Ahem, look what they are trying to do next door in Massachusetts

While RI politicians continue to avoid dealing constructively and aggressively with the structural problems underlying the state's financial crisis, some of our neighbors in Massachusetts are heading in the completely opposite direction.

Yes, in the state formerly known as Taxachusetts, a band of activist citizens are pushing for a statewide vote to eliminate the state income tax:

A group of antitax activists launched a campaign over the weekend to abolish the state income tax, setting the stage for a contentious public battle if the measure is added to the ballot this fall.

After pushing a similar initiative that almost passed six years ago, a group called the Committee for Small Government is back for another round, asking voters to end the income tax and save the average taxpayer $3,600 a year. The group, led by libertarian Carla Howell, is almost certain to gather the 11,000 signatures needed to put a question on the November ballot.

To say that state officials are worried about the prospect would be an understatement.

Community, political, and business officials are grasping for words such as "chaos," "devastating," and "catastrophe" to describe the scenario that would unfold if the measure passes.

Six years ago, Beacon Hill didn't pay much attention to what seemed to be a pie-in-the-sky campaign. Confident that voters would reject the plan as folly, no one even organized a campaign to fight it.

But it almost passed, gaining the support of 45 percent of voters...

A fledgling coalition of city and town officials and union officials hired former Blue Cross Blue Shield executive and civic leader Peter Meade to head a battle against the income tax cut, and is interviewing high-powered public relations firms. Their Coalition for Our Communities plans a fund-raising and public educational campaign to combat the allure of the tax-cutting measure, which would cost the state roughly $12.7 billion - about 40 percent of the budget.

Some political observers are expecting a public tax battle the likes of which has not been seen since Governor Michael S. Dukakis was in office...

These are the kind of engaged, activist people I had in mind when I wrote earlier this week about the crisis in RI and how important it was for RI to have a coalition of citizens committed to change. Why do we almost NEVER hear of similar groups of people in RI?

On a concluding note, I got a chuckle out of Andy Roth's words about the Massachusetts' initiative:

I don't know what I like more about this article. The fact that Massachusetts citizens are pushing for a repeal of the income tax, or the fact that bureaucrats are going bonkers with the prospect that they might succeed.

And how would raising taxes even higher in RI not incentivize further flight from the state by more residents?

ADDENDUM

In the comments section, Ken is kind to pass along the link to the American Legislative Exchange Council (ALEC) report entitled Rich States/Poor States: ALEC-Laffer State Economic Competitiveness Index. Key sections include the executive summary here and the section "America's Economic Black Hole: The Northeast" on pages 15-18 of the report. The Rhode Island summary can be found here, where they describe the economic outlook as 48th out of the 50 states.

There is no "moderate" solution option left anymore; the entrenched special interests and politicians have made sure of that. The state is headed for collapse under the status quo. So we might as well throw the state into bankruptcy and restructure it with some logic.

What's Not in the Numbers

A few important considerations are missing from Tom Sgouros's comment of his "review" of state tax revenue statistics:

I was reviewing some statistics about state tax revenues last week, and looked at business taxes. Along with the income tax and sales tax, business taxes were once the third important leg of funding state operations, but no longer. Between 1996 and 2006, income tax collections rose by 76%, sales tax collections by 97% and business taxes by -- wait for it -- 14%, far less than inflation over that decade.

Why have business tax revenue declined so much? The economy has suffered recently, but not for all of that decade. The biggest reason for the decline is a nearly endless stream of special tax breaks. We offer businesses several different investment tax credits, an R&D credit, a credit for wages paid in an Enterprise Zone, a jobs development credit, a job training credit, a biotechnology tax credit, an "innovation and growth" tax credit, and much more. Some of these are worth millions of dollars. For others, we simply don't know what the effect is on the state budget. But the result is that 94% of the businesses in our state pay the minimum corporate tax of $500.

For one thing, it's difficult to measure the significance of percentage change without knowing the dollar amount for each category. More to the point, however, Sgouros's analysis requires that one ignore economic realities: It may be, for example, that the same policies that kept business taxes down enabled or encouraged increases in salaries and sales, thus increasing those taxes. One ought also to remember that offshore outsourcing has also expanded during the period in question, peeling off business revenue and making it advisable for the state to decrease the cost of doing business here.

Rhode Island clearly doesn't do economic development well, but presenting percentage change statistics isolated from context and lamenting pro-business tax policies bespeak precisely the approach that will bury Rhode Island, if permitted to affect our tax structure.

Non-Public Employees in New York's Public Pension System

From an interesting blog called Pension Risk Matters:

Attorney General Andrew Cuomo is investigating "alleged abuses of the state pension fund" at school district, town and village levels. External contractors may be costing Empire State taxpayers a bundle in the form of "undeserved" retirement benefits. (See "Cuomo expanding pension probe," April 14, 2008.)

The TimesUnion blog, that second link, elaborates.

Attorney General Andrew Cuomo on Tuesday is expected to announce that he is further broadening his probe into alleged abuses of the state pension fund to include not just school districts, but towns and villages as well.

Cuomo was already looking into the practice by some school districts of putting outside contractors, particularly lawyers, into the state retirement system. The practice has allowed some attorneys to rack up huge amounts of retirement credits — possibly illegally, Cuomo says, because they didn’t qualify as employees.

The attorney general is now turning his attention to a similar practice in local governments, especially the smaller ones, which also don’t always have staff attorneys but hire them under contract.

One of the lawyers who benefited from that system, James Roemer, accrued a taxpayer-funded pension worth more than $80,000 a year working for various cities, towns, counties and villages, in addition to being in private practice. Roemer, according to a person familiar with Cuomo’s investigation, has been subpoenaed in the probe.

By gum, Rhode Island may have the second highest unfunded public pension liability in the country. But we don't have non-public workers in any of our public pension systems.

(... Do we?)

Taking from the Not So Rich

So proud of this little snippet from a Providence Business News piece is Patrick Crowley that he's mentioned it multiple times:

But what about the rest of us? After all, nearly 50% (48.7%) of the returns filed were for incomes BELOW $30,000 a year. And while this group pays 4% of the state’s income tax they actually earn only 3% of the income in the market. The $100,000-$200,000 group earns 24% of the wages but only pay 23% of the income taxes, and the $75,000-$100,000 group earns earn 14% of the wages but only pay 12% of the income taxes. This takes the “progressiveness” out of the “progressive” income tax. And because the other taxes people pay are “regressive” (property tax, sales taxes, etc) the picture becomes more clear – people at the bottom end of the income scale, not the top, are paying more than their fair share.

