actual effectiveness of the hoop-jumping job creation incentives recently laid out by the Governor. (As commenter Roland writes under Justin's post, apparently it is a way to use stimulus money for short term gain). This morning, I heard Helen Glover reading from this American Thinker piece about the problem with this whole approach of trying to micro-manage small business from the top down.

Suppose you are a business that has held on to valuable employees for the last year at a great financial cost. You are now supposed to compete with a startup that has preferential tax treatment because he is hiring new employees. Or perhaps you must now compete with an existing competitor that was less financially sound and thus had to lay off workers. He may now get a tax break to hire them back. You must then compete with more expensive workers than your competition. Instead of creating an incentive to hire you may have created an incentive to lay off workers.

Because the president decided to float this idea in his supposed "State of the Union" with an audience of 48 million viewers, employers who may be considering hiring back workers may elect to delay this as long as possible in order to get the tax credit mentioned, which may be far from being enacted. This would likely delay any employment rebound.

And why should such a benefit only be allowed for ‘small' business? With such high unemployment don't we want to encourage hiring from large businesses as well? If a small business gets preferential treatment for a new hire is he not discouraged from growing beyond the magical and arbitrary tipping point and losing that tax break? Will the job ‘created' by the small business come at the expense of another job in a larger company, negating any benefit?

The solution is, of course, simplicity. Cut taxes for all businesses, reduce government. I know the Governor also has proposed that, so perhaps this is, indeed, short-term window dressing. As always, back to you General Assembly...



A Phony Incentive for Hiring

Justin Katz

Does anybody believe this will work?

The deal would give employers a $2,000 tax credit for each new full-time worker hired between July 1, 2010, and Dec. 31, 2011. The tax credit would apply for the year the hiring takes place. ...

There are controls on the tax credit. The newly hired workers must have collected unemployment, received welfare benefits, or graduated from college in the previous 24 months.

The employee must work 30 hours a week or more and earn at least 250 percent of the state’s minimum wage. Doing the math, that’s about $18.50 an hour, or close to $40,000 a year for a 40-hour-a-week worker. He or she must also be granted access to group health-insurance benefits, if interested.

A small one-time tax credit in exchange for a median-cost permanent employee? About the only businesses that are apt to take advantage of the credit are those that already planned to hire, it seems to me. In other words, they'll hire when the numbers make sense, and the numbers are well beyond the reach of such a credit.

Companies aren't going to take on additional burdens or additional risks for $2,000. What they need is a reason to believe the state to be worthy of investment and the local economy to be primed for explosion. Under those circumstances, the extra two grand might spur them to get ahead of the hiring curve (although not likely). As it is, this is like offering a free after-dinner mint to get passengers to make dinner reservations on a sinking ship.


February 2, 2010


Obama's Inaction = Tax Increases for Middle Class

Marc Comtois

UPDATE: Reuters has pulled the original story that this post was based on. MMM.....egg. Alan Viard of the American Enterprise Institute explains.


January 29, 2010


Senate Dems to Pres Obama: No Freeze on Spending

Monique Chartier

The applause had barely ended on the President's State of the Union Address before the Senate had put the kibosh on one of the initiatives therein. From the AP yesterday:

Just days after President Barack Obama endorsed a partial freeze on domestic spending, his Democratic allies in the Senate have rejected a plan attempting to do pretty much the same thing.

Old-school Democrats were the driving force in killing the bipartisan legislation, sponsored by Alabama Republican Jeff Sessions and Missouri Democrat Claire McCaskill. Their plan was slightly modified version of Obama's that would have permitted domestic agencies an increase of just about 1 percent, with slightly higher boosts for the Pentagon.

I'm not sure what's more astonishing: the incomprehensible level of spending that this Congress and this administration have achieved (let us anticipate a popular criticism that often crops up at this point by noting that it was no better when George Bush was over-spending) or that there are actually people who couldn't limit themselves to incomprehensible plus 1%.

The AP also noted that

A 56-strong majority of senators supported the plan but it failed because 60 votes were required. The vote came the morning after Obama threatened to veto spending bills that would exceed a domestic spending freeze.

Roll call here. H/T the Fred Thompson Show.



Spreading Your Wealth Around

Justin Katz

Marc already offered the only commentary necessary on the idea of taxing workers during a recession to pay the unemployed, but there's a tangential point to be teased from this:

Under one scenario, the maximum amount of the new tax on a worker could be about $58 a year.

Doesn't look like much, does it? We all chip in and help those who are down on their luck, just now. How could one object?

Well, $58 per year is a small amount. But so is an increase in the municipal water bill. So is another $100 or so for a local pay-as-you-throw garbage program. So is the incremental increase in taxes to pay teachers' step increases. So is the annual increase in RIte Care. So is the per capita cost of the stimulus program. This list could go on and on.

Before you know it, that little bit of money to help out struggling families is creating disincentive to spend cash and thereby finance businesses. It's raising the cost of hiring new employees. In short, it's generating more struggling families.


January 26, 2010


Tax Workers? Yeah, That's Brilliant

Marc Comtois

Really, guys?

A state advisory board is considering a new tax on workers to help bail out the beleaguered state trust fund that pays benefits to the unemployed....[It] could take the form of an addition to the tax that employees already pay into the state’s Temporary Disability Insurance (TDI) program. Revenue so raised would be diverted to the state unemployment insurance trust fund.

The TDI tax rate for 2010 is 1.2 percent of the first $57,900 of a worker’s wages. Raising the TDI tax rate to 1.3 percent for 2011 would yield an extra $13 million or so, according to state labor agency calculations. (The increase could amount to a tax of $57.90 a year for higher-income workers, less for lower-income workers.)

Predictable.


January 23, 2010


Flight of the Golden Geese

Justin Katz

For those disinclined to understand, here's a video parable about a goose that lays golden eggs (via TaxProf):

As we're learning, in Rhode Island, the video doesn't tell the whole story. The same mentality that plagues the fictional farm affects not only the golden-egg-laying geese, but also the industrious animals that find ways to produce new things (or old things more efficiently). And not only does the farmer take more of the fruits of their labor, but he also places restrictions on their operations, while expanding the burden that must be "shared."


January 22, 2010


RIPEC's Analysis of Firefighter Pay/Contracts

Marc Comtois

My post concerning the Warwick Beacon's look into Warwick firefighter pay/contracts has generated some commentary regarding the RIPEC report (mentioned in Russell Moore's story) that found:

On average, [a RIPEC] report showed that Rhode Islanders spend about $6.24 on fire services for every $1,000 of personal income, or just under double the national average of $3.21 per $1,000 of income.
Those who doubt these numbers seem to have these questions (cribbed directly from actual comments):

1) EMS services are included for Rhode Island but not the other states. By including EMS, you couldn't even compare Providence to Worcester- two very similar sized cities, but Worcester's EMS is provided by UMass Hospital, and Providence's by the Fire Department.

2) The cost represents the total cost of fire protection in RI, meaning sprinkler systems, alarms and other additions, not just the actual fire department budgets.

3) Belief that pension costs are included in the RI costs but not in those for other states.

All the RIPEC report says about it's methodology is:

Fire Protection comprises expenditures for the prevention, avoidance and suppression of fires and for the provision of ambulance, medical, rescue or auxiliary services when provided by fire protection agencies.
To be clear, I'd like more particulars myself. RIPEC appears to have used data taken directly from U.S. Dept. of Commerce, Bureau of the Census, Government Finances, the Bureau of Economic Analysis (for personal income data) as well as their own calculations. Based on the Census Bureau's explanation of their methodology, the data is provided by the states. (Right now, I don't have the time to weave through the tables myself--and the links I provided are my best guess). All that being said, here are my thoughts on the 3 main contentions.

1) Whether cities and towns pay for EMS or not is not as relevant as some think. Having tax dollars pay for EMS is still a governmental (taxpayer/resident) choice. Just because some don't cover EMS via taxes doesn't mean it should be excluded from a comparison of tax dollars spent on fire/safety services. Those are real dollars no matter what column on the spreadsheet you want to put them in. Don't let the inconsistent accounting methodology obscure the fact that other cities and towns in other states appear able to provide EMS services through private companies or hospitals and not through taxpayer supported fire departments.

2) It is probably true, given the brief explanation by RIPEC, that they include expenditures for fire suppression (sprinkler systems, etc.) the state paid to have installed in government buildings (for instance). There can't really be any doubt that much of that expenditure is a direct result of government over-reaction to the Station Night Club fire. We all know that small businesses have screamed that they can't afford to pay for the new requirements. Unsurprisingly, local governments didn't because, well, they had the money, right? (Ours....)

3) There is no way of knowing whether pension costs were included or not without the raw data.

I'm sure this won't satisfy RIPEC's critics, though I wonder if they have similar reservations about the rest of RIPEC's analysis regarding other areas of government expenditures?


January 20, 2010


Banks as Tax Collectors

Justin Katz

Here's the ruse (emphasis added):

President Obama expressed confidence Saturday that lawmakers would approve his proposed tax on banks to recover bailout money, despite opposition from Republicans and the financial industry.

And here's the reality (emphasis added):

The proposed 0.15 percent tax would last at least 10 years and generate about $90 billion over the decade, according to administration estimates. It would apply to about 50 of the biggest banks, those with more than $50 billion in assets, and include many institutions that accepted no money from the $700 financial industry bailout.

And here's the president's faulty premise:

Obama challenged those who say banks can't afford the tax without passing the costs on to shareholders and customers.

"That's hard to believe when there are reports that Wall Street is going to hand out more money in bonuses and compensation just this year than the cost of this fee over the next 10 years," he said. "If the big financial firms can afford massive bonuses, they can afford to pay back the American people."

The financial firms could afford to do lots of things with their profits, but what they do typically rewards those in charge, especially those responsible for the strategies that generated their revenue in the first place. Taxing all banks in order to pay for handouts to a few of them doesn't change the industry dynamics around competition for top talent. That is to say that the banks will look for other areas to make up for losses from taxation rather than the pay scales of those whom they credit for their success, largely by passing them on to customers.

The bigger point, though, is that this plan will suck $90 billion directly out of the global economy, with the focal point of the United States. For example, consider some number crunching from the Providence Business News:

Citizens Financial Group Inc.'s parent company, Royal Bank of Scotland Group Plc, may owe $625 million a year if Congress passes a new tax on financial institutions proposed by President Barack Obama.

From where does Mr. Obama believe that money is going to come? Out of the bonuses of executives? If one believes the narrative of the left, bank executives are immorally greedy connivers. From a rightward perspective, the bonuses are the price that the market has placed on their talent (hugely distorted upward through the meddling of government, to be sure). In neither case are financial leaders likely to simply accept an indirect tax on their income.

As I've said before, if one wishes to curb outrageous pay and bonuses, the best method would focus on increasing competition, making excess unsustainable. Taxation favors incumbency, exacerbating the underlying problem.


January 16, 2010


If We're Going to Be Setting Tax Rates Based on Your Membership in a Group, Why Stop With a Health Insurance Tax?

Carroll Andrew Morse

What could possibly say Saturday in Rhode Island more than a blog post written in a form of an homage to a Bill Reynolds "For What It's Worth" column...

There's no truth to the rumor that independent RI Gubernatorial Candidate Lincoln Chafee will be combining his revenue raising ideas with the the recently proposed Democratic health insurance tax structure to develop a new plan for a two-tier sales tax, where union members pay one rate and non-union members pay a higher rate.

Or that non-membership in a union will now translate into a lower standard deduction on your Federal income tax form.


January 11, 2010


Bait & Switch? Shovel Ready Stimulus Dollars Not Evident in "Shovel" Related Employment Figures

Monique Chartier

Rush pointed out today that while the hype was about stimulus dollars going to shovel ready jobs, much of the money went instead to budget deficits of states and municipalities, as evidenced in part by an unemployment rate in the construction industry of 22.7%.

Never to be outdone in Rhode Island, we went them one better: we used the money to plug some budget holes AND we jacked overall spending by 12%, very little of which went to "shovel" projects.

There would be little justification, stimulus or fiscal, for most of the stimulus spending anyway. That it was advertised as targeted to one thing and ended up elsewhere adds an unnecessary level of dishonesty and mistrust.


January 8, 2010


A Mainstreet Scam

Justin Katz

A commenter to yesterday's post on unemployment insurance appears to believe that I misunderstand the way the system works. He or she is wrong.

