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.

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"e also pay a lower than average percentage sales tax (79% per capita)"

And how much of that is because some people buy as little as possible in RI. If someone lives very close to Attleboro or Seekonk, maybe they choose to pay the lower sales tax there, instead of paying it to RI.

Posted by: Patrick at July 20, 2010 12:25 PM

It's also important to note who Chafee's tax burden will fall upon. While, as you note, it's just 1%, it's overwhelmingly a tax on poor and middle-class families who will, under Chafee's plan, pay far more than upper-class families [like Chafee, who has a personal fortune] relative to their overall income. It's just 1% -- until you realize that that's not just on clothes, but also food, electricity for home use, heat for home use, water for home use, medicine, school meals, rent for college & rent for nursing homes, textbooks, etcetc.

Chafee can't have it both ways -- he can't both argue that the the tax increase is insignificant while at the same time arguing that it's vital. He can't say property taxes are super bad [which he does constantly] while at the same time increase taxes on home owners by taxing their water, heat, and electricity.

Posted by: Jake at July 21, 2010 7:06 AM
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