That's all one needs in order to conclude that it isn't worth the time or effort to pay for the article or the periodical in which it appears. It might be enough, for some, to observe that Crowley is not satisfied that just over half of all taxpaying households are paying 96% of the taxes, but so thick are the deceptions (or incomprehensions) embedded in his little paragraph that one can hardly stop there.

Although the numbers don't correspond precisely with the latest version online (2006, PDF), he appears to be working from the Rhode Island Division of Taxation's Statistics of Income Report on resident income taxes. If that's the case, then he's already skewed the data considerably for the claims that he's making, because he appears to be using the "RI taxable income" data for his percentages — the problem being that much of the progressivity for which he pines has already been figured into the numbers by that point. The picture changes considerably if one looks at AGI:

	Under $30,000	$30,000 Under $50,000	$50,000 Under $75,000	$75,000 Under $100,000	$100,000 Under $200,000	$200,000 or More
% of total RI taxable income	2.4	11.2	15.0	13.7	24.6	33.3
% of total AGI	10.6	12.5	15.3	13.3	22.4	26.0
% of total RI income tax	4.0	7.9	11.4	11.1	23.7	42.1

The difference between the two are modifications, deductions, and exemptions — in short, those considerations by which the government addresses matters outside of raw income statistics that ought to affect the taxes that they pay. This manipulation becomes all the more notable when one considers the numbers on a per-tax-return basis and adds tax data:

	Under $30,000	$30,000 Under $50,000	$50,000 Under $75,000	$75,000 Under $100,000	$100,000 Under $200,000	$200,000 or More
RI taxable income per return	1,860	23,401	40,185	59,433	96,854	472,615
AGI per return	12,393	39,127	61,609	86,450	131,809	551,011
Income tax per return	172	913	1,691	2,670	5,165	33,088
Tax % of RI taxable income	9.27	3.9	4.21	4.49	5.33	7.00
Tax % of AGI	1.39	2.33	2.75	3.09	3.92	6.00

The probability is that the likes of Crowley would look at the numbers and still decry the inequity across classes, and with that protestation we slip into more philosophical realms... except, of course, for a final adjustment of the picture to account for the distribution of those tax returns that were filed jointly by couples:

	Under $30,000	$30,000 Under $50,000	$50,000 Under $75,000	$75,000 Under $100,000	$100,000 Under $200,000	$200,000 or More
% of returns jointly filed	11.5	28.8	55.5	78.5	86.8	85.7
RI taxable income per person	1,669	18,173	25,838	33,296	51,837	254,529
AGI per person	11,115	30,386	39,614	48,431	70,551	296,750
Tax per person	155	709	1,088	1,496	2,764	17,820

In short, when one accounts for different rates of joint returns, the average AGI in the lowest group decreases 10%, while the vilified $75,000-$100,000 and $100,000-$200,000 groups show decreases of 44% and 46%, respectively. Crowley distorts his data, that is, to the detriment most especially of working and middle class families. It would be fair to ponder for whose benefit he labors.

Little wonder socialists can't make the world work the way they want it to.

ADDENDUM:

Rushing to post this earlier, in order to get to my husbandly duties in the yard, I had a persistent feeling that there was one final "and so" that I wasn't noting. Fresh air and dirty hands having cleared my head, I realize that it was the ratios of each group in each category — holding individuals in the Under $30,000 group to 1 and seeing how individuals in each other group compare by that measure:

	Under $30,000	$30,000 Under $50,000	$50,000 Under $75,000	$75,000 Under $100,000	$100,000 Under $200,000	$200,000 or More
Individual RI taxable income ratio to lowest	1	10.9	15.5	20.0	31.1	152.5
Individual AGI ratio to lowest group	1	2.7	3.6	4.4	6.3	26.7
Individual tax ratio to lowest group	1	4.6	7.0	9.7	17.9	115.2

And so... taking into account jointly filed returns (the appropriate methodology for which is certainly up for discussion), and sticking with AGI numbers, there simply can be no doubt that our tax structure is disgracefully progressive, in the way in which Crowley desires.

The Color of Irony Is Crimson

In a leave-no-stone-unturned search for more revenue, the Massachusetts legislature has ordered a study of the implementation of a 2.5% "annual assessment" on college and university endowments which exceed $1 billion. Nine Massachusetts institutions of higher learning would be affected by what would be a first of its kind assessment.

Glenn Beck points out the fabulous reaction of an official of one of the institutions that would fall into that category. Harvard's Associate Vice-President for Government, Community and Public Affairs, Kevin Casey:

You'd be taxing success here.

* * *

Over time this would put us at a real competitive disadvantage which would drastically hurt the Commonwealth.

[Can we get him to address the Rhode Island General Assembly?]

Beck breaks it down.

No, you're kidding me. It's like you're taxing success by taxing people who are making money and who happen to be richer than others? You're taxing success? Boy, Kevin, I never looked at it that way. You might be onto something there. "Over time this would put us at a real competitive disadvantage." No, it would put Harvard at a disadvantage against those who didn't get taxed? No. Who might pay a lower tax? It might put that company at a disadvantage? No, no, Kevin, you're looking at it wrong.

* * *

In the final insult to injury he goes on to say, "And it would hurt the commonwealth. It would hurt the state." How? How? Are you saying because Harvard wouldn't be able to have so much money so they couldn't grow? So they couldn't hire more people? They couldn't bring more people into the state? I never thought of that when I was thinking about taxes and companies. I just thought, oh, they're screwing the state; the bigger they get, the more people they hire, the more people that live here. It's crazy. It's almost like you're talking about the philosophy of, oh, I don't know, Texas. It's almost like you're describing the philosophy of, oh, I don't know, a conservative. It's like you're taxing success. No, Kevin, you're wrong. It's not like we're taxing success. We would be taxing success.

Excuses Over the Border For Raising Taxes

For almost thirty years, lucky Massachusetts has had Proposition Two and a Half.