The point is that the system is not able to address times of economic hardship. Since the federal government won't allow the state to hold off repayment of the relevant loans when it meanders into a good economy at some undefinable point in the future, the missing resources can come from one of only three places: 1) cutting the benefits to the unemployed, 2) increasing the tax on businesses, or 3) looking elsewhere in state government for the money.

Something similar to number three is done as a matter of course across government. Consider the telephone tax/fee in Rhode Island:

The money raised by the phone surcharge is used to provide and upgrade Internet access at 460 public schools and libraries across the state, but revenues have dropped by 35 percent since 2004, forcing the state to contribute out of the general fund, said Carolyn Dias, chief of operations at the state Department of Education.

So here's a program in which a tax was sold to the people of Rhode Island as a relatively painless way to finance school technology (rather than using the money that we've already provided for such things by way of our regular taxes). The model turns out not to work, so the government takes the money from something else.

Of course the phone surcharge is in the news because Governor Carcieri has a plan to decrease it as a trade-off for creating a similar surcharge on cell phones:

The cell phone proposal would add a 16-cent monthly surcharge to all cellular phones (or numbers), while reducing the existing surcharge on landlines to 16 cents from 26 cents.

With the number of cell phones rising and landline accounts dropping, the measure could boost revenues by $300,000 in the current budget year and $600,000 during fiscal 2011, according to the governor’s budget office.

Given the ubiquity of cell phones, one is tempted to argue that this is merely another broad-based tax disguised as a user fee, but it's actually worse than that. It's a tax on the productive and fruitful, benefiting those who are neither. The only people who would actually benefit by the shift toward cell phones are people who don't have them, probably the elderly, most prominently. Young families and businesses often have more than two. And:

... speakers from Verizon and T-Mobile opposed the new surcharge, saying Rhode Island already has among the highest cell-phone fees in the country.

The sentence before that, in the report, points toward another indication of the scam that is big government: "The state receives two federal dollars for every dollar it contributes to the program." In other words, the federal government uses taxpayer dollars to create incentive for states to take taxpayer dollars in order to fund some preferred program.

If a program is worth funding, officials should be honest and straightforward and pay for it from the general tax base. Carcieri should be ashamed to perpetuate this government card trick, which disproportionately harms the demographics that the state should favor... if it wants to survive.


January 6, 2010


RE: Budget Misery - Moderate Solutions

Marc Comtois

Over at the FrumForum (a moderate Republican blog run by David Frum) Eli Lehrer explains:

Many of the biggest budget items for states—Medicaid, bond payments, pension obligations to retirees—are virtually impossible to reduce. Big , broad-based tax increases, although difficult to avoid under many states’ balanced budget laws, will simply discourage investment and growth. Without indulging into liberal (“tax the evil corporations”), moderate (“run government like a business”), and conservative (“cut taxes to increase revenue”/”privatize all education”) fantasies, states looking to balance their budgets aren’t totally out of luck.
He offers six suggestions for balancing budgets, two of which address some familiar problems here in Rhode Island: pension reform and eliminating "special tax abatements and business 'relocation/retention' grants." As to the latter, Lehrer explains:
In efforts to attract new enterprises, revitalize decrepit areas, boost politically favored types of business, nearly all states run massive corporate welfare programs including “enterprise zones,” “TIF (tax increment financing) districts,” “job retention tax credits,” state “HUB (historically underutilized business) zones.” Although a few states simply give grants to private businesses, most of these programs involve issuing bonds, building infrastructure, or granting tax credits that benefit only a particular business or development. The practice produces headlines for politicians but largely serves to let political leaders decide on the location of development that would happen anyway. These business subsidies tend to feed on themselves: cities like Chicago and Syracuse, New York have made such widespread use of them that almost all new development requires some sort of tax abatement or other assistance since unabated tax rates are so high as a result. Although it appears almost certain to cause some short-term pain, many states would almost certainly increase revenue while cutting base tax rates if they simply quit the abatement drug cold turkey. Certain areas, many of them in need of help, probably would lose out. But, in the end, the free market would make better decisions about business locations than central government planners ever could.
As we've argued before, the goal should be to make the state more business friendly in general by lowering taxes and regulatory barriers across the board. This can be accomplished by simplifying and streamlining, not creating a web of loopholes and "incentives" that result in one-off deals benefiting a particular business instead of all.



Budget Misery and the Government Payroll Economy

Marc Comtois

Rhode Island is not alone in facing budget deficits as many other states (if not most) are in the same predicament. As a recent study by the Cato Institute shows, a lot of the deficit problems stem from generous public employee compensation packages.

State and local governments face large budget deficits as revenues have stagnated and spending has remained at high levels. To reduce deficits, large savings can be found in the generous compensation packages of the nation’s 20 million state and local workers. In 2008, wages and benefits of $1.1 trillion accounted for half of total state and local government spending.
Cato's charts speak for themselves.

cato-2009-avgcomp.JPG

cato-2009-share-bennys.JPG

cato-2009-total.JPG

Part of the problem is that there are now more government workers than "goods producing workers" (construction, manufacturing, mining, agriculture) in the U.S. (source, h/t):



As John Carney and Kamelia Angelova (who produced the above chart) explain:
We've gone from providing jobs in profit-making private industry to providing jobs in profit-eating government work. Toward the end of 2007, the total number of government jobs exceeded the total number of goods producing jobs. Welcome to the government payroll economy.
Yup.


December 20, 2009


What State Aid Does

Justin Katz

It's difficult to care — in the midst of a major recession, with unemployment at its current level and the state government in perpetual deficit — about political sniping about who told whom what when, but a statement in such an article begs for correction (emphasis added):

RHODE ISLAND GOVERNMENT funnels one-third of its $3-billion "general revenue" budget to municipalities and school districts.

The vast majority goes to schools.

The state budget Carcieri signed in June designates $187 million for municipal governments, a figure that includes "restricted accounts," such as money that must go to local library construction. And local school districts were set to receive $890 million, including funding for charter schools and the state-managed Central Falls school system.

The funding stream helps keep local taxes at bay.

No. What the funding stream does is to help keep local spending — especially on labor — up. The evidence is in the items that Governor Carcieri is suggesting as compensation for cuts to aid, most of which entail lightening the contractual burden on municipalities. In the long term, less aid from the state would not mean commensurately higher property taxes; it would mean commensurately lower giveaways to unions.


December 18, 2009


Leadership and Rhetoric

Justin Katz

Monique and Matt covered budgets and leadership on Wednesday night's Matt Allen Show. Stream by clicking here, or download it.


December 17, 2009


And Then the Other Side

Justin Katz

From AP writer Ray Henry's ">report, it looks like RI Senate Majority Leader Daniel Connors drew the short straw:

"I think we need to look at all of our taxes and determine, you know, those that could be changed to provide sufficient revenue for the state to provide its services," Connors said during a Statehouse interview.

You know, we'll just find a way to take "sufficient revenue" from the people of the state. That's all. Easy.

Of course, Senate President Teresa Paiva-Weed stands right with Connors and is apparently in need of a civics lesson from the people's perspective:

"Essentially, the proposal the governor is making is we're going to cut taxes with the left hand ..., income taxes, and we're going to increase property taxes," Paiva-Weed said.

Note that Paiva-Weed makes no distinction between the scope of her tier of government and more local tiers. The Democrats are trying to protect their public-sector union pals at the municipal level by shifting the narrative to insist that municipal leaders have no choice. They do, and so do their local constituencies.


December 14, 2009


When Taxes Aren't an Issue

Justin Katz

Mark Perry observes (with charts) a progressive trend in American taxation:

The Tax Foundation reported last week that more than 143 million individual income tax returns were filed in 2007, and 46.6 million of those returns had a zero or negative tax liability, setting a new record for the number of "non-payers." This group represented almost one out of every three tax returns filed in 2007 (32.6 percent, see chart above), and reflects tax filers whose exemptions, deductions, and credits wiped out any federal income taxes that would have been due. According to the Tax Foundation, every dollar withheld from the paychecks of the "non-payers" during the year was refunded, and in about half of the cases, substantial additional money was refunded to the tax filer. There were an additional 15 million people in 2007 who did not earn enough income to file a tax return, bringing the total number of Americans who paid no federal income taxes to more than 61 million, or 39 percent of the tax-eligible population (158 million including filers plus non-filers).

As Perry notes in the words of American Enterprise Institute Economist Alan Viard, increases in government spending likely mean less to people who don't think they pay for it. This one item is not a complete explanation, but we appear to be witnessing the realization of a risk that has been foreseen with democracy all along: the majority can simply vote itself money from the minority, disregarding or ignorant of the self-destructive nature of that practice.


December 7, 2009


Don't Scheme on Taxes, Simplify

Justin Katz

URI Economic Professor Edward Mazze's tax-cutting suggestions sound reasonable enough, but one can't help but be suspicious of the urge to control:

Murphy said of Mazze's plan, "I want to be open to it." Murphy said he was particularly interested in Mazze's proposal geared toward revitalizing local downtown business districts.

Murphy said he remembers a vibrant Main Street in West Warwick when he was a boy. "I know in the last 40 years, our Main Street in West Warwick has not come back to where it was," he said.

An article in the latest Sakonnet Times (not online) describes the Tiverton Town Council's approval of a suite of zoning changes for commercial districts, and the accompanying pictures present a similar longing for the downtown-style main street. But there are reasons other than zoning and the lack of targeted tax breaks that Main Streets have been disappearing. Some of them are cultural; some of them are economic; the point is that attempting to counteract these forces will come at an economic cost and may fail to produce viable businesses, anyway.

In other words, if pulling the Rhode Island economy back up the cliff is the objective, we shouldn't be layering all sorts of aesthetic preferences on pro-growth policies. We also should focus on simplicity. All of Mazze's proposals will benefit people savvy enough to know about the breaks, to take the proper steps, and fill out the proper forms, but big-government corruption and waste illustrate very well that the skill set for jumping through hoops is not necessarily an indicator of a successful business. "Targeted" tax cuts, in that sense, become targets for which people looking for breaks will shoot. We need to encourage people who are interested in running businesses.

As Roland Benjamin says:

"If [Rhode Island's] tax structure was reasonable in the first place, you wouldn't need [targeted tax breaks]."

And if Rhode Island's political and academic leaders were competent to manipulate an economic recovery, we wouldn't be in the mess that we're in.


December 2, 2009


A Corporate Tax by Any Other Name

Justin Katz

So, Governor Carcieri and his Director of the Department of Revenue, Gary Sasse, have switched from a "gross receipts tax," which would essentially be an expanded and hidden sales tax, to a "net receipts tax," which Providence Journal reporter Neil Downing describes as follows:

Under a net receipts tax, a corporation generally would pay tax on its revenue after claiming only a limited number of deductions (the number and nature of which have not been set). Thus, more of a business's income would be subject to Rhode Island tax. But a lower tax rate would apply, Sasse said. ...

Sasse also said that any such plan would not harm the many small businesses that are organized as "pass-through" entities, such as limited liability companies and subchapter S corporations.

Sounds a bit like an expanded corporate income tax, no? Downing reports that the plan would be to "eliminat[e] at least one other tax, such as the state's corporate income tax, the sales tax or the personal income tax"; if it's not the first that goes, then Rhode Island would be killing its economy, not helping it. If it is the first that goes, it would essentially be a name change with the promise of future increases. Once the deductions are eliminated through the trick of changing what we call the tax, the General Assembly will find it a relatively simple matter to ratchet the rate up.

Suppose that the income tax is what's eliminated. Corporate entities will have an irresistible incentive to organize as pass-through entities, which will limit their ability to expand and ultimately undermine estimates of the revenue that the state receives from the "net receipts tax," because more income will flow to the untaxed channel. (Except for the restraint on expansion, that's not an unattractive outcome, but it will ensure the continuation of continual budgetary shortfalls.)

And if it's the sales tax, we're left with a gimmick that increases prices and shifts the tax burden to businesses from out-of-state consumers.

The faster Rhode Island's leaders come to the realization that there is no easy way out of this mess, the better off we'll all be. Taxes have to be cut, not reconfigured. Regulations have to be relaxed. And mandates have to be rescinded. Start selling that message now, because it's going to be a long, hard fight. Tossing out a new taxation buzz-phrase every few months merely delays decisiveness and confuses the public.


