We Don't Have a Tax Revenue Problem
Marc Comtois
The usual suspects are out complaining about Governor Carcieri's proposed budget cuts:
Even without details, Kate Brewster, executive director of Rhode Island College’s Poverty Institute, said the outcome is predictable and “slashing public services while not addressing the tens of millions of dollars that are being lost to some of the recently enacted tax cuts and tax credit programs is really not fair to the average Rhode Island taxpayer … Capital gains tax cuts, personal income tax cuts, movie picture tax-cuts. We have to ask ourselves whether these are affordable.”
Ah yes, the money that is "lost" to tax cuts. That means we're not getting as much tax revenue as before, right? Well, let's see.
For clarity, I'll break them out by category. First, let's see how much less Rhode Island businesses are paying in taxes:
Business tax revenue dipped in 2002 (after 9/11) but had rebounded by 2003/2004. However, it is predicted to dip in 2008, from $376.4 million to $354.9 million. I guess it is around $20 million less...but that certainly bucks the trend that has resulted in about a 50% increase in business tax revenue from 2001 to 2008.
Well, how about Rhode Island taxpayers?
Same sort of trend as the Business tax revenue, though there is no projected "dip" in 2008.
Income tax revenue has continued to climb, increasing by about 30% since 2001. The same trend and percent increase is also true for "other" tax revenue, which climbed from 2001-2005 but have leveled off since then (and that's fine by me!).
Basically, tax revenue from all sources hasn't gone down (though it will remain essentially the same in both 2007 and 2008). Between 2001 and 2008, it has increased from $2,011.9 to $2,543.6 million (about 26%), but increases in government expenditures have easily outpaced these revenue increases.
In short, expenditures have gone from $4,839.2 to $7,017 million (about 45%) over the same period.
The horse has been flayed and it's bones turned into meal....but for the millionth time: it's spending, not revenue that is the problem.
All data obtained from the RI State Budget Office web site. Figures for 2001-2005 are actual/audited, for 2006 are revised, for 2007 as enacted in FY budget and 2008 as proposed or projected.
That study is flawed. I'm sure Pat Crowley will provide some of his patented "Analyze-ation" and have all sorts of examples of how you're wrong.
"Business revenue ... is predicted to dip in 2008, from $376.4 million to $354.9 million. I guess it is around $20 million less...but that certainly bucks the trend that has resulted in about a 50% increase in business tax revenue from 2001 to 2008."
Huh. I wonder what could it have been if the state hadn't been dead last for business tax climate and near the bottom for overall business climate?
Marc,
Kudos to you! Hope you realize how much your (and the entire AR crew) fact based commentary is appreciated. This blog fills the huge information void left by our superfluous lazy and unprofessional 'mainstream' Rhode Island media.
Much thanks!
Don't expect to hear one bit of intelligent discussion from a union whore or a poverty pimp. It just ain't gonna happen!
I fully agree with Tim. Keep up the good work, Marc. It's good stuff and makes us all smarter.
Greg and Kevin- Way to raise the level of conversation, boys.
But I can't resist a challenge….
Marc says, "Ah yes, the money that is "lost" to tax cuts. That means we're not getting as much tax revenue as before, right?' Marc's argument is that, as long as tax revenues go up, we can't have lost money to tax cuts.
I disagree.
First, Marc reports revenues and expenditures in dollars, which is fine, but it has some consequences. First, the rate of increase in expenditures is 3.2% per year, 2001-2008. That's probably a little better than inflation, yes? So, in constant dollars spending hasn't much but (credit where credit is due!), Marc's right- spending hasn't gone down.
But, we don't know, and can't know, from Marc's chart, whether or not we've lost money to tax cuts. It may be (almost certainly is) the case that, without the tax cuts, revenues would be higher than they are. This would happen, for instance, if business revenues went up and the business tax rate stayed the same so that business tax revenues went up, while at the same time capital gains tax went down.
In that case, we might then have more revenue than we had before, but less than we would have had without the tax cuts. Thus, we lost money to the tax cuts.
I feel compelled to say, just to forestall the typical responses, that I have made no claims that taxes are too low or should be higher, that expenditures are too low or should be higher, that any particular tax should be raised, etc.
Reasonable counter-arguments are welcome. Childish name-calling and attempts to blame the world's woes on liberals will be ignored.
Thomas,
1. Where are you getting the 3.2% figure from? To start in 2001 at $5,000 and get to $7,000 by 2008, you need a 4.9% "inflation" rate.
2. If inflation is the primary factor explaining the spending increases, then how come the sales tax figures, which should also be tied to inflation, grow only 1.5% between 2001 and 2005, and are basically flat afterwards? Why should inflation have a substantially bigger impact on government spending than on other spending?
Andrew,
1. Sorry