But it can be overridden by voters on the local level. On Sunday, Boston Herald columnist Howie Carr highlighted some justifications offered to elicit "yes" votes in advance of Brookline's override ballot two days ago.

A snooty editorial writer for a local newspaper instructed the great unwashed as to how little money the Brookline hacks want to extract from workingmen:

“That difference of $110 a year is less than the cost of a Starbucks coffee per week.”

* * *

Barbara Anderson of Citizens for Limited Taxation, the best source for information about these votes, notes a new trend this year: raising the ominous specter of teen crime waves if, say, the high school chess club is eliminated.

“The kids may get lost and turn to destructive behavior,” wrote a woman from Ashland. “The crime threat to all citizens will increase.”

And my favorite, a euphemistic update of an oldie but a goodie:

The hacks used to say they needed to pick your pockets “for the children.” That’s become a cliche, although in Beverly they’ve tried to work around it. The override is no longer for the children, it’s for “our youngest citizens.”

While Brookline's override passed, Chip Faulkner, Associate Director of Citizens for Limited Taxation indicated this afternoon that most Prop Two and a Half override ballots have failed. He cited as the cause voter anger over ever increasing taxes and over the generosity of public sector benefits.

The beauty of Prop Two and a Half is that permission for a property tax increase over 2.5% must be obtained from those responsible for the bill. Contrast with Rhode Island, where the increase threshold is higher and, worse, authority to cross it does not vest with taxpayers.

Are There Any Limits to What State Government Can Tax?

Saul Hansell of the New York Times reports on a challenge to the state of New York's attempt to extend its tax reach that is likely to have a big impact on the future of the Internet...

Before the ink on the bill has even dried, Amazon.com has filed a suit challenging New York State’s new law that forces online retailers to collect sales taxes on shipments to state residents.

On Friday, Amazon filed a complaint in New York Supreme Court in New York City, objecting to the law. The provision is meant to contribute about $50 million to the $122 billion budget that was passed by the state legislature April 9 and signed by Gov. David A. Paterson last week.

The issue isn’t whether people should pay taxes when they buy goods from out-of state sellers like Amazon, which is based in Seattle. For decades, New York and other states have required their residents to pay use tax — equivalent to sales tax — on out-of-state purchases for which sales tax wasn’t collected.

The question is whether the vendors must collect those taxes on behalf of the state. Generally, only those companies that have a physical presence, such as an office or store, in the state of the purchase are required to collect the taxes.

The new law is based on a novel definition of what constitutes a presence in the state: It includes any Web site based in the state that earns a referral fee for sending customers to an online retailer. Amazon has hundreds of thousands of affiliates—from big publishers to tiny blogs—that feature links to its products. It says thousands of those have given an address in New York State, although it does not verify the addresses.

Senator Alves' Latest Corporate Tax Proposal

Senator Stephen Alves (D - West Warwick) has proposed a graduated tax on gross corporate revenue.

Moving swiftly (because, obviously, Senator Alves did also) past Rhode Island's already repellent corporate tax climate and the fact that the budget crisis will not be solved by raising taxes of any sort, by the senator's own numbers, a full 17% of corporations in Rhode Island which do not presently make a profit in this higher bracket would get entangled in his net.

A couple of months ago, when he proposed, to a chorus of bronx cheers, that the minimal corporate tax be doubled, the senator stated that 94% of corporations in Rhode Island pay "only" the minimum - $500 - corporate tax. What this means is that 94% of Rhode Island corporations either do not make a profit at all or only make a profit that equates to a maximum of $500 in corporate taxes - $5,555.

Yet the senator stated that under his proposed new tax structure, 77% of Rhode Island corporations would continue to pay "only" the $500; the rest would pay more. We established that presently, 6% of Rhode Island corporations make a profit above the $500 tax mark. 94 - 77 = 17. Therefore, 17% of Rhode Island corporations would be bumped into a higher tax bracket, not because they made any more money but simply because Senator Alves wants more money from them.

The Senator indicated on the Dan Yorke Show today that one of the reasons he is proposing this revision is because some corporations are cheating (my word) on their taxes. If this is so, the solution is audits and an enforcement of existing law. It is not to commit the legislative equivalent of hiring a plane to sky-write:

Attention, domestic and out of state corporations. Our tax structure used to be really bad. Now it's really REALLY bad. (You still want to be here, though, right?)

The Iraq War and the State Budget?

At the Taubman Center panel on the Rhode Island budget crisis I attended at Brown University a few weeks ago, several members of the audience attempted to attribute at least part of the state deficit to Federal cut-backs in domestic spending forced by the costs of fighting in the Iraqi theater in the War on Terror. (And much to my disappointment, Paul Choquette, supposedly one of the voices of fiscal sanity on the panel, didn't disagree). However, the notion of a drastic -- or any -- reduction in domestic spending by the Federal government since 2001 or 2003 isn't supported by the numbers.

The Heritage Foundation's Brian Riedl has calculated that Federal spending, adjusted for inflation, has grown by about 30% overall since the year 2001. Riedl doesn't break out an Iraq-war figure specifically, but he does separate out the defense-related portion of the Federal budget. According to his numbers, 63% of the amount of the Federal spending increase has gone to entitlements and other non-defense related areas, while 34.5% has gone to defense. Non-defense related spending, in fact, has risen in the vicinity of 3% to 4% above the rate of inflation, on an annual basis, since the year 2001.

So, with Federal spending per household already near its highest levels ever (over $23,000, according to the Heritage Foundation), are advocates for bigger-and-bigger government really willing to attach themselves to the position that non-defense related government spending should always be climbing by more than twice the rate of inflation, no matter how much of the nation's GDP is ultimately consumed?

Federal government outlays reported in Federal Spending by the Numbers 2008, dated February 25, 2008, by Brian M. Riedl of the Heritage Foundation; all figures are in BILLIONS of dollars…

New Spending since 2001: $675,000,000,000

New Defense Spending since 2001: $233,000,000,000 (34.5%)

New Entitlement/Non-Defense Discretionary Spending: $425,000,000,000 (63%)

Don't Go Changing, to Try and Please... Special Interests

The Rhode Island Public Expenditure Council (RIPEC) makes a point that ought to be raised every time the progressives put forward data purporting to illustrate the lack of effect of recent tax cuts:

Estimating that taxpayers already are kicking in an average of 12.3 percent of their income to finance state and local government, the Rhode Island Public Expenditure Council urges that Governor Carcieri and the legislature be wary of making any sudden changes in the tax structure as a quick fix for the looming budget crisis.