November 21, 2009


Preemptive Rebuttal on Property Taxes

Justin Katz

Yes, the common advice is simply to ignore NEA-RI Assistant Executive Director Pat Crowley, and for psychological purposes, that is certainly an attractive approach. Its problem is that it's in Crowley's nature to rush to expose more broadly forming strategies and flaws in thinking of the local left. So, when he devotes so much of his time as a professional agitator to proving that Rhode Island's property taxes really aren't that bad — here and here — we can be assured that we'll see such nonsense begin to spread as a self-justifying common knowledge among the segment of Rhode Island society whose selfish or vain interests are dragging the state down.

There's a bit of irony to this tack. After all, when progressives have brought up property taxes, it's typically been to decry the fact that they're regressive, as Tom Sgouros explains:

Property tax is regressive because the value of the house or apartment you live in doesn't scale with your income. If you earn $50k, you probably live in a house or unit worth $300k (give or take). If you earn $500k, you probably don't live in a house worth $3 million. Instead, your house is likely worth $800k or a million. So ten times the income goes to three times the taxes.

With reference to Sgouros, there's also some conflict with Crowley's latest spin in that the former has tended to ignore property taxes as a percentage of home value in order to stress the fact that the rates are lower where the values are higher, while the latter wishes to use high property values in order to explain why the government ought to be able take more money. The two leftists illustrate nicely why regular citizens are wise to be suspicious of statistics, because they can be twisted in multiple directions per the rhetorical needs of the propagandist.

So, take a moment to absorb all of the multiple rankings provided in Crowley's Tax Foundation source, limited to Rhode Island and the abutting counties of Massachusetts and Connecticut (Bristol County, RI, not included because of small population, not low rank). Rhode Island counties are shaded red, Massachusetts, blue, and Connecticut, green.





And for good measure, here's a similar chart for median incomes:

For the state-by-state comparison, Crowley likes the measurement by percentage of value for obvious reasons, even though progressives typically prefer to measure all taxes against income (to show that the rich don't pay enough). In fairness, my usual argument with respect to different taxes is that, if it's justified for the government to tax a particular transaction (sales or income) or property, then it should set rates according to the value of the thing being taxed, without adjusting for some external consideration. If we've decided that a town should receive its revenue from property taxes, then it ought to set a rate for all property, and those who possess a greater portion rightly pay proportionally more. That's fair. Otherwise every tax becomes a form of income tax.

For the purpose of deciding whether a particular state's property taxes are comparatively high, though, the percentage of home value isn't but so useful. For one thing, there's dollar value and there's the value to the user; taxes for a two-bedroom hovel might cost $4,000 per year in Rhode Island, but $1,000 in some other state. For another thing, the cost of government doesn't go up but so much based on residential property values. That is, it doesn't cost much more to send firefighters to a $200,000 hovel than a $75,000 hovel or to educate the children living in them.

If the question is whether the state of Rhode Island and its municipalities extract a large tax burden from their residents, the income comparison is more appropriate. As the above figures illustrate, even though Rhode Islanders have higher income than the median for the country, we pay an even larger percentage of that income in property taxes, and even though our counties' median incomes are dispersed among those of abutting counties, they cluster at the top for percentage of income absorbed in property taxes.


November 10, 2009


A Sales Tax by Another Name

Justin Katz

Senators Frank Maher and Leonidas Raptakis were on Matt Allen's Violent Roundtable last Friday night, and the trio spent a bit of time discussing the potential gross receipts tax. As I wrote a few weeks ago, at bottom, this scheme merely shifts the tax burden to businesses, probably to the benefit of the wealthy. Be the gimmicks what they may — even if the state eliminates the sales tax or income tax — I just don't see how shifting the tax burden thus can be a positive development for the state's business environment.

Perhaps I'm looking at it too plainly.

The senators mentioned that the plan that they've heard would exempt businesses up to $600,000, but inasmuch as "gross receipts" means total revenue before expenses, it really doesn't take much to reach that total. They also suggested that the tax would apply more broadly than the sales tax does — including to service providers of all kinds — which makes me wonder whether that isn't the underlying purpose, for some.

The truth is that I simply don't trust the General Assembly to talk about a tax increase, even with a promise of a decrease elsewhere, because I don't believe that the powers who be won't work it out in such a way as to simply take more.


November 6, 2009


Binding Arbitration & Tuesday's Special Election Candidates

Carroll Andrew Morse

I have tended to avoid the written-questionnaire format for interviews of political candidates and officeholders, because the ratio of informative-answers-from-the-candidate-himself-or-herself to canned-answers-written-by-committee can often be less than optimal. Or it could be that I'm just bad at writing questionnaires, as RIFuture's Brian Hull has been able to get substantive answers to some very good questions that he put via questionnaire to the candidates in the General Assembly District 10 (Providence) special election to be held this Tuesday.

In particular, Republican candidate Maurice Green gave as unambiguous an answer as you'll ever hear -- in a political context or elsewhere -- on the subject of binding arbitration…

Question: With persistent negotiations between cities and towns and teachers unions often failing to reach agreements, do you support or oppose binding arbitration legislation?

Maurice Green: I have been employed with the Providence Police Department for over 20 years, which makes me an active union member with the Fraternal Order of Police. And as such, I have personally benefited from binding arbitration on many occasions. However, I vehemently disagree with binding arbitration, because of the adverse effects it has on our citizens. Property taxes increase when cities lose binding arbitration decisions. Clearly, my personal gain is short lived if the state is in the tank, and the community's property taxes are driven out of control.

In contrast, Democrat Scott Slater expressed his support for stripping local government officials of final decision making authority over a large portion of their municipal budgets, as long as an arbitrator is working through a "fair" process…
Scott Slater: I acknowledge that the current system we have in place is dysfunctional and I believe that a binding arbitration model is needed. I think that binding arbitration could provide an effective solution to labor and management contract disputes. As of now, progress has been made on a legislative proposal to provide resolution to failed negotiations. As a state representative, I will work to have a fair piece of legislation to protect our children’s education,
…and Independent Wilbur Jennings opposed binding arbitration because teachers might not like it (begging the question of whether he'll change his position, if he finds out that both of Rhode Island's teachers' unions are in favor of it)…
Wilbur Jennings: I am not in favor of binding arbitration, because you cannot make the teachers sign a contract they deem unfair. If you force a contract on these professional, you will have an unhappy workforce and that will not be good for the teachers, students, or taxpayers.
This is an important issue, not just for District 10, but for all of Rhode Island's upcoming elections, Governor's race included. Which candidates running in 2010 will be supporting the legislature's attempts to impose non-democratic budgeting on all of Rhode Island's cities and towns, and which will be supporting having accountable officials make final decisions for their communities?

And who will be able to meet the Green standard, in terms of making their position on this matter clear?

The rest of the RI Future questionnaire is available here.


November 5, 2009


Drowning in Desire for Other People's Money

Justin Katz

The state of Rhode Island's revenue take is like a chest of treasure sinking to the bottom of the ocean, and some folks are intent on having us all chase it to the bottom:

"We've already been cutting, cutting, cutting," said one of the few people watching Wednesday's discussion, Russell Dannecker, fiscal policy analyst for the Poverty Institute at Rhode Island College. He cited a study by State Policy Reports that reports 29 states have proposed tax increases for the coming fiscal year.

Frankly, Rhode Island has to stop "cutting, cutting, cutting" around the edges and give some serious thought to wholesale excisions of programs. Information from the first link above illustrates why that is the necessary direction:

Among the highlights of Wednesday's presentation:
  • Collections from the state's business-corporation tax plunged to $4.5 million from $14.8 million in the same period a year earlier, a $10.3-million drop.
  • Sales-tax collections fell by $19.77 million, or 6.6 percent, to about $278.6 million.
  • Net receipts from the personal-income tax (after refunds and other adjustments) fell by $14.3 million, or 4.5 percent, to $307.8 million.

The number 1 job of the state government must be to do whatever it can to help Rhode Islanders make money. The quick first step should be to cut taxes, and the larger step, still expedited, must be to slash regulations and mandates. We cannot afford to govern ourselves as we've been doing.


October 31, 2009


Consolidation as Another Means of Redistribution

Justin Katz

If you should attempt to discuss state-to-state migration trends related to taxation, Tom Sgouros will proclaim the whole thing far too complicated, with insufficient data available, to make broad statements. When it comes to people moving from town to town within the state related to taxes and services, well, he's not so reserved:

When a family moves from Cranston to Exeter, Cranston loses a little of its tax money, and Exeter sees an increase in the demand for its services. For most services, Cranston can't cut expenses as fast as they lose dollars. This isn't because of unions, but simply because of arithmetic. A hundred fourth-graders in a school make four classrooms. But ninety-nine students also make four classrooms. Just because you've cut the students doesn't mean you can cut the payroll, and the same effect is apparent with police, fire protection, sewers and more.

On the flip side, many studies have shown that the new residents of a town like Exeter seldom pay enough in taxes to cover the services they demand. This is especially true since most services cost more to provide way out in the burbs, where people are far apart from each other. It's why towns invented developer impact fees.

But what this means is that when people move from one town to another, the town they move from feels pressure on their tax collections and the town they move to feels pressure on their services. The result is that taxes can go up in both towns.

At best, you can say that this assessment is true under a certain, extremely limited, range of household types, and even then, the scenario by which taxes always go up everywhere whenever anybody moves requires a slew of assumptions. For example, if the property left behind in Cranston is reoccupied by somebody else, there is no loss of taxes. The same is true in the opposite direction in Exeter, unless the house was newly built. If the family has no children, there is no change in the schooling requirements for either town. And in the same way that removing a child from a class doesn't necessarily reduce the need for teachers, adding a child to a class doesn't necessarily increase that need.

In order for cities and towns even to come close to functioning, they must have somewhat of a balance between taxes and services, which means it simply can't be the case that every resident uses more in services than he or she provides in public revenue. And were that the case, to the extent that some other source of municipal income supplements the budget, loss of a taxpaying resident must represent a net gain.

Sgouros wants you to believe that towns aren't able to raise taxes quickly enough to cover new residents and that cities aren't able to cut services quickly enough to make up for lost revenue, but what he's claiming to be true doesn't make any sense:

The paradox of Rhode Island town finance is that today, the places with low taxes are the suburbs where the services are most expensive to provide, while the places with the highest taxes are the cities, where services are cheapest. It's the movement of people, and what it does to the tax rolls in towns, that bring us to this peculiar, and probably not stable, spot.

The problem is that the paradox only exists if one blacks out half of the relevant information. Consider some various data for the two towns that Sgouros uses as a hypothetical resident movement — from Cranston to Exeter:

Cranston Exeter
Residential tax rate (per $1,000) $15.34 $12.33
Municipal residential tax levy $101,633,398 $9,516,802
State aid $16,361,405 $1,053,443
Population 79,269 6,045
Occupied housing units (OHUs) 30,954 2,085
State aid per capita $206.40 $174.27
State aid + tax levy per capita $1,488.54 $1,748.59
State aid + tax levy per OHU $3,811.94 $5,069.66

Even though the tax rate is lower in Exeter, and even though it receives less per person in state aid, the actual amount of money that it collects per person is higher. Services may cost more to provide in the suburbs, but there's no paradox, because the towns are paying more for those services. And it isn't just that families are larger in Cranston, because Exeter pays even more on a per-household basis.

When one digs through all of the rhetoric and odd mathematical assertions, the disparity between urban and suburban areas derives from the fact that property is worth more outside of the city while city dwellers tend toward the end of the spectrum that uses more public services. (We're leaving political waste and corruption out of the picture, to allow clearer thinking.) What Sgouros actually sees in consolidation, therefore, is another means of redistributing money.

Like me, he's skeptical that consolidation will save appreciable money through economies of scale, but at the end of the article, and the end of the day, he's not concerned with saving money, but "reduc[ing] pressure." He wants to "insulate" town finances "from the effects of people moving." That is, to the greatest extent possible, he wants to trap Rhode Islanders into paying for expensive government programs that urbanites demand and government functionaries are only too happy to provide.

As some of us have begun to suspect, "consolidation" and "regionalization" are merely newly en vogue terms for big government and a decrease in citizen influence.


