Dan Lawlor: RI's Tax Policy Just Isn't Working

Dan Lawlor: RI's Tax Policy Just Isn't Working

“Institutions that once worked well enough for the major stockholders are no longer adequate to bear the burden of all our mistakes.” -Gore Vidal, “Political Melodramas”

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%.

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

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Since that time, college tuitions have gone up, jobs have been cut, RIPTA services have been cut, the DMV has been centralized, we've grown more dependent on gambling revenue, school buildings are poorly maintained, ponds are still polluted, there are more documented homeless than in any time, and, despite our tax cuts, we still rely on sweetheart deals for large companies to come to Rhode Island (a la 38 Studios). Is this what prosperity looks like?

For a trip down memory lane, let's take a peak at revenue sources for Rhode Island's state government since WWII.

RI Revenues

In 1947, the Rhode Island General Assembly instituted at 1% sales tax.

According to Dr. Jay Goodman, in 1961, the state had a 3% sales tax. The AFL-CIO was opposed to the sales tax, and put forward a proposal to cut the sales tax while creating an income tax. It was ignored.

The early 1970s were a time of crisis in the state. Factories closed, city streets were destroyed for highways, and violence broke out on many streets. In 1971, under Governor Licht, the state began collecting an income tax, at a rate of 15%.

In 1974, still reeling from the naval base closures, the state established a lottery to generate additional revenue.

By the 1980s, under Governor Garrahy, the state had a 6% sales tax. In 1983, the top income tax rate was 26.75%. Our unemployment rate was 8.5%.

In the mid-1980s, the state entered a building boom, influenced by insider deals and protections. Republican and Democratic leaders alike cashed in. At one point, in June of 1988, our unemployment rate was 2.9%.

In 1990, under Governor Diprete, the state initiated a two year temporary 7% sales tax. Our unemployment rate was 6%.

Following the credit union collapse and a dramatic rise in unemployment, Governor Sundlun moved to make the 7% sales tax long term to help stabilize revenue.

In the 1996, the top income tax rate was 27.5%. Our jobless level was 5.3%. Let's repeat that. Our top income tax rate was 27.5%. Our jobless level was 5.3%.

In 1997, the General Assembly and Governor Almond began a five year plan to cut the tax rate by 10%. There was discussion of cutting the sales tax to 6.5%, but it did not materialize. In 2002, after the Almond reductions, Rhode Island's income tax rate was around 11%, not counting deductions. The state's sales tax remained at 7%. Our unemployment rate in was 5.5%.

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%.

In 2012, we still have a temporary 7% sales tax, with cities and towns having the ability to add on a 1% meals tax. Local property tax bills have soared as financial aid to cities and towns have been dramatically cut, in large part due to the dramatic reduction in income tax revenues. Our unemployment rate is 10.8%.

Since the 1970s, regressive taxes like the sales and property tax have gone up, while progressive taxes like the income tax have gone down (from a top rate 27.5% in 1997 to 5.99% today). We're more dependent than ever on sales, property, corporate, and lottery money, as our income tax funds have decreased. Our employment situation is worse now than at any point when our income taxes were higher, even the 1982 recession which peaked at 9.5% jobless.

Tom Sgorous once made a similar argument here.

Our tax policy has basically been that the rich pay less in income tax, and we all pay more in property and sales tax. Let alone that our corporate is higher than both Massachusets and New Hampshire. This strategy for growth doesn't seem to be working.

Policy Suggestions

The political leadership of Rhode Island needs a model that works, and must follow it. New Hampshire has opted for no sales tax, no income taxes (except for dividend and interest income), tourism and meal taxes, a lottery, an 8.5% corporate tax, and high property taxes, resulting in high business growth and job creation, with services varying greatly by town. Massachusetts has opted for a diverse revenue stream of 5.3% flat tax on income, a 6.25% sales tax, an 8% corporate tax, a lottery, and property taxes- and has a sales tax holiday, some of the best public schools in the country, excellent research and development, and a strong public transit system.

Whichever way we choose to grow, our political leadership from all parties, Democrat, Republican, Green, Moderate, Libertarian, need to consider what is the mission of the State Government of Rhode Island, and how do we construct laws and a budget around that mission?