"Before any changes to the tax structure are made, they ought to be analyzed in a fair amount of detail," said John C. Simmons, executive director of the business-backed organization that studies public fiscal matters.

"We're saying you have to do this in a thoughtful way," especially, he said, because the legislature has made changes to the tax code in recent years and it will take some time to gauge their effects.

One change is the flat tax option passed by the General Assembly in 2006. Another reduced the capital gains tax on assets held more than five years.

"Those changes are just starting to hit," Simmons said.

RIPEC puts our tax burden at 7th highest in the nation, with special emphasis on taxes that are particularly harmful to the business environment (general business and sales).

A Reason to Look Fondly on the '70s

I've been meaning to note — for its sheer shock power — a chart of Rhode Island's state budget since 1950.

Stunning. I'd say there's room to trim, don't you think?

How Is Art Handy Like a Diaper?

It was one thing when Representative Art Handy (D, Cranston) decried the injustice of the little known diaper-service tax shelter during his testimony supporting his Economic Death and Dismemberment Act. We could at least give him the benefit of the doubt that he was speaking extemporaneously. But he apparently liked the image so much that he's used it in a Providence Journal op-ed:

The act would also bring our sales tax into the 21st Century by expanding it to include certain services. Just think about a mom who buys diapers at the local market. On a $10 bag of diapers, she'll pay 70 cents in sales tax. But a mother who can afford the luxury of a service that picks up her dirty diapers, launders them, and delivers them back to her door pays no tax at all.

As a basic factual matter, Handy is wrong. Diapers are non-taxable in Rhode Island. (Perhaps he ought to take that up with his local market.)

As a conceptual matter, he's wrong again. The money paid for a person's time spent laundering cloth diapers is taxable as income. The delivery vehicle's gas is also taxed, and any number of things — from property to supplies — are taxed, as well. The service provider doesn't just eat those costs.

As an economic matter, he's short-sighted. As the previous paragraph implies (and as I've said before), the wealthy person who hires a diaper cleaning service creates a job. That's why it's a service: because somebody has to do it, and more likely than not, that somebody falls in the income range that Handy claims a desire to protect.

Fairness in Analysis

The essential argument behind that dreadful tax legislation (whose name we dare not speak) is, as Tom Sgouros put it in testimony last night: The state takes "too much money from people who can't afford to give it, and not much money from those who can." Or, as those who are less worried about the appearance of truth might say:

Our Tax System is Out of Balance!

• Lowest income pay 13% of their income in state and local taxes,
• Highest income pay just 6%!

That claim derives from the following table, from a report (PDF) in which Sgouros apparently had a heavy hand:

Percentage of Income Paid in State and Local Taxes for a Rhode Island Family of Four
Income quintile	Lowest 20%	Second 20%	Middle 20%	Fourth 20%	Next 15%	Next 4%	Top 1%
Average income	<$8,400	$21,500	$36,000	$57,900	$96,100	$189,000	$787,000
Personal income tax	0.5%	1.5%	2.2%	2.6%	3.4%	4.2%	5.8%
Corporate income tax	0.0%	0.0%	0.0%	0.0%	0.0%	0.1%	0.1%
Property taxes	4.4%	3.5%	4.1%	4.4%	4.3%	3.2%	2.0%
Sales tax	3.2%	2.6%	2.1%	1.7%	1.4%	0.9%	0.4%
Excise taxes	4.9%	3.2%	2.4%	1.7%	1.2%	0.8%	0.3%
Total taxes	13.0%	10.8%	10.7%	10.4%	10.2%	9.0%	8.6%
Federal deduction offset	–	-0.1%	-0.4%	-1.0%	-1.6%	-1.8%	-2.6%
Total after offset	13.0%	10.7%	10.3%	9.5%	8.7%	7.3%	6.0%

Putting aside questions of whether it's legitimate to treat every tax as if it were an income tax, a few corrections and tweaks to the data paint quite a different picture. First must be corrections to a couple of outright errors: A subsequent table on property taxes shows both housing taxes and "other property taxes" but failed to combine the two in the "total property taxes" row all quintiles except the lowest, and the total row was transported to the summary table. For the top 1%, that means the 6% grand total is fully 0.7% too low. To be fair, we have to adjust the other way (much less significantly) because the summary table double-counts corporate taxes.

The larger change that ought to be made is to remove the "federal deduction offset" line. Inasmuch as the table is billed as incorporating "state and local taxes," the fact that the federal government discounts its own take is an arbitrary snatch of data from another set. It would be relevant to an investigation of total tax burden in Rhode Island but is misleading if federal taxes are excluded. Alternately, we could calculate the percentage of household income that returns to Rhode Island via the feds, which (as Sgouros himself has pointed out) is a substantial component of our budget, including those aspects that are already redistributive.

Alas, I lack the time for such research and analysis, so I'll leave the federal government out of the equation, which leaves us here:

Percentage of Income Paid in State and Local Taxes for a Rhode Island Family of Four (adjusted)
Income quintile	Lowest 20%	Second 20%	Middle 20%	Fourth 20%	Next 15%	Next 4%	Top 1%
Average income	<$8,400	$21,500	$36,000	$57,900	$96,100	$189,000	$787,000
Personal income tax	0.5%	1.5%	2.2%	2.6%	3.4%	4.2%	5.8%
Property taxes	4.4%	3.7%	4.2%	4.6%	4.6%	3.6%	2.7%
Sales tax	3.2%	2.6%	2.1%	1.7%	1.4%	0.9%	0.4%
Excise taxes	4.9%	3.2%	2.4%	1.7%	1.2%	0.8%	0.3%
Total taxes	13.0%	11.0%	10.9%	10.6%	10.6%	9.5%	9.2%

Clearly, if an imbalance exists, we could more than rectify it by eliminating excise taxes (cigarettes, alcohol, gas, etc.). What Sgouros et alia intend by "correcting" our tax whack (in the "out of" sense) is an increase in taxes overall. As we see upon converting the percentages in the table to dollar amounts, it's a very tricky thing to mask redistribution with "fairness."