October 27, 2009


Michael Morse: Mutual Aid: A Simple Start to Regionalization

Engaged Citizen

We are taught at an early age to call 911 in case of an emergency. People’s perception of what an emergency is may differ, but one fact does not; we expect our calls to be answered expediently. Fire departments handle most 911 calls in our area. Those departments pride themselves on a speedy response to calls from the community. When the bell tips at a fire station, everything stops, personnel drop whatever they are doing and hit the apparatus floor. Meals go cold, showers stopped half taken, cleaning and maintenance jobs are not finished. Those things can wait. Nothing matters but the call. Within thirty seconds, the trucks hit the street. People know that help is on the way. They assume the closest units are answering their calls, and they are correct in that assumption. What they may not be aware of is how far the closest unit actually is.

Providence Mayor David Cicilline recently proposed legislation aimed at clearing potential hurdles in the way toward regionalization of city departments. In a carefully worded statement, he cites the need to maintain services and cut costs in difficult economic conditions. Planning for regionalization would not begin in earnest until legislation is passed, the Mayor stated.

North Providence’s Mayor Lombardi notes that the closest responders are not always the ones that are sent, due to jurisdictional complications. Our elected leaders have begun the process of considering consolidation of our emergency response departments. Consider how many years the consideration will take before any progress is made.

A good place to begin consolidating emergency service organizations in and around the Capitol City is to expand existing mutual aid agreements. An automatic dispatch of the closest unit makes sense. The logistics of doing so will be a difficult, but far from impossible task. All considering could be done quickly, and a plan could be put in place within months, not years.
On any given day the cities of Providence, Pawtucket, Cranston, East Providence, North Providence, Johnston and Central Falls provide mutual aid to each other, mostly in the emergency medical services departments. As the system currently works, a municipality must drain all of it’s resources before another town can be called for help. People who live on or near town lines are particularly at risk. If a life threatening emergency occurs, they could, and often do wait for an advanced life support vehicle to arrive from the other end of the town or city while a rescue from the next town sits in the bay, in service, a few blocks away waiting for a call from inside the borders of their own city.

Because of the population’s increased use of 911 for routine medical problems, urban municipalities cannot keep up with the demand for emergency services. It is an ebb and flow system, one on the brink of collapse on a daily basis. Meeting the needs of every caller would bankrupt most municipal budgets.

Presently, each city or town is responsible for providing coverage inside it’s own border. Some stations were built “close to the line,” prior to the construction of major highways. It was a different world when these places were built, the planners of those long gone days had different problems to consider, different political alliances to placate and a completely different landscape.

Without scrapping the current system and implementing better policy regarding the dispatch of emergency resources, cities and town departments must rely on each other. An ultimate goal of consolidating these departments is desirable, but in reality is decades away. Consolidation based on need already happens on the street level, and with few exceptions runs smoothly.

An automatic mutual aid system and agreement will greatly increase the effectiveness of our public safety departments. Mayors and town managers will be forced to work together to make a system badly in need of repair more efficient. The opportunity for grandstanding will be taken away, political gain would be nil, and simple, good governance shown to be an effective tool in bettering the lives of the citizens by providing quicker emergency response to whatever needs may arise. It is the response times that need improvement, and automatic mutual aid will help save lives.

Michael Morse is a Providence EMT and firefighter and writes a blog, "Rescuing Providence".



The Method Is the Message, in RI Recovery

Justin Katz

Reviewing a recent RIPEC study (PDF), Brian Hull pulls back from the most relevant question:

When we look at the 2007 Per Capita Personal Income for RI, MA and CT we find the following: Rhode Island is $39,829, far less than Massachusetts ($48,995) and Connecticut ($54,981). The per capita personal income of MA is a little more than 23% than that of RI. Likewise, the PCPI of CT is 38% more than RI. With these numbers, it's easy to see why general expenditures per $1,000 of PI is higher in RI than in MA and CT. There are fewer "$1,000s of personal income" here to support the government's expenditures.

Does this make the expenditures more expensive, or even less necessary? No. It just means that, as a society, we earn less money than our neighbors to fund these services. All things being equal, if we raised the per capita personal income in the state, then the spending per $1,000 of personal income would decrease. We should aim for that!

An interesting tidbit of information that I learned from Tom Sgouros, in his book "Ten Things You Don't Know about Rhode Island," is that blue-collar, working-class jobs in the state pay much less than comparable jobs in MA and CT. This is in contrast to the relative equivalent salaries earned by professional, white-collar jobs (even though RI still earns a little less). And this helps explain why RI earns less, but that's a discussion for another day.

His heavy reliance on Tom Sgouros notwithstanding, Hull presumably does not buy into the idea that our problems require the reduction of spending through consolidation and the like. After all, consolidation, of itself, will not prime the job-creation machine, and it will not bring Rhode Island salaries up to the levels of our neighboring state. It is not, in other words, the reason that Rhode Island fares so much more poorly than the states by which we're engulfed. Since the problem is too few $1,000s — not who holds them — the answer cannot be that our tax structure doesn't take enough from the rich (which is nonsense, anyway).

If he asks the right questions, Hull may be dangerously close to agreement with we who believe that Rhode Island's government must get out of the way of its economy. Schemes that allow for continued regulations and mandates and wealth redistribution will fail. Have failed. We cannot mandate that people have more money. We have to allow them to make it.


October 23, 2009


Taxes Aren't Mysterious; the Question Is Merely Who Pays

Justin Katz

Could be I'm missing something:

Governor Carcieri's administration director, Gary Sasse, gave a roomful of state senators a list of "two to three things" to do over the next few months as the state tries to climb out of its financial abyss. ...

The third was a variation on a key piece of an ambitious proposal to solve deficit-wracked California's budget crisis: lower the tax burden on the wealthy, repeal sales taxes and replace the corporate profits tax with a new levy pegged to business revenues. ...

According to information compiled by the Rhode Island Public Expenditure Council, a business-backed research group, most states, including Rhode Island, have corporate income taxes that are levied against profits, defined as gross receipts minus expenses. Gross receipts taxes apply to all business revenues with few or no deductions. All transactions are taxed, including business-to-business purchases of supplies, raw materials and equipment.

Rhode Island has already taken a very small step by taxing public utilities (telecommunications, electric, gas) on their gross earnings; insurance companies on their gross premiums; and certain health-care providers on their gross revenues.

We all know that Rhode Island's business environment is the state's core problem (to which other central problems contribute, of course). Even if we assume that the untrustworthy state government of Rhode Island follows through with step 2 and eliminates other taxes, rather than just keeping the additional revenue, the gross receipts tax would essentially shift the tax burden to businesses.

Perhaps there would be a modest bump in perceptions of the state, but it would be founded on a gimmicky trick: Two of the ways in which businesses would adjust to the new tax would be to pass it on to consumers and decrease the salaries that it pays. With the principle that state government revenue must remain flat, all these changes can do is to transfer the burden, and in this case, it appears likely to take less from wealthy families and more from everybody else — especially the working and middle class families who are already hollowing out our society by emigrating.

Why waste waning political equity on this? As I said, I may be missing something, but as it stands there's a taint of benefiting upper class Rhode Islanders as an a priori consideration in the name of economic development.


October 16, 2009


Binding Arbitration as Viewed by One of RI's Public Labor Unions

Monique Chartier

The following e-mail was distributed today to members of NEARI.

A message from NEARI President Larry Purtill:

URGENT!!!! The RI House Labor Committee will hear legislation on binding arbitration for teachers Wednesday, October 21, 2 PM at the State House, and the full General Assembly is scheduled to reconvene October 28-29.

After over two decades of lobbying for binding arbitration, our time has come. It is imperative that NEARI members call, email, or write their representatives and senators urging their support for binding arbitration. Our opponents have been contacting members of the legislature – now it is time they hear from us. Binding arbitration will provide a closure mechanism to the collective bargaining process that we have needed for a long time. We cannot allow another East Providence situation to occur in Rhode Island !

You can find contact information for your legislators here. Below are talking points to help you craft your message.

Continue reading "Binding Arbitration as Viewed by One of RI's Public Labor Unions"

September 25, 2009


It Depends at What Period of Capital Flow One Looks

Justin Katz

What an improvement is the reemergence of sincere argumentation on RI Future. I may find its new owner, Brian Hull, to be wrong about the implications of taxation, but I trust that he's attempting to express his opinion to persuade rather than to mislead. Thus, not only may exchanges be fruitful, but the actual assumptions of each side may be addressed:

... any reduction in an individual's state tax liability does not necessarily lead to investment. The tax savings could be saved, or spent on luxury items (which may or may not be purchased in the state). Lastly, and most importantly, if an investment does actually occur, that investment can occur anywhere in the country or in the world. Wealth flows after opportunities to make money off that wealth, regardless of where the opportunities arise. A potential investor will seek the highest return on his investment, and not necessarily care about investing in his community or state. This shouldn't come as any surprise to you, so I'm wondering why you're so glib in correlating tax cuts to economic growth. ...

Do you honestly think that a $6,000 tax cut going to an individual making over $419,000 a year will generate job growth in Rhode Island? Do you think all those wealthy Rhode Islanders who got their $6,000 tax cut will join together and invest their tax savings in creating new businesses in the state? I suppose it's possible, just like it's possible that I’ll be struck by lightning, or win the lottery (you can't win if you don’t play), but we both know your claim is specious and the cost to the state necessitated its elimination.

That Brian is addressing capital gains taxes, specifically, is helpful, because it clarifies that the activity being taxed is in one way or another an investment in the state. If one treats a tax cut as no different than a direct handout from the government, like those rebate checks most of us received under misguided Bush policy, as Brian apparently does, then, no, $6,000 to each person in the limited group of really rich people won't generate much economic activity. But especially in the case of capital gains, that $6,000 is not the investment that the state is seeking with its low-tax policies — the investment that generated the revenue that was taxed at a savings of $6,000 is.

Brian's mistake is to treat revenue to the state as if it is the only, or at least most important, measure for the Rhode Island community. As a 2008 Poverty Institute fact sheet arguing for the elimination of the capital gains tax cut illustrates (PDF), the tax "savings" to the wealthy investor (in this case claimed to be $4,974) comes from an actual capital gain of $193,113, which itself is only a portion of the investment.

Although Brian is correct that the tax savings may be spent on anything, anywhere, for the tax to be levied in the first place, the investment must have been associated with Rhode Island in some way, whether by benefiting an actual Rhode Islander or by representing an investment in our state by a resident of some other state or nation. A low capital gains tax gives a state's businesses an advantage in their ability to offer stock options as remuneration as well as to attract investment from elsewhere. It also creates incentive to make money by investing, which one is often begin doing close to home — as with local real estate or nearby companies.

Of course, such cuts and business ventures are operating in a hostile tax and regulatory environment, but in isolation, the effects of a given policy are relative, meaning that it's better to have a lower tax even if it won't be a trump card.

ADDENDUM:

Brian also presents a table purporting to illustrate that Rhode Island's tax burden isn't particularly heavy. His direct source isn't obvious, and I don't have the time, right now, to dig into the numbers for myself, but it appears to measure the actual dollar amount of different taxes — income, sales, property, corporate — as a percentage of actual personal income. The problem with this is that it lumps all Rhode Islanders together and doesn't really provide much useful information about tax policies effect on taxpayers.

The fact that Rhode Island's corporate income tax claims 0.4% of personal income (ranking us 26th highest in the country) could mean only that not a lot of Rhode Islanders operate businesses that make money. This possible interpretation is emphasized by the fact that New Hampshire ranks fourth, at 1.1%. Similarly, the fact that Rhode Island ranks 32nd in percent of personal income going to sales and gross receipts taxes could indicate that folks don't do as much shopping in our state.


September 20, 2009


Tax-friendly Places to Retire: You'll Never Guess Which State is Not So Friendly

Monique Chartier

Mary Beth Franklin of Kiplinger's Personal Finance has an article in today's Washington Post entitled "Tax-Friendly Places for Retirement".

Because tax treatment of different retirement income sources, as well as real property, varies widely by state, the fifty states were not ranked best to worst. For those contemplating a move upon retirement, Kiplingers has this handy-dandy map of the US, which not only enumerates the positives and negatives of each state in various retirement-related tax categories - pension taxes, taxes on Social Security benefits, sales tax, property tax, income tax - but includes lists of the best and worst five states in these categories.

If you'd like to start your search for a retirement destination by at least determining which states to steer away from, look for the ones that are bad in several such categories. This is where we find Little Rhody.

