Rhode Island is a small place of many charms. Its history is stirring, its connection to the oceans enriching, and the culture is a wonderful mix of Portuguese, French Canadian, Asian, and other cultures – and cuisines – that make Little Rhody a delight to visit.
Living and working there is not so easy though. Population is in long-term decline and business is contracting. The ironically named “Superman Building” has lost its last tenant and the crown jewel of Providence’s skyline will be a looming reminder everyday that something has to be done, but what?
Like a patient etherized upon a table, small measures won’t cut it. The fumbling efforts for a big score (Sorry, Curt Schilling, but when libertarian and left agree that Rhode Island made a deal with the devil, it’s time to hit the showers. ) or giving away the store to buccaneering corporate nomads and their enablers (see this list of supporters for one such scheme in New York) are doomed to failure..
A Change of Pace and Rate
Rhode Island instead is considering something that is almost heretical: kill a tax to help the economy. Not for one or some but for everybody. It’s the sales tax.
Currently, Rhode Island has a very uncompetitive sales tax rate, and is threatened by possible reductions in Massachusetts (considering a cut to 4.5% from 6.25%, but offset by a hike in the income tax to 6.25%). Here’s map with regional sales tax rates, and the bind Rhode Island is in becomes clear:
Yet, a serious proposal has arisen to eliminate the sales tax in toto in Rhode Island. This idea could leverage how taxation works to benefit Rhode Islanders and it deserves attention. Why?
Mobility: why sales tax freedom works
When people enter Delaware, the first sights they see are signs proclaiming: “Welcome to Delaware, Home of Tax-Free Shopping.” They stop their cars and start shopping.
Subtle? No. Effective? Yes.
The sales tax is not only a terrible tax; regressive for people on fixed income and the poor, but it diverts wealth used for purchases to where it is taxed the least. Along with Delaware, New Hampshire has no sales tax and it shows, to Massachusetts’s and Maine’s chagrin. Money is mobile, and sales tax acts as a repellent.
If Rhode Island adopted sales tax elimination, it could be reasonably expected the Delaware and New Hampshire effect would be repeated. At the same time, the struggling small businesses and struggling human beings of Rhode Island would see a significant increase in their disposable income which they would spend or invest, at a time when Rhode Island’s decline shows no signs of stopping.
An idea that crosses the aisle
Most will assume this reform would be supported by those such as Grover Norquist. Actually, a brave Democratic State Representative - Jan Malik - has introduced the measure to get a debate. Representative Malik understands why this is good tax policy: he is a small business owner. Small business doesn’t get the breaks of big companies, nor do his customers.
Representative Malik understands what the mobility of money means:
“Drive Route 6 in Seekonk. Why are all these big box stores opening up in Seekonk? Why are all these big box stores opening up in Attleboro?” Malik said. “It’s time we do something to help make businesses feel good about being in Rhode Island.” Providence Journal 05/30/13
Representative Jan Malik D-Warren
This is what the sales tax map would look like for Rhode Island if the sales tax were eliminated. That green color? Its the color of money. That’s the money that would stay in Rhode Island.
UrbanTools believes that this tax ought to be phased out in rather quick shifts of about five years. The calculated revenue loss is estimated to be about $800 Million based on current receipts. UrbanTools suspects that there is not net loss, due to the empowerment of the local economy.
The Massachusetts plan to shift taxes is not workable in Rhode Island (or anywhere). But advocates for the bill argue that local government would see a benefit. We believe that to be true, but not for the sort of reasons presented, because advocates seem to view this tax reform as a zero-sum game.
What would grow? Land values. Land values would go up for commercial and service zoned land. CBDs would see increases, as would highway commerce. The increase of these land values – made possible by government action to reduce taxation of labor and capital – would be the most efficient, equitable and simplest resource to balance the revenue losses. Other land values would increase as consumers and commerce are empowered to again become active participants in the economy.
We’ll follow this story closely. Rhode Island deserves a chance to prosper after decades of decline.
(An earlier version of this post identified Representative Malik as Senator. UrbanTools regrets the error.)