Percentage of Income Paid in State and Local Taxes for a Rhode Island Family of Four (dollar amount)
Income quintile	Lowest 20%	Second 20%	Middle 20%	Fourth 20%	Next 15%	Next 4%	Top 1%
Average income	<$8,400	$21,500	$36,000	$57,900	$96,100	$189,000	$787,000
Personal income tax	$42.00	$322.50	$792.00	$1,505.40	$3,267.40	$7,938.00	$45,646
Property taxes	$369.60	$795.50	$1,512.00	$2,663.40	$4,420.60	$6,804.00	$21,249.00
Sales tax	$268.80	$559.00	$756.00	$984.30	$1,345.40	$1,701.00	$3,148.00
Excise taxes	$411.60	$688.00	$864.00	$984.30	$1,153.20	$1,512.00	$2,361.00
Total taxes	$1,092.00	$2,365.00	$3,924.00	$6,137.40	$10,186.60	$17,955.00	$72,404.00

Apparently, even though the excise tax category is "the most regressive," removing it would benefit the average wealthy family by an order of three. All of these measures of regression are, in reality, on the negative side of the ledger. In other words, excise taxes aren't the "most regressive"; they're the least non-regressive (or, the least progressive) component of a tax burden that is sixty-six times as heavy for a family of four in the top 1% than a similar family in the bottom 20%.

Perhaps progressive meddlers would do better to market smoking and drinking to the rich... or, you know, just encourage business and wealth growth by rethinking their erroneous worldviews and agitating for different tax policies altogether.

How Much Is Not Enough?

Tom Sgouros (who is apparently more involved in this bill than I'd thought) just said:

The state is getting too much of its money from people who can't afford to give it, and not much money from those who can.

But this is different in kind from what he's been arguing thus far, which has been the percentage of income that the individual pays. If he wants to argue how much money the state is getting from whom, he'd have to look at the 80% of taxes paid by the top quintile. (That's "ish"; I can't recall where the 80% cut-off is, exactly.)

Ugh, Life

The Big Government folks have themselves a win-win situation with punitive taxation: interested citizens are kept unnaturally busy just making ends meet, so their ability to become involved is diminished.

Well, it's going to take me a while, but I hope to get down to the statehouse tonight, assuming the hearing continues.

A Not So Handy Bill

House Bill H7950, sponsored by Representative Arthur Handy (D-Cranston) and quizzically entitled "Economic Growth and Fairness Act", will be heard tomorrow at the rise of the House. There is a rumor also of a rally against the bill at 4:00 in the Capitol Rotunda.

Rep. Handy issued a press release (h/t Dan Yorke) today detailing the substance and merits of his bill. Below are two statements from it.

It will give tax relief to 90 percent of Rhode Islanders

* * *

Under the plan, the state would net an estimated $161.2 million to $185.2 million in new revenue

With apologies to the representative, these two assertions simply are not credible. Regardless of all the nice-sounding statements in the press release, even if they had gone on for twenty pages instead of two, what matters is the juxtaposition of these two suppositions about the same bill. It is a prima facie non-starter that 90% of Rhode Islanders will have a lower overall tax bill while $161,000,000 in new revenue is created.

In addition to a credibility problem, the macro approach of the bill is wrong. Rhode Island's ranking as the fourth highest taxed has still left the state with an annual deficit of around $400,000,000. Clearly, revenue is not the problem. Nor was the deficit itself an unforeseen bolt from the blue. Rather, it was deliberately created through an over-emphasis on the spending side of the budget. And that solely is where it must be addressed. Broad-based, yes - spending cuts, not tax targets.

So sayth also the House Republicans, who issued this letter today:

Dear Speaker Murphy and Chair Costantino:

On Wednesday, March 26th the House Finance Committee has scheduled a hearing for 2008-H 7950, a bill that would raise taxes and fees to extricate the state from the projected $350 million budget deficit. We do not believe that the solution to Rhode Island’s budget deficit lies in increasing taxes. Rather, we must focus on reducing the amount of money spent.

We see no utility in beginning a dialogue on increasing taxes or fees in Rhode Island. It is well known that Rhode Island is already among one of the highest taxed states in the nation that harbors the most hostile business climate in the United States.

We are opposed to 2008-H 7950, or any other legislation, which would raise taxes or fees in our state.

Why Pat Crowley Thinks High Taxes Are a Good Thing In and Of Themselves

A few weeks ago, I pointed out that a basic assumption guiding liberal/progressive thinking about taxation is that…

Government is entitled to a fixed amount of revenue, no matter what services it provides.

There was some spirited objection to my analysis, questioning whether anyone sane really believed this.

Well, today, over at RI Future and in the Providence Business News, in almost so many words, Pat Crowley affirms that the belief that government is entitled to its revenue, no matter what services it provides is a core of principle of progressive thought…

What is the point of income taxes? Are they a mechanism to pay for services from the state? No.

That's a direct quote. This, plain and simple, is why progressives have no credibility on issues of government reform, because high taxes in conjunction with mediocre services provided to the general public are acceptable under their stated ideology.

Remember this during the upcoming budget battle. Progessives like Crowley want your taxes to go higher, but not because it will help pay for government services. He has said it himself.

Stopping the Tides

When it so happens that the powers that be seem intent on acting in opposition to crystal clear reality, citizens are compelled to act. In Rhode Island, there's hope — or, in any case, we've hope — that plain information will serve to stop the tides, because it is in the universal self-interest to do so.

You've heard the argument: Our state's regime of taxation, regulation, and spending is driving away the range of citizens who are most likely to be productive, both as workers and as entrepreneurs, while attracting those most apt to partake of our too-generous services. As the taxation policies installed to compensate for the lack of further windfalls inspire the outward flow to continue, the government's shortfall with each budget will expand, rather than contract. How far down the path of economic stagnation do we want to go?