Three states are particularly tough on retirees. Not only do they fully tax most pensions and other retirement income, they also have high top tax brackets: California (9.55 percent on income less than $1 million), Rhode Island (9.9 percent) and Vermont (9.5 percent). Connecticut and Nebraska also fully tax retirement income.

Additionally, we are one of the top five worst states for property taxes and we are one of around fifteen states which assess an estate tax.

But we're all working stiffs. Why should we care how the state treats retirees tax-wise?

First and most selfishly, a couple of those taxes - property and income - apply to us as well.

Secondly ... okay, this one is pretty selfish, too - for the same reason we need to care about our corporate taxes and, more generally, the business climate: more taxpayers in the state means a broader tax base so that everyone pays less in taxes.

Finally, a note with regard to Kiplinger's citation of Rhode Island's top income tax bracket as 9.9%: their data may be slightly outdated as the Gov and the General Assembly have been slowly ratcheting back that rate. This only highlights the urgency, however, of undertaking the difficult but necessary task of making all of our tax rates at least middle of the road - so that Rhode Island no longer actively repulses taxpayers of all varieties by cropping up on the wrong end of lists such as this.


September 17, 2009


How Regressive is Rhode Island's Current Property Tax Structure, Revisitied

Carroll Andrew Morse

Pawtucket Mayor James Doyle's op-ed from Tuesday's Projo provides a good occasion for revisiting the topic of the supposed regressiveness of Rhode Island's property tax structure. Mayor Doyle would like to see more state aid and less "reliance" on the property tax for funding education in Rhode Island…

The state has also shunned its responsibility to properly fund education. Rhode Island is the only state without a fair and predictable education formula, and ranks among the nation’s highest for relying on local property taxes to pay for education.
Keep the idea that it's "reliance", and not "use of", that the Mayor would like to see reduced.

The table displayed below is an updated version of the table presented originally in July, where the amount of property tax that Rhode Island cities and towns collect from their residents as a percentage of income was estimated. In response to the original result, commenter "John" pointed out that Rhode Island' classifies apartment buildings as "commercial" properties, meaning they are not included in the "residential" levy figures and therefore that official "residential" levy figures do not include the total amount of property tax collected from a municipality's residents. For some communities, the additional amount can be significant.

To correct for this concern, I used 2007 municipality-by-municipality valuation data provided by the Rhode Island Office of Municipal Affairs, which includes the total valuation in each property classification category used by the state of Rhode Island; by multiplying the valuations in the "apartment" and "combination" (i.e. mixed residential and commercial) categories by a municipality's commercial tax rate, and adding the result to the official residential levies, better estimates of the total amount of property tax levied on residents by municipal governments can be obtained.

The inclusion of the "apartment" and "combination" categories in a "residential" levy does pull a number of communities near the bottom of the original list towards the middle...

Municipality Total Community Income
(2007 ACS)
"Residential" Tax Levy
(2007 Muni Afrs.)
Est. "Apartment" & "Combined" Tax Levy Res + Apart + Comb Levy as
% of Income
Westerly $736,318,944 $49,194,534 $1,003,130 6.8%
South Kingstown $902,219,848 $52,242,106 $1,547,292 6.0%
Chariho(R) $753,927,104 $43,614,470 $755,162 5.9%
Newport $743,149,136 $40,355,194 $2,962,691 5.8%
Johnston $793,255,802 $41,208,491 $1,799,035 5.4%
Cranston $2,143,969,940 $101,633,398 $7,922,334 5.1%
North Kingstown $1,066,793,770 $50,529,940 $1,544,002 4.9%
West Warwick $780,349,600 $33,119,054 $3,698,454 4.7%
Coventry $1,045,810,920 $46,659,667 $1,570,195 4.6%
Bristol/Warren(R) $979,570,240 $43,443,793 $1,491,611 4.6%
Providence $3,419,209,140 $126,320,027 $27,489,420 4.5%
Warwick $2,563,100,925 $105,379,974 $9,610,825 4.5%
Smithfield $627,377,590 $27,295,469 $583,537 4.4%
North Providence $932,747,152 $34,525,710 $4,767,002 4.2%
East Providence $1,240,282,560 $44,567,063 $4,929,768 4.0%
Cumberland $1,062,425,700 $40,650,687 $1,399,975 4.0%
Lincoln $750,233,679 $26,341,821 $1,532,767 3.7%
Pawtucket $1,508,546,425 $47,200,154 $7,871,267 3.7%
Woonsocket $918,048,573 $23,083,073 $6,554,922 3.2%


Pawtucket remains in the next-to-last slot (now tied with Lincoln). Pawtucket is also a big state education aid recipient, one of 4 communities in Rhode Island (counting Central Falls, which is funded almost entirely by the state) receiving over $6,000 per-pupil from state government.

So, unless Mayor Doyle would, for example, advocate cutting his own city's already low-as-a-percentage-of-community-income property tax in response to receiving additional state aid, i.e. use the additional aid to replace revenue instead of to improve education, how can his call to "reduce reliance" on the property tax lead to anything other than a system where state taxes are raised without local property taxes being cut?

The date for the calculation of the apartment/combined use levy is below the fold.

Continue reading "How Regressive is Rhode Island's Current Property Tax Structure, Revisitied"


A Burning Ring of Revenue Fire

Justin Katz

One thing to remember: Every time you read about state tax revenue lagging expectations, the expectations have likely already been downgraded since the last time analysts were disappointed:

Two reports issued Tuesday afternoon by the state Revenue Analysis Office showed total state revenue in July and August was down 4.2 percent from the same two months last year, after adjusting for money collected in one year that is accounted for in the previous year.

Besides trailing last year, the revenues for July and August also trailed what state budgeters projected would come in. The shortfall is $12.8 million or 3.3 percent.

I don't know if we can afford to wait until the next election to replace the legislators who've brought us to this impasse. Here's a fantastic, small-scale example of the incompetence at work:

The cigarette tax collection is trickier to figure out.

The amount of money taken in during July and August is ahead of last year, $23.5 million compared with $20.5 million. But that is far less than what lawmakers budgeted: $26.3 million.

They looked for the increase because the state raised the cigarette tax by a dollar — to $3.46 a pack — in April, toward the end of the last budget year.

Simmons said that budget makers may have underestimated how much the tax hike would decrease consumption of cigarettes that are taxed in Rhode Island.

So, the legislators increased this tax 40% in the hopes of increasing revenue 28%, and thus far they've realized 15%. During the summer, when smoking tourists are trapped and aren't likely to waste their valuable vacation time searching for deals across the border (or quit altogether).

The governor's staff proposed this particular tax hike, and one hopes they're duly embarrassed. Ultimately, however, the budget was reconfigured in the General Assembly's name.

Whoever's to blame, anybody looking for an economic turnaround in Rhode Island shouldn't put their chips on the table until well after just about every other state in America has already been humming along for quite some time.


September 11, 2009


Ocean State Policy Research Institute Hosts Grover Norquist

Justin Katz

Ocean State Policy Research Institue was good enough to invite me to its fundraising event at the Providence Marriott featuring famed tax hawk Grover Norquist. Some of Norquist's speech was familiar from his last appearance in Rhode Island, but considering all that has happened — with the election, tea parties, legislative assaults, healthcare — there were many new topics to address. And Grover gives an entertaining, informative speech.

Video in the extended entry.

Continue reading "Ocean State Policy Research Institute Hosts Grover Norquist"

September 7, 2009


Setting Up Continuing Deficits

Justin Katz

Don't let this tidbit slip past our awareness:

Emerging from a tough competition, four Rhode Island police forces have won money from the federal economic stimulus program to hire police officers, the White House has announced.

The largest single sum, $3,529,812, goes to Providence, to hire 13 officers. The other beneficiaries are Pawtucket, to hire or retain 8 officers; Woonsocket, 4; Central Falls, 2; and the Narragansett Indian Tribe, 1. ...

The award covers the cost of hiring officers at entry-level pay and benefits for three years. But there is a "catch," as some critics of the stimulus program call it. When the aid dries up at the end of the period, the employer is required to keep the new personnel on the payroll at local expense for at least another year.

We can expect that the "stimulus" regime is full of such ramps into an uncertain future — with the government borrowing money from the future in order to obligate itself to maintain expenditures that it may or may not be able to afford a few years down the road. It's government by economic fantasy, with elected representatives and bureaucrats proving that college students aren't alone in unwise reliance on debt.


September 1, 2009


The Thing About Taxation

Justin Katz

Oswald Krell is at it, again — proving, this time, that beating a strawman for long enough begins to resemble a pillow fight against one's self:

Low tax states are more violent, have higher rates of teen pregnancy, somewhat higher poverty rates, and lower median incomes.

Do low taxes cause these problems? No. Correlation is not causation.

Rather, to me, what is emerging is the description of an attitude. Low-tax proponents favor "Stand on your own" rhetoric, which is really a coded term for letting the rich shirk their civic obligations. The result is that the bulk of the population is noticibly worse off in low-tax states: more violence, more teen pregnancy, more poverty, lower incomes.

Now, explain to me: why this is an attractive paradigm?

I repeat: The argument for taxes in Rhode Island isn't that low rates are the decisive factor in a given region's economy, and adding social data doesn't change the fact that people and businesses do take the cost of government into consideration.when they plot their financial lives. The question that Rhode Island's progressives are so studiously striving to ignore is that taxation must be judged based on a given state's circumstances, and Rhode Island is overburdened with them, as with other manifestations of big government like mandates and regulations. "We will let you operate your business as you see fit and to keep more of what you earn" need not be innuendo for gun violence and teen pregnancy.

Lower taxes and lightened regulations would encourage economic activity and improve the earning potential of all residents, which I'm reasonably certain would correlate positively with improved social markers in the state, as well. (Krell doesn't provide his sources, so I'll simply offer the hypothesis that Rhode Island fares poorly, by such measures, compared with similar states.)

That's a suggestion that RIFuture-owner Brian Hull should consider, as well:

The recession effect is having a profound impact on the state's economy, but the long-term financing of the state would be better served if the General Assembly would make the "tough choices" and restructure the tax code, shifting the burden away from the vast majority of Rhode Islanders who have seen their incomes shrink and are struggling to make ends meet.

For perspective, don't lose sight of the fact that, in the name of improving the economy, Hull wants both to raise taxes and to shift them toward a particular group. Apart from being manifestly unjust, such a strategy would be economically devastating. What, pray tell, would Hull like to change about this picture:

Me, I'd like to see less red across the board.


August 31, 2009


A Warm Anchor Rising Critique Welcome to Brian Hull

Justin Katz

We'd like to welcome, of course, Brian Hull to the RI blogscene in his new role as proprietor of RIFuture. I, for one, am hopeful for a return to the collegiality of the Matt Jerzyk years and am determined not to be the cause should that prove unworkable.

That said, what better method of offering a cyber handshake and slap on the back could there be than highlighting our fundamental differences? And they must be fundamental, because this argument seems flatly erroneous to me:

There is a real big problem with the [state government] shutdown days, over and above the forced pay cut of 4.6% that the employees will have to absorb. We already have a weak economy, and to essentially take another $17.3 million out of it won't make things any better. Consumer spending makes up the bulk of GDP, nationally and in the state. Add the multiplier effect and every dollar spent generates a dollar plus in economic activity. By stripping out $17.3 million from the local economy of Rhode Island, we're going to depress the economy by much more than $17.3 million. This is not a good thing.

Yet:

We're in a recession, and while the recession might be getting better, there is no indication that employment will bounce back anytime soon. This will mean a suppressed economic situation in RI potentially for years to come. The unfortunate reality is that we need to raise revenues. And that means higher taxes.

We could certainly dip into the argument over whether state workers or taxpayers would use money in a more economically productive fashion. Even if we ignore the fact that it costs the government money to collect taxes, but nothing not to collect them, and even if we accept that new taxes would skew toward the higher end of the economic spectrum (which I assume would be Brian's preference), I'd argue that the business owners and wealthy residents thus implicated would be apt to spend additional money in a way that maximizes the multiplier effect.

The more direct point, though, is that Brian's appeal to the need to leave money in the economy ought to suggest a different form of government cut than to the labor force. Instead, he merely argues for redistribution.

He doesn't even advocate for easing restrictions, regulations, and mandates on businesses and productive individuals as a way of increasing economic activity and, thus, government revenue. One gets the impression, from his post, that "taxpayer dollars" exist in some sort of pool outside of the economy that folks won't "be happy about paying" to the government, but that they otherwise won't use.


August 21, 2009


Stimulus Jobs: Finagling the Definition of "Retained"

Monique Chartier

In a scene presumably also unfolding in other municipalities, the Woonsocket Education Department has applied for $2.4m of federal stimulus dollars so as to retain forty positions in the school system; more specifically, to prevent the closing of the [correction provided by MikeinRI] Davies technical school Woonsocket Area Career and Technical Center.

The goal of stimulus spending was stretched from the get-go with the clever addition of the qualifier "saved", as in "3.5 million jobs created or saved". I understand and sympathize that Woonsocket has serious budget problems. At the same time, isn't it now stretching the goal of stimulus dollars beyond recognition to utilize them to address budget issues on the local level, especially in view of the state's upside down teacher pay to student achievement ratio?

Woonsocket school officials would contend - in fact, do so in the application - that they are applying for these funds in part to address academic shortcomings identified in the district. But is this not a matter that would have been more appropriately and effectively addressed during the course of contract negotiations over the course of the last fifteen years?

Now, if we multiply Woonsocket's request to spend stimulus dollars for this reason by school districts around Rhode Island and the United States, we are faced with the questions of utility, efficacy and possibly even honesty. Does the expenditure of stimulus funds - which are, we should remind ourselves, not free money but tax dollars - on public sector contracts of questionable feasibility truly benefit the economy?


August 14, 2009


The Toll Plan Continues Apace

Justin Katz

This progression was in plain view when Rhode Island began sidling toward transponder-based tolls:

The authority has also begun planning what could lead to reinstituting tolls on the Mount Hope Bridge, which is now free, and eventually impose tolls on the new Sakonnet River Bridge, which is under construction. The authority has commissioned a study that Chairman David A. Darlington said will look at tolls on all three bridges and various combinations of the three.

The board said it expects to raise tolls regularly, perhaps every three years, depending on its repair and maintenance expenses. The increases would be based on the Consumer Price Index, on an index of construction costs, or other inflation indicators.

With each new toll booth, more Rhode Islanders will bite the bullet and include a toll-paying device as another cost of daily life. With each new transponder, and with each Rhode Islander thus moved one step further from actually handing a piece of currency over for the ability to use a particular piece of public infrastructure, each new toll will be easier to implement and each increase politically easier to accomplish. (And let's not forget that residents' movement will become that much easier to track.)

In my view, this is nothing other than an incremental duplication of taxes that we already pay.


August 11, 2009


The State's Spending Practices

Justin Katz

Former state representative Carol Mumford deserves a hear, hear for her op-ed in yesterday's Providence Journal:

Those who believe that Rhode Island is a poor state would be surprised to know that during most of my 10 years in office, the state's revenue increased at the approximate rate of 3.5 percent a year. While our revenue increased at this modest but steady rate, our expenditures increased approximately 7 percent to 11 percent a year. That says it all, doesn't it? No matter what the income, those people or entities that live beyond their means find themselves in the situation Rhode Island faces today. ...

On another note, those who believe our state population figures are static at about one million should look closely at the composition change. The Rhode Island Economic Development Corporation testified before House Finance that in the last decade those who are considered affluent in Massachusetts have doubled in number. The number of people who are considered affluent in Rhode Island has decreased by 50 percent. The affluent did not lose their assets; they fled. An examination of the latest "Kids Count" figures shows that the number of poor children in Rhode Island has mushroomed. The population numbers remain static, but many who used to pay the bills are elsewhere.

But how can that be? An opposition analyst assures us rich taxpayer interests have won battle after battle at the State House, and welfare benefits are difficult to procure.


August 10, 2009


Taxes, Wealth, and Recovery

Justin Katz

With the reminder that Rhode Island is at the top of the list when it comes to stimulus spending per capita, I thought of a table that I'd seen predicting the years during which each state's economy would recover to pre-recession employment levels. Curious what it would look like, I added the recovery information to the table that I used while assessing whether there might be a correlation between tax burden and the proportion of wealthy residents.

The result is below. The colors still correspond with tax burden (red being the highest), and the middle column still ranks states according to the number of IRS tax returns showing income over $200,000 (highest at the top). The patterns in the new column are meant to group the states by the year in which they'll recover, with those at the top matching previous employment levels by 2011 and those at the bottom doing the same some time after 2015.

Nothing decisive, but interesting.


August 8, 2009


Self-Reflective Disproof on the Left

Justin Katz

As fun as it may be to roll rhetorical balls down the lane and topple simple propaganda and otherwise erroneous talking points on the Rhode Island left, the state would profit from a more credulous and balanced discourse. Plainly put, Oswald Krell's supposed proof that "there is no negative correlation" between "high taxes and percentage of high-end earners" is incorrect on every level of analysis.

On the first level, Krell is wrong about the argument that he's professing to disprove. Inasmuch as he cites me specifically, I can attest his error without qualification. The argument is not that taxes are the end-all-be-all of people's decisions about where to live. Krell and friends wish to attack a simplistic strawman because the actual observations of the other side (our side) are unarguable. The argument is that taxes are a factor, and changing them amidst the other factors that people are already considering will have a predictable outcome. If all else remains constant, raising taxes within a state will decrease the population that pays those taxes. Consider an automobile: increasing or decreasing the amount of gas that flows through the engine will affect its speed, even though the results will vary based on other factors, such as the vehicle's prior speed, the size and type of the engine, the weight of the car, and the terrain that it's currently traversing.

On the second level, Krell is wrong about the necessary disproof even of his strawman. He ranks the states according to their tax burden and then according to the percentage of tax returns showing income above $200,000. He takes as the hypothesis for disproof that the lowest taxes would instantly equate to the highest percentage of rich residents, but failure to obtain those results hardly disproves correlation. To even get close to so dramatic a demand, he'd have to be much more specific in his rankings. The question wouldn't be tax burden, but tax burden on those making over $200,000 per year; if a state taxes those households less, but the majority of its citizens, whose income is much lower, more, then its tax burden could be high while its wealthy remain in place. (I've long been arguing that this has been happening in Rhode Island, although the tragic solution of the General Assembly and, even more, the state's progressives is to increase taxes on the wealthy rather than lower taxes on the majority.)

Even more egregious, though, is that Krell takes the extremes of tax burden (the ten highest and the ten lowest), ranks them with respect to rich folks in isolation from the other thirty states, and then raises his arms with a giant "See!" that there's no correlation. To the contrary, by this foolish methodology, if there's any intermixing of the states at all, there is correlation. It appears that the only outcome that Krell would accept as evidence of his opposition's position is if the tax burden ranking and the rich percentage ranking were perfectly inverted. But there are degrees; it's only a question of the strength of the correlation.

Which brings us to the third level, on which Krell's assessment of his own data is just wrong. At least in his first attempt at this analysis, he made some attempt to keep all categories limited to quintiles. Simply putting the top and bottom quintiles of states from one ranking in their relative order for another ranking is useless. Consider the table at left, for which I ranked all 50 states using Krell's sources. (Although, I had different results with three states; given that all the rest are the same and my double-checking of the data for those states, I suspect he miskeyed a couple of numbers on his spreadsheet.) The left column is the ranking by tax burden, with highest at the top; the right column is the ranking by percentage of $200,000 tax returns, again with the highest at the top.

Clearly — and as nobody is denying — wealthy people find the states between Washington, DC, and Boston to be desirable places to live. It makes sense that the state governments whose territory is desirable for reasons that don't relate directly to taxation (geography, resources, proximity to industrial and financial centers, etc.) can get away with higher taxes. The tax burden becomes a premium that residents are willing to pay. The question that the people of each state must answer for themselves is whether their level of taxation exceeds the theoretical premium that productive people are willing to bear given other attractions of the locality. In Rhode Island's case, high taxes, combined with poor public services and crumbling infrastructure, constitute a severe restraint on the economy and, therefore, our well-being.

Returning to the table, though, a few interesting observations work very well with the broad theory that I've been proposing. The Northeast and California (which amounts, essentially, to our entire region on the West Coast) hold up pretty well in the wealthy column, but high-tax states outside of our region drop precipitously. It fits the general hypothesis to suggest that taxation matters more in the mass of states that have less to distinguish themselves from each other, which describes (e.g.) Ohio and Wisconsin.

The states with no shading, which make up the middle quintile on the tax burden side, distribute with remarkable evenness across the the rich ranking. The orange states appear to have tax burdens well out of proportion to their attractiveness, and they fall away into the bottom three quintiles.. The green states, by contrast, appear to benefit significantly from their low tax burdens, and the light-blue states more or less stand in place while the green states surpass them in percentage of wealthy residents, with three rocketing up the chart.

As I always disclaim, making grand assertions from this data would require much more extensive research and analysis. But for the purposes of online discussion of local policies, it makes for another interesting consideration among the mound of evidence concerning the direction in which Rhode Island should head. And for the purposes of disproving Oswald Krell's disproof, I'd say that it's decisive.


August 6, 2009


The Other Side's Frightening Arbitration Numbers and Blindspot on Taxing the Rich

Justin Katz

Oh happy day! Patrick Crowley has endeavored to bend numbers to his purpose, once again, and as usual, he seems incognizant of the degree to which his data actually illustrates the problem that he hopes to dismiss as a paranoid fantasy. The fact that he doesn't provide his source simplifies matters, because we needn't be distracted by the complexities that municipal negotiations can entail.

So we note, from his Figure 3, that the ratio of arbitrated contracts to negotiated contracts during the decade beginning in 1995 is typically somewhere around 6 arbitrated to 50 negotiated. Clearly, in Connecticut (which appears to be the data pool), arbitration is the final resort for the hardest cases, where the town and the union each put up the greatest fight.

In that light, turning to Figure 1, it's stunning how well unions do in arbitration. On average, arbitrators awarded 95% of the salary increases that negotiations procured during a given year. That includes two years during which the raises granted in arbitrated contracts were 33% and 10% higher than those in negotiated contracts. If we leave those two years out, we find only a 13% penalty in arbitration (e.g., a 3.06% raise instead of a 3.48% raise); again, that percentage describes the raises that the contracts granted, and none of the cited contracts called for flat or negative salary growth (and probably doesn't account for step increases and longevity). It's also worth considering the possibility that the perks, compensation, and rights that the arbitrators gave to the unions with the other hand far exceeded the salary "compromise" in value.

On a different topic (while I'm absorbing the appearance of actual numbers on RIFuture), one of my biggest fans, Oswald Krell, declares that "the level of taxation is completely irrelevant to where rich people live." Huh. (Clarification, here.)

The necessary disclaimer is that my argument about taxpayer flight has focused on the working and middle classes. That said, here's the list that strikes Krell as nakedly random; the states are listed according to the percentage of population with income over $200,000 (highest percentage on top), and the number following the state's name is the Tax Foundation's ranking for tax burden (#1 being the heaviest burden and #50 being the lightest):

  1. Connecticut: #8
  2. New Jersey: #10
  3. Massachusetts: #28
  4. New York: #3
  5. Texas: #43
  6. Wyoming: #42
  7. Delaware: #47
  8. Rhode Island: #4
  9. Alaska: #50
  10. New Hampshire: #49

Personally, I'd be reluctant to make grand claims based on such rankings, because the factors that come into play are endlessly complex — especially when one is generalizing about the intersection of multiple criteria. But is there really nothing observable about these top 10 rich-folk states? Nothing that distinguishes those with high tax burdens from those with low tax burdens?

The high-tax-burden states are all coastal abutters of New York City. Massachusetts is right there, as well, and has the added benefit of a lower tax burden (or had that benefit). They're also pretty small, so the geographic variation isn't as pronounced as in, say, California. The five low-tax-burden states are literally scattered across the country.

If the project is to see whether there are observations to be gleaned from the combination of these two rankings, it would be eminently reasonable to hypothesize that rich people like to live near New York City and in states with low tax burdens. Obviously, a multitude of factors come into play, but it takes a nigh upon willful blindness to proclaim the complete irrelevance of taxation.