Under the principle that the impossibility of taking strides does not grant us permission to stand still, we've put together a flyer of sorts that seeks to convey one component of the vast body of evidence. We encourage you to print out copies to do with as you deem productive. Put them on public bulletin boards. Hand them out. Send them to media types and legislators. And if the effort meets any success, we'll proceed down the list of points until we've persuaded enough people to make it possible for Rhode Island to avoid utter (and utterly unnecessary) calamity.

Expanding the Sales Tax

With a hat tip to Dan Yorke, below are some of the new things that will now fall under the expanded sales tax being proposed by the tax-and-spenders in our Legislature, under the, ahem, "ECONOMIC GROWTH AND FAIRNESS ACT OF 2008". Oh sure, there is this.....

Commencing on January 1, 2010, the rate shall be six and one half percent (6.5%). Commencing on January 1, 2011, the tax rate shall be six percent (6%). Commencing on January 1, 2012 and thereafter the tax rate shall be five and one half percent (5.5%).

Until we decide that we "can't afford" that reduction.

And then there is the fact that the Income Tax is going to INCREASE, anyway:

For the period January 1, 2002, and thereafter through July 1, 2008 the rate shall be twenty-five percent (25%) of the taxpayer's federal income tax liability. For the period January 1, 2008, and thereafter, the rate shall be twenty-seven and one-half percent (27.5%) of that taxpayer's federal income tax liability, as defined in subsection 44-30-2(b).

And the flat tax option will be terminated (p.37) and capital gains taxes are going back up (p.39-40, 47). Yup, why cut government when we can tax more?

OK, here's the almost complete list of new "revenue sources" and revoked exemptions.

The furnishing of dry cleaning and/or laundry services.

The furnishing of linen and uniform supplies.

All services provided to domestic animals except those provided by a doctor of veterinary medicine.

The furnishing of watch and jewelry repair services.

Appliance repairs.

Any public golf course green fees and private golf country club fees and membership dues.

Marina fees and services.

Health club fees and services.

Any temporary employment agency fees and services.

Telemarketing bureau fees and services.

Telephone answering services.

Any security system fees and services except those provided by a locksmith.

Any janitorial fees and services.

Any landscaping fees and services.

Any carpet cleaning fees and services.

Any swimming pool maintenance fees and services.

Any solid waste hauling fees and services.

Any porta-pit rental fees and services.

Payroll fees and services.

Any tax preparation fees and services.

Any architectural fees and services, including landscape activities fees and services.

Any interior design fees and services.

Any management consulting fees and services.

Any marketing research and polling fees and services.

Any real estate property management fees and services.

Any motion picture admission tickets.

Any limousine service and usage fees.

Any dating service fees.

And here are some of the things no longer exempt:

Newspapers

Containers

Camps with fewer than 75% of Rhode Islanders in attendance

"Certain Institutions" - health care facilities

Trade in value of Motor Vehicles

Precious Metal Bullion

Compressed Air

Promotional and product literature of boat manufacturers

Equipment used for research and development

Banks and Regulated investment companies interstate toll-free calls

Mobile and manufactured homes generally

Horse food products

Non-motorized recreational vehicles sold to nonresidents

Aircraft

Dietary Supplements

Sales by writers, composers, artists

Sales to common carrier for use outside state

Buses, trucks and trailers in interstate commerce

Other

2% tax for all recipients of accounting services provided by accountants and legal services

Historical Bldg Business tax credits are discontinued

Various exemptions outlined in Sections 44-11-12, 44-11-14.5 and 44-11-43 of the General Laws in Chapter 44-11 entitled "Business Corporation Tax" are repealed.

Various exemptions outlined in Sections 44-17-1 and 44-17-2 of the General Laws in Chapter 44-17 entitled "Taxation of Insurance Companies" are repealed.

Biotechnology investment tax credit

3:30 PM | Comments (4) | TrackBack (0)

Rhode Island Constitution 101 - Control of the Budget

Both the Providence Journal and A.R. commenter Ken have erroneously amplified the amount of power the Executive Branch possesses over the state budget - more specifically, its control of the amount of local aid that will be disbursed from state coffers.

This week in an article about current events in Woonsocket, the Providence Journal asserted:

For the current fiscal year, the city faces a proposed loss of $700,000 from the governor, who is trying to balance a multimillion-dollar state deficit by cutting money to cities and towns.

And under Justin's post, "More Taxing Than Expected", commenter Ken stated:

Why such a surprise? The governor has been publicly telling everyone he was going to spread the state structural budget deficit pain across all 39 cities and towns.

Would that the Governor had more control over the state budget. In point of fact, if he proposed the reverse, an increase in education aid to cities and towns, but the General Assembly did not concur, it simply would not happen. We know because this is how FY 2008 wrapped up.

Some conceptual points suggest themselves out of the observations by Ken and the ProJo.

"Budget deficit pain" is not a completely unexpected, uncontrollable bolt of lightening from the gods. It is self inflicted by our elected officials who do not always make such decisions on the basis of the best interest of the state or even the individual recipients of such funds.

Secondly, contrary to the implication in both those statements, the Governor has proposed to spread budget cuts across the board. He is correct to do so. Our current fiscal problems did not arise out of one budget category so they cannot be resolved by focusing on only one category.

More importantly, however, the Governor this year and the General Assembly last year are correct in finally putting an end to increases in local/education aid. Too often, elected officials on the local level have negotiated and executed local contracts that had no bearing on either the quality of the service provided or the ability of taxpayers to fund them and do not conform to the terms of "contracts" under which most of the private sector (i.e., the taxpayer) operates. Witness our ranking as fourth highest taxed state, which calculation includes the level of property taxes, juxtaposed by the recent NECAP results.

In short, it should not become the burden of the state when local officials have implemented budgets and contracts in an irresponsible fashion.

More Taxing than Expected

A Sakonnet Times story that does not appear to be online confirms my suspicions: Tiverton's going to raise my taxes even more than the previously suggested maximum. Apparently, "the big jump is in the debt service on school bonds" (a 45% increase), followed by an estimated 3.2% increase for the school district. Of course, Rhode Island law encourages increased debt, because it is exempt from legislated increase limits.

Also notable is the passivity with which article conveys tax increase information:

That budget figure factors out to a new tax rate of $11.59 per every $1,000 of assessed valuation for Tiverton property owners, [interim Town Administrator James Goncalo] told the council. The current tax rate is $10,26 per $1,000, while the year before ('06–'07) it was $9.62 per $1,000.