August 1, 2009


Pushing It as Only Rhode Island Can

Justin Katz

The latest news on the business sales tax front — which isn't online, because Projo.com is still down — is that Liberty Elm diner has come up with the $5,000 needed to prevent closure, while the Carcieri administration will begin notifying local police about which businesses to keep closed sometime next week. As I suggested yesterday, discussion of this matter must begin with the acknowledgment that businesses collected the sales tax money and then, apparently, spent it. That said, this is more than a bit heavy-handed:

For the Liberty Elm, the reprieve will be short. The diner must pay another $5,000 by the end of August before the state will allow it to establish a monthly payment plan.

Granted that the state has a right to that money, but the impression begins to be of an extortionist with his thumb on a "client," especially in light of anecdotes such as the following email that I received this morning:

One of your points need a little clarification: "businesses find it necessary to help themselves to free loans from the state." Its worth pointing out that the state charges a hefty 18 percent interest rate and late fee on delinquent payments. Hardly giving them an advantage over other businesses that pay on time. In fact the debt that piles up on late payments is in many ways more holes in a leaky boat. I was in the same situation with my business in November. (You have to be paid in full by December for license renewal and again by July for your sales tax permit.) Business started to fall off. I went through my savings and then maxed out my credit cards to try and keep things going. I managed to come up with the tax money that was owed but was short on the interest and penalty. The business was employing people, making money, and I would have been able to have everything paid in about 3 months. The state refused a payment plan. I was looking at being unemployed, broke, and seeing a business that I gave 11 years to go away. I had to bring them to court and get a court order for a payment plan. Got that news 3 days before the deadline. So I one-hundred-percent agree with you that the state should make payment plans with these businesses. In an ideal world maybe even lower the interest rates.

The way the system works now, a business that employs people, pays vendors, and does not leech off the welfare system could be closed for hitting a rough patch. But I can't complain; after all, the state pays all their bills exactly when they are due.

It certainly fits the image of this state to squeeze those who are trying to be productive while coddling those who demand handouts.


July 31, 2009


RI Government Not Alone (for what it's worth...)

Marc Comtois

From Reason:

Unlike the federal government, states can't simply run deficits indefinitely. For that reason, they have a powerful duty to pile up surpluses during fat years, which would allow them to make up the revenue that goes missing during lean years. But for many lawmakers, the future extends only to the next election. So any money they have, they feel an insatiable need to lavish on someone.

Politicians are happy to blame the recession for depriving citizens of programs they have come to expect. The recession didn't create the gap between state government commitments and state government resources. It only exposed it.

For instance:
In state after state, the government's take has ballooned. Overall, the average person's state tax burden has risen by 42 percent since 1999—nearly 50 percent beyond what the state would have needed just to keep spending constant, with allowances for inflation.

Even low-tax states like Texas and Nevada have followed the same course. No one has been inclined to say, "Taxpayers don't need to send us more money. We've got plenty."

All that growth should have been enough to pay for essential programs and furnish ample reserves, allowing state governments to weather a downturn without major adjustments. But the states put a priority on burning through all the cash they could get. Last year, they spent about 77 percent more than they did 10 years before.

We know that's true around here. Heck, we even managed to have a budget 12% higher this year! Party-on.



There's an Obvious Solution to the Sales Tax Problem, You Know

Justin Katz

Today, we get the advocacy profile — a standard newspaper fare by which readers are made unequivocally aware of the "objective" reporter's opinion:

Inside the Liberty Elm Diner Thursday, the lemonade was cold and the bacon was hot.

But the mood hung heavy with a sense of foreboding.

Customers who devoured BLTs and pancakes wondered if that would be their last meal at the diner car that’s become a local favorite.

A day earlier, the Elmwood restaurant was one of 1,200 businesses statewide that received notice that it must close up shop unless it pays its overdue sales taxes immediately.

The timing was especially painful, coming just hours after television crews from The Food Network had visited the cozy diner for a segment on its hit show Diners, Drive-Ins and Dives, which promises to give the eatery national exposure.

Owner Carol DeFeciani is forthright about her predicament. She owes thousands — $25,000 to be exact — and that the police could shut her down at any moment. But like so many small business owners, she’s not sure how her debts mounted.

Gary Sasse again makes a surprise appearance as The Villain:

Department of Revenue Director Gary Sasse said it is important to distinguish sales tax payments from other kinds of taxes. If a business is up and running, it is presumably collecting sales taxes on behalf of the state, which should be set aside and passed along to the Division of Taxation. So long as that process is carefully followed, businesses shouldn’t fall behind as they might in other areas.

In an era of hundreds of billions of dollars of stimulus giveaways, it seems to me that the state could come up with some way to give these small businesses a chance to keep running despite tax lapses. At the very least, the bureaucrats could give the owners a reprieve until a few weeks after the General Assembly reconvenes.

The reason for that schedule is the operative datum from the article to which Marc linked yesterday:

[Tax Administrator David] Sullivan said the number of business owners in this category is up this year, though not significantly despite the recession.

In other words, this isn't a special circumstance due to the economy. (Although a disclaimer ought to be made that Rhode Island was already into the recession last year, so it would be helpful to know the data going back a few years.) Every year, this number of businesses finds it necessary to help themselves to free loans from the state by using money that they have collected in the state's name for something else. We can argue adjustments and exceptions, but that's the bottom line.

And as such it points us right back to the drumbeat epiphany that Rhode Island is not an easy place to do business. Cynthia Needham might have added to her advocacy article about the little diner that couldn't, for example, that the General Assembly added another 1% to the sales tax for businesses that sell meals and beverages back in 2003. As I recall, that was yet another gimmick whereby the state made it appear to be keeping up its promises (in this case, to municipalities) while actually taking the pound of flesh from somebody else.

It's illogical to push for constant growth of government and the consequent increases in taxation and then to treat the difficulties of hardworking entrepreneurs as another circumstance in which parties need a helping hand from the government (e.g., flexible payment plans for back taxes). These are the fruits of your political philosophy, Rhode Island. Live with them, or change your policies.


July 30, 2009


Rhody Going After "the Little Guy"

Marc Comtois

This ProJo story about RI government going after small businesses for uncollected sales tax caught the attention of the Drudge Report. Great. Li'l Rhody comes shining thru again.....

State tax officials have put more than 1,200 businesses across the state on notice this week that they are out of business unless they pay their overdue sales taxes immediately.

For most, that action came in the form of a personal visit from the state Division of Taxation, ordering business owners to lock their doors at once.

By Wednesday, a line of people had queued up inside the Department of Administration building on Smith Hill, waiting their turn to plead their case to a state revenue agent. Some were angry. Others frustrated.

“I understand the state needs money, but to put pressure on the small guy or the moderate guy that’s struggling, it’s not going to do any good,” said Mike Suriani, who owns an electrical supply company in South Providence.

In Suriani’s case, it may have been a bookkeeping error that landed him in the three-hour line. Suriani says he paid his taxes in full — albeit a little late –– and had copies of the cancelled checks from the state showing he had indeed turned over the sales taxes he collected.

But that didn’t keep taxation officials from appearing at his door Tuesday demanding that he close up shop.

“Yes, the rules state that we have a responsibility to pay our bills every quarter. But when your customers come in and they don’t pay you for a month, and then another month, and another month, businesses have no choice [in] the eyes of the state but to close up and get out,” Suriani said.

It's easy to have a knee-jerk anti-tax reaction and the commentary on the story is widely against the state tax collectors. No surprise: who likes taxes? And we shouldn't be surprised that bureaucrats show little or no empathy or compassion to those conscripted to do the government's dirty work.

However, you have to think that some of these small businesses collected sales tax on behalf of the state and they actually haven't passed that back as required. Like it or not--and I don't--government dictates that business has to do the tax collecting (sales and income) for them. Easy enough to think it stinks and make comments about how RI stinks (presumably along with the other states who collect sales tax?). But it'll take major political change to alter the current tax system (like making people pay income taxes on their own).

So maybe this can be an opportunity to make a change. A tax revolt? Perhaps. More likely, it could be a key issue for electing reform-minded politicians in 2010. We'll see. But if nothing is done, then all we'll have is a little righteous indignation and the status quo.


July 29, 2009


Funding Formula Fallacies, or How Regressive is Rhode Island's Current Property Tax Structure?

Carroll Andrew Morse

Providence City Councilman Terrence Hassett, quoted in a Philip Marcelo Projo article from a week ago Sunday, explained the purpose of an education "funding formula" more directly than most…

“There is an ocean of money available for some communities that is not there for poorer urban communities,” says Providence City Councilman Terrence M. Hassett, a Smith Hill Democrat.
In other words, there's money for the taking all over Rhode Island, and Councilman Hassett wants it for Providence!

Of course, it’s not just about Providence. The Projo’s almost-always excellent Julia Steiny, who alas has gone over to the darkside on the issue of the “funding formula”, was a little more precise this past Sunday, explaining its purpose as transferring money away from "property-rich" districts…

One big problem with [current funding formula proposals] is that they commit the state to pay 25 percent of every district’s funding, at a minimum. Whoa. This effectively means shifting money from the low-income districts, which get more state help, to the property-rich ones, that currently get as little as 3, 4, 6 percent from the state. This is certainly not in the spirit of equity for the low-income kids. So strip out this and any other provision blocking the way to an equitable target formula.
However, for the great majority of Rhode Islanders, tax-payments don’t come out of property wealth; they come out of income, the more meaningful baseline for analyzing government taxation and expenditure policies.

For every Rhode Island school district of 20,000 residents or more, a 2007 estimate of community income is available from the United States Census Bureau's American Community Survey. The Rhode Island Department of Administration’s Municipal Affairs Office compiles data on residential tax-levies collected by each city and town in the state (presented in an earlier post here). Combining these sources, residential tax-levies as a percentage of community income for the year 2007 can be calculated, for RI school districts with 20,000 or more people…

MunicipalityPopulation
(2007 ACS)
Per-Capita Income
(2007 ACS)
Aggregate
Income
Res. Tax Levy
(2007 RI Muni Afrs)
Res. Levy As
% of Income
Westerly 23,033 $31,968 $736,318,944 $49,194,534 6.7%
South Kingstown 29,149 $30,952 $902,219,848 $52,242,106 5.8%
Chariho (R) 24,214 $31,136 $753,927,104 $43,614,470 5.8%
Newport 23,368 $31,802 $743,149,136 $40,355,194 5.4%
Johnston 28,786 $27,557 $793,255,802 $41,208,491 5.2%
Cranston 82,397 $26,020 $2,143,969,940 $101,633,398 4.7%
North Kingstown 28,030 $38,059 $1,066,793,770 $50,529,940 4.7%
Coventry 35,420 $29,526 $1,045,810,920 $46,659,667 4.5%
Bristol/Warren (R) 33,616 $29,140 $979,570,240 $43,443,793 4.4%
Smithfield 21,314 $29,435 $627,377,590 $27,295,469 4.4%
West Warwick 30,560 $25,535 $780,349,600 $33,119,054 4.2%
Warwick 84,975 $30,163 $2,563,100,925 $105,379,974 4.1%
Cumberland 35,238 $30,150 $1,062,425,700 $40,650,687 3.8%
North Providence 34,022 $27,416 $932,747,152 $34,525,710 3.7%
Providence 170,220 $20,087 $3,419,209,140 $126,320,027 3.7%
East Providence 47,168 $26,295 $1,240,282,560 $44,567,063 3.6%
Lincoln 22,377 $33,527 $750,233,679 $26,341,821 3.5%
Pawtucket 72,335 $20,855 $1,508,546,425 $47,200,154 3.1%
Woonsocket 45,009 $20,397 $918,048,573 $23,083,073 2.5%

The supposed "regressiveness" of the property tax doesn't appear in the community-level data. Rhode Island's lower-income communities, the communities that are taxed-to-the-max according to the conventional wisdom, actually pay some of the smallest percentages of income in residential property taxes. (And these figures don't include the separate fire-district levies that are present in some communities).

Woonsocket and Pawtucket, in particular, combine large per-pupil state education aid totals with small residential tax levies into the smallest amount of per-pupil spending in Rhode Island, suggesting that they have been using state education aid money not as a supplements to local revenue sources for building stronger education systems, but as replacements for local revenue. For example, if Woonsocket’s residential tax-levy per dollar of community income was at the level of Pawtucket's, i.e. second lowest on the list above, instead of the lowest, about $5.5 million additional dollars each year would be available to the Woonsocket school system.

Now, communities have every right to make decisions about the taxing and spending levels they would like to set. What they don’t have is a right to raise taxes on the rest of the state to pay for the choices they've made, when their fiscal policies hit a wall.