Nobody raises the taxes, they just "factor out."

The rest of the council's budget discussion will be carried out behind closed doors because "further budget reductions might affect staffing and/or labor contracts." The party's over; expect a fight.

Every Tax an Income Tax

The problems with it are manifold (some enunciated in the comments section), but Tom Sgouros's analysis of property taxes brings to light an interesting conceptual matter:

However, consider the question, "how much property tax do the richest 11,900 people in Rhode Island pay?" With the data I have, I can't say for sure, but I can put a maximum figure on it. The maximum would be where the top 2.5% of income earners paid the top 2.5% of property tax bills. And here's what I find: the top 2.5% of residential property tax bills is a hair under 9.9% of all the residential property taxes collected in the state. This is about $150 million.

Again, the top 2.5% of households earn 31% of all the income, and pay 40% of the income taxes. But when you add property taxes in (those are the two biggest sources for supporting state and local government) you'll see that with 31% of the income, they pay a bit more than 20% of the taxes -- at a maximum. Like the property tax, the other taxes we levy are also regressive, so if someone feels like adding in the effect of sales and excise taxes, this 20% number will go down.

What Sgouros makes eminently clear, here, is that, to the progressive, every tax should be a form of income tax. The top 2.5% of households pay 29% more as their share of income taxes than their percentage of income. The top 2.5% of property-tax payers fork over 296% their per capita share of that tax base. In other words, to Sgouros, a "fair" property tax wouldn't be based on the property, but on the person who owns it and his or her income.

Seen from the perspective of a go-getting Rhode Islander, this approach would require that they pay more for the very same house as they strive to improve their situations. Consider: What would you do if advances in your career bumped up your property taxes? What if the growth of your company resulted in a compounding of the tax on your place of business?

Stomping Out the Carpet

It was a minor thing, but I opted for a detour, on my way through Newport after work, yesterday, to avoid some movie filming off Bellevue, and it seemed parking in the neighborhood was somewhat more tight than usual. I can well imagine, that is to say, how the Hollywoodsters could disrupt a town for a while. Still, if municipalities are to be compensated for that, legislation put forward by Senator Paul Jabour (D, Providence) is unnecessarily complicated and (to my knowledge) invests the Rhode Island Council on the Arts with a new, not necessarily appropriate, responsibility:

The legislation would impose a 1-percent tax on the gross revenue of films produced in the state. Revenue from the tax on each film would be divided among the Rhode Island cities and towns in which the movie was filmed, allocated in proportion to the amount of money the production company spent in that municipality. The Rhode Island Council on the Arts would be in charge of distributing the funds collected through the tax.

Many Anchor Rising readers are nonplussed, no doubt, by state leaders' concentration on movie-making as a desirable industry to attract to Rhode Island (although there is something mildly neat about its presence). Still, Jabour's bill seems practically designed for maximal dampening of the trend. Why can't cities and towns simply charge an up-front fee to cover police and general disruption?

"Pain, Captain?"

Further to the remarks (the gift that keeps on giving) of Senator Stephen Alves at the Greater Providence Chamber of Commerce’s legislative lunch last week - specifically:

“I think we have been fair to the business community,” Alves, D-West Warwick, said. “The pain should be shared equally.”

Gosh, that sounds good in theory. The hitch is that, to date, distribution of the pain has been quite uneven, as the numbers starkly reveal.

Rhode Island taxpayers are the fourth highest taxed. Rhode Island corporations literally could not be in a worse position, tax-wise and, further, probably would like evidence of the fairness purportedly shown to them.

On the flip side, Rhode Island spending on social service programs is in the top third nationally. Rhode Island teacher pay (the ultimate destination of much of the Education Aid to Cities and Towns) ranks eighth highest nationally. And benefits for Rhode Island state employees constitute an additional 88% of salary versus 29% in the private sector.

In light of these numbers, it is understandable that the reaction of Rhode Island corporations to Senator Alves' statement would be, "Thanks, Senator, but we've been 'sharing' the pain for a while. Is it someone else's turn yet?"

Rhode Island's Corporate Tax is an Income Tax

Effectively, for nine out of ten corporations. Source: Senator Steve Alves.

Let's remember that the corporate tax (already $500 per year) is assessed regardless of profit generated by that corporation. If the corporation lost money, this tax must still be paid. So if, as Senator Alves asserts, 94% of corporations in Rhode Island are paying the minimum corporate tax, it's a good bet that most if not all are losing money or at best, breaking even. That means that the owners of over 90% of Rhode Island's corporations are reaching into their own pockets to pay this tax.

Reviewing once again Senator Alves' comments at the Greater Providence Chamber of Commerce's legislative luncheon:

Of the 45,840 corporations registered in Rhode Island, 94 percent pay only $500 in annual corporate income taxes to the state

The modifier "only" is inaccurate from the jump. Most Rhode Island corporations are not Coca Cola. So $500 is a lot of money. More importantly, it is grotesque for a legislator to imply that corporations are not paying their fair share when the basis of his accusation is a mandatory minimum tax payable regardless of profits. Essentially, Senator Alves is saying, "Look, they're paying $500 (that we're forcing them to pay). That must mean they can afford to pay more."

Senator Alves has confused the tax gun with affordability. Just because someone is forced to pay doesn't mean that they can afford to pay. Or that another waggle of the tax gun ("cough up more dough") is the correct course of action for a state which does not lack for revenue and already ranks dead last for business tax climate.

A Correction to the Letter

Just a quick correction to letter to the Providence Journal refuting Crowley's refutation of me:

[Crowley] notes that cash handouts claim a small percentage of total state spending. This is among the Poverty Institute’s favorite talking points. He notes that such handouts are also a small percentage of our welfare system.

That last sentence shouldn't say "He notes that"; it should just start with "Such handouts."

Whatever Happened With the Big Audit?

Though not always asked in the friendliest of tones, this is a good question.

And the answer is: quite a bit. Renamed "Fiscal Fitness" (not to be confused with the Governor's anti-donut "Healthy Weight in 2008" initiative), $279,000,000 was found and saved and the program has not closed up shop.