To truly make education work, Rhode Island needs a "funding formula" that guarantees that money intended for education actually goes to improving education and not to clutching and grabbing politicians who may be more interested in replacing revenue over improving the quality of services. Instead of shifting money between district-level bureaucracies, where it likely to vanish into Rhode Island's arcane budgeting processes, a “funding formula” should be based on the idea of money following the student to the school chosen by the student and his or her family, through open districting, charters, and/or vouchers, so there's a greater likelihood of it being applied towards its intended purpose of improving education.

And Rhode Island cannot afford – in a very literal sense -- to give its elected leaders any excuse through a "funding formula" to say: sorry, high-taxes are written into law whether the revenue is used to improve student performance or not, and there's nothing we can do about it.

CONTINUING DISCUSSION:

Commenter "John" raises an important point regarding Rhode Island's tax classification system…

Urban communities have a significantly higher number of apartment developments (both rent subsidized and not) that are privately owned, yet classified and taxed as "commercial" property. The folks who live in these apartments are having their income counted in your analysis, but the levy on their "residence" isn't being counted.

The disproportionate amount of such residential high density living creates an appearance of low taxation where it may not truly exist.

Adding to the problem in doing such an analysis, the various special laws regarding classification may have the break for classification as residential or commercial at different points. Generally, state law forces classification of every building with six or more apartments as commercial property. In Woonsocket, that threshold is for ten units or more…

However, I will point out that Woonsocket's entire commercial/industrial levy for 2007 was $11,098,260; if apartments accounted for half of that levy in Woonsocket (about $5.5 million), and no part of the levies anywhere else, it would still only move Woonsocket up one spot on the list.

John raises a second important point…

Please let's continue the discussion.


July 28, 2009


A More Direct Route to Welfare

Justin Katz

Here's an eye-popper:

Josefina Lorenzi, 47, who has been imprisoned since her Dec. 11 arrest last year, was sentenced by Judge William E. Smith in U.S. District Court, according to acting U.S. Attorney Luis M. Matos.

Lorenzi pleaded guilty in connection with the scheme that used other names but her home address [to file false tax returns]. Lorenzi must surrender for deportation while on supervised release. She is an illegal immigrant, according to Thomas Connell, spokesman for the U.S. Attorney’s office in Rhode Island. ...

Using a search warrant, agents said they found eight more refund checks totaling $22,526, payable to other people at Lorenzi’s Indiana Avenue home. Agents later found 27 more false returns.

The additional refund requests and prepared checks found in her home and the total money fraudulently sought came to $150,360.

The article doesn't explain whose names Lorenzi used (and a quick online search reveals no further information), but one thing that's obvious is that her scheme wouldn't even have been a possibility were the income tax a simple flat rate without the intricacies of prior withholding. Or, in this case, if the government expended a little bit of effort ensuring that the people with whom it deals are actually citizens.


July 25, 2009


An Objection to the Notion of "Lost Revenue"

Justin Katz

An endorsement of the "Amazon tax" by the left-wing Center on Budget and Policy Priorities has brought the topic back into the news, and while it's predictable that such a group prioritizes expansion of revenue uber alles, it's disappointing to see the same principle so thoroughly permeating our government:

[Rep. Steven] Costantino [D-Providence] has said that the law is intended to help level the playing field for local retailers who collect the tax and are at a competitive disadvantage with online retailers who do not.

Gary S. Sasse, director of the state Department of Revenue, said that how state sales tax applies to online purchases has "become an issue that all of the states need to face."

It could be resolved by Congress, but "unfortunately, Congress has punted" on the issue, he said.

"Short of Congress exercising the necessary leadership on this issue, you'll have states responding to this issue . . . [by passing] this type of legislation," Sasse said in an interview at his office on Friday.

Frankly, I find the "competitive disadvantage" argument to be a ruse. Anecdotal evidence suggests that the lack of sales tax essentially adjusts for shipping costs in consumers' minds or, in the event of free shipping, for the delayed gratification. Given their differing model, some online retailers do have lower prices for particular items, but those differences are independent of taxes and shipping.

The larger point is the distasteful practice of government's chasing revenue wherever it may exist. A market has developed for untaxed online goods, and reformulating the law in order to siphon some money to state governments that have driven their polities into the ground becomes a matter of Congressional "leadership"?

Congress should leave the law as it is. If other states follow Rhode Island's lead and attempt to tax all online sales based on the existence of affiliate programs (that offer fees for referrals and the like), I suspect online retailers will continue to end the programs, rather than give up their counterbalance to shipping costs. In the meantime, state-level officials should concentrate on proving their competence at doing something other than grabbing dollars from the private sector.


July 24, 2009


Rhode Island Diverting 911 Fees into the Operating Budget

Carroll Andrew Morse

The Associated Press is reporting that Rhode Island is one of several states that's been using money from fees on cell-phones, nominally intended to support 911 service, to plug holes in its yearly operating budget...

Oregon, Arizona, Delaware, Hawaii, Wisconsin and Tennessee are among the states that have dipped into their 911 money recently. New York and Rhode Island have been diverting their funds for at least five years. States started collecting the funds in the 1990s.

In the fiscal year that ended in June 2008, Rhode Island collected $19.4 million in 911 fees and used $5.8 million for 911. The rest went to the state's general fund.


July 21, 2009


Who Woulda Thought It: Defined-Benefit Pensions Don't Do Well in a Market Crash!

Carroll Andrew Morse

Given the numbers reported in this Los Angeles Times story from today…

California's two huge government pension funds reported whopping annual losses today of about one-quarter of their portfolios.

The California Public Employees' Retirement System, the largest in the nation, today posted a preliminary drop of $56.2 billion for the fiscal year ended June 30. The second-ranked fund, the State Teachers' Retirement System, reported a preliminary loss of $43.4 billion.

…would anyone like to volunteer to walk Anchor Rising's readers through the explanation, heard from some quarters, of how the financial meltdown has "proven" that 401(k)s and individual Social Security accounts are unworkable, while not proving the same thing about defined-benefit pension plans?


July 19, 2009


Question for Our Congressional Delegation: What is the Revenue Source for All of this Spending?

Monique Chartier

On Thursday, our delegation unanimously applauded the legislative progress being made on the nationalization ...er, the reform of our healthcare system.

In the last eight months, two Congresses and two Presidents have spent the following sums.

TARP (bank bailout): $700 billion pledged; $200 billion distributed of which $66 billion has been repaid.

Bailout of AIG: $182 billion

Bailout of Fannie and Freddie: $290 billion

The mortgage bailouts: billions spent or pledged

Bailout of auto companies: $83 billion & rising

The 2010 budget: $3.6 t-trillion

The general stimulus package: $789 billion

(Quick question on this one: as most of the money has not been spent, can we just return it to the Treasury? I'm reluctant to suggest returning it to the taxpayers as someone might injure himself laughing. Back in the Treasury to fund more legitimate programs would be fine. Thanks.)

To a greater or lesser degree, all of these spending programs have been of questionable value and/or questionable as to the efficacy of their ostensible purpose. Each is either indefensibly riddled with pork or conceptually comprised of pure pork.

Honorable Solons representing Rhode Island. To this already incomprehensible level of spending, you propose to add one hundred billion dollars annually for health care "reform" that fails to reduce health care costs as originally advertised as well as an unknown amount on a carbon cap and trade program whose sole effects will be the further depletion of American wallets and the driving away of ever more manufacturing companies. (Sidebar: can we perhaps learn from the experience of others and decline to implement this highly questionable scheme?)

It is only natural that we would ask not only the proposed funding source for all of this spending but whether it is wise. As for the former, the senior senator gets one point for honesty.

Reed was non-committal on the question of how to raise money for the health-care overhaul. “Let’s see what develops in the Finance Committee,” he said, referring to the Senate panel still embroiled in drafting its portion of the health care plan — the provisions dealing with taxes, Medicare and Medicaid.

But does it not demonstrate serious irresponsibility to contemplate, much less advance, gargantuan spending programs without identifying the means to pay for them and, more importantly, demonstrating that they will do less harm, short or long term, to our country than simply doing nothing? We respectfully request answers, Messrs. Reed, Kennedy, Langevin and Whitehouse, or we request that you cease and desist your efforts in these matters.


July 12, 2009


Knowing What They Want to Do on Energy

Justin Katz

The letter that Walter Schmidt, of North Scituate, sent in to the Providence Journal deserves a hear hear:

A July 2 letter ("Bill's passage a fine day for the environment") thanked U.S. Reps. Patrick Kennedy and James Langevin for voting for the "cap and trade" bill.

The author, however failed to mention the cost of this bill. While not a direct tax on the public, it is a stealth tax. The bill would tax energy producers by forcing them to purchase carbon credits. This tax will be passed on to consumers and will raise the cost of electricity, heating oil, natural gas and gasoline. Estimated increases range from $1,400 to $3,000 per household per year depending on usage.

Manufacturers and farmers will also pass their increased energy and transportation costs on to the consumer, raising the price of virtually everything.

Raising taxes on companies that produce and deliver energy will also cost jobs as they downsize to reduce expenses. With unemployment approaching 10 percent nationally, this should be unthinkable. The "green" jobs this bill would create would compensate for some of these losses but we need more jobs, not a transfer of jobs.

This bill has other negatives. New homes would be required to conform to the energy standards of California, the state that's issuing IOUs to state workers. Before you could sell an existing home it might have to pass an energy audit and be brought up to code at your expense. This will not help the housing market.

We are in the grip of the worst recession since the Great Depression. Passing any legislation that increases taxes, the cost of living and unemployment is insanity.

On the bright side, the letter gave me an excuse to watch the cap-and-trade song again:


July 9, 2009


Warwick Payrolls

Marc Comtois

Over the weekend I was at a neighborhood July 4th get-together. The group was a mixed one. If I had to guess, most were either a-political or run-of-the-mill Rhode Island Democrats. The topic turned to the recent closing of a local Warwick elementary school and how property taxes just got a big bump (believe me, they did). There was anger over the tax hikes and the school closure. One parent questioned why a school would close when money could have been saved elsewhere, mentioning the fact that the teachers make a lot of money and that you could find it all out at the "Ocean State Policy" website.

The parent then listed off some of the salaries of teachers from the local elementary school. There were a few surprised faces amongst those who heard the numbers, to which the parent then said, "Yeah, I know...I thought they made like $45-$50,000 or something, not that much!"

In an attempt to shed some more light on the situation, I decided to take a ride on the Transparency Train to analyze the actual school payroll numbers for Warwick. It's more time consuming but also more illustrative of the actual situation than the teacher contract.

I looked at the 2007-08 salaries of full-time teachers in a variety of categories. The below table, based on the 2007-2008 Payroll, summarizes my findings. It shows the number of teachers in each category, the total amount of money dedicated to their salaries and then average salary, average low and high salaries (the average high salary at the Jr. High and High School level reflects the pay received by department heads), and the average median salaries.

If you compare these numbers to the salary schedules in the teacher contract (page 109 in this PDF), you'll find that that, for the most part, the median Elementary and High School teacher salary in Warwick is the equivalent of a Step 10 (or more) with some longevity and probably some advanced education bonuses thrown in. Overall, elementary teacher salaries are the highest, followed by High School and then Junior High.

Given that most people think teachers make about as much as the average Rhode Islander, around $50,000 - $54,000 a year (in 2007), it's understandable their surprise when learning about these numbers. While it is true that new teachers enter the work force at the average income level, that doesn't last for long. It is apparent that the majority of teachers are compensated at a level at the top or above the traditionally negotiated step scheme. While the teacher salaries are arguably commensurate with other professionals of similar background and training, the benefits they earn--in addition to the shorter work-year--are something those in the private sector don't enjoy. In addition to their salaries, teachers also receive $10.5-$12,000 in pension contributions from the district in addition to $15,000 in medical/dental benefits.

But these numbers also help explain some other things, too. In general, teachers at the Junior High level are paid less than their Elementary or High School colleagues. This is unsurprising given the additional challenges faced when teaching this age group. In short, once they get they're time in, a lot of teachers go to Elementary or High School, where the kids are generally more receptive or, in the case of High School, you know what you're dealing with. In Jr. High, every day is a mystery with a cohort that is feeling their oats. Unfortunately, that they are so challenging is the very reason to keep the best, most experienced teachers at the Jr. High level. If only they had incentive.