Some highlights of the 279 mill:

> $25,000,000 over three years in the state employee health insurance contract.

> $750,000/year in record storage expenses.

> On-line renewal of eight trade license categories covering 28,000 professionals.

> $15,000,000 over five years by opening the vehicle Emissions and Safety Testing program to competitive bidding. (This and the record storage. We really ought to check into this open bidding thing more often ...)

Now Here's a Tax Bill That Ought to Pass

With the growing stack of tax-raising bills, it's good to know that the General Assembly will at least have to address a different approach (emphasis added)

In an effort to bring some much needed tax relief to Rhode Islanders, while generating revenue in this era of hundred million dollar budget deficits, Representative Victor Moffitt (R-Dist. 28, Coventry) has introduced a bill that would lower the state sales tax to 5% from the current rate of 7%.

"By lowering the sales tax, individuals would be more inclined to buy products and companies would be more inclined to do business in Rhode Island, which would create jobs, and that would generate more income for the state than the current tax structure does at its present rate," said Representative Moffitt. "Let me be clear, this is not a move to lower and broaden the sales tax structure. There is no broadening of the sales tax in my proposal."

Recently, the Tax Foundation ranked Rhode Island 50th in the Unites States in Business Tax Climate Index. That ranking, taken in context with our current and projected budget crises, lends credence to the idea that the solution to Rhode Island's fiscal problems is lowering taxes, as opposed to raising them.

"The current sales tax rate of 7% was established back in the 1990's during the banking crisis, and at the time was said to be temporary," said Representative Moffitt. "Given our high tax burden, and our stagnating economy, it is time that the tax rate be lowered to so that we can be more competitive with our neighboring states."

Re: Well, Maybe if the Doctor's Office Was in the Mall....

A small but annoying point. This is a link to a Rhode Island craigslist posting which reads:

I wonder how many people go and get the free monthly bus passes with their medical assistance card and turn around and sell them???? In the past few days I've noticed people selling them on here....kinda makes you wonder.

He or she is correct. While browsing through craigslist postings under the "General" category a couple of weeks ago, I was a little surprised to come across someone who had posted a "January bus pass" for sale.

And here is a posting for four February bus passes. The location is Providence, RI. It is not clear if the $25 price is each or takes all four.

Do bus passes have pictures of the pass holder? If not, perhaps it is time. Selling tax payer funded bus passes is in the same category as selling food stamps. These services are available for people who really need them. They are not intended as a round-about way to provide casual spending money.

And if they are, we can just dispense with a good deal of effort and harrumph, cut out the middle man - the Division of Taxation - and leave those dollars in the pockets of tax payers to casually spend.

Rhode Island: Fourth Highest Taxed

"Our People are Taxed Too Highly."

So said Governor Donald Carcieri during his post State of the State media rounds. And - drum roll, please - the Tax Foundation concurs. For the third year in a row, they ranked Rhode Island fourth highest taxed, state and local combined.

Data source of the Tax Foundation's analysis: Bureau of Economic Analysis, US Department of Commerce.

ADDENDUM

In addition to compiling state by state tax rankings, the Tax Foundation is also the organization which calculates Tax Freedom Day. Will Ricci over at Ocean State Republican advises that there is a refutation rebuttal lame counter analysis of Tax Freedom Day which involves quibbling about the definition of the words "income" and "tax" (shall we add "is"?) and an inexplicable desire to exclude four fifths of tax payers from the calculation.

The Tax Foundation easily exposes the weaknesses of this criticism.

Leaders, You Do Have a Choice

Not to darken your day, but the latest bit of bad news brought to Rhode Islanders by Providence Journal business writer John Kostrzewa comes with a very important point:

When cities and towns do revaluations required under state law, they will find the total value of their residential property has probably declined. With a lower total valuation, municipal officials will have a choice — cut spending to match the new lower level of tax revenues, or raise the tax rate to collect enough money to meet the budget.

Yes, local officials, you do have a choice. The fact that my assets are worth less in now way necessitates that you tax them at a higher rate. What it does necessitate, if you ask me, is that you turn your focus to spending within the town's means and to finding ways to make my geographically based assets worth more.

State Budget - Where to Cut

To close the half billion dollar operating deficit and back Rhode Island down from its ranking as the seventh highest taxed state, the focus must be on state spending which is funded by General Revenues - state income tax, lottery proceeds, business tax, gas tax, sales tax. Out of the 2007 state budget of $7,000,000,000, approximately $3,200,000,000 is funded from General Revenue. [The rest of the revenue - federal, etc - is free, right ...?]

Below is the breakdown for 2007 General Revenue spending. These are the areas in which cuts need to be made. For contrast, I added General Revenue spending for 2000, which totaled around $2,200,000,000.

It should be noted that while Rhode Island's General Revenue spending increased by $1,000,000,000 and total spending increased by $2,400,000,000 from 2000 to 2007, Rhode Island's population increased by only .009, from 1,048,319 to 1,057,832.

ADDENDUM

Commenter John correctly points out that this post, expensive (my characterization) as it is, does not include all General Revenue spending because it

obscures (within different line items) the other driver of spending increases -- increased costs for pensions and, especially, pay as you go costs for retiree health care. Those are broken out separately in a different set of analytical tables in the budget.

The question then arises, of all the categories, what is mandatory and what is discretionary spending? As the General Assembly has made costly promises throughout the budget that the state cannot keep, it becomes clear that the entire expenditure side of the budget has been rendered discretionary, even including the two sacred cows which John reminds us of.

	FY 2000 Revised	FY 2007 Revised
General Government
Administration	$301,398,448	$451,453,511
Business Regulation	7,897,375	10,812,564
Labor & Training	6,745,759	6,997,013
Revenue	0	35,773,913
Legislature *	30,784,769	33,472,897
Lieutenant Governor	687,999	896,416
Secretary of State	4,470,547	6,106,546
General Treasurer	4,808,862	2,662,801
Boards for Design Professionals	315,350	380,240
Board of Elections	2,098,265	3,684,992
R.I. Ethics Commission	814,502	1,273,231
Governor's Office	3,729,907	4,681,601
Public Utilities Commission	740,530	737,811
R.I. Commission on Women	123,003	99,023
Subtotal: General Government	$364,615,316	$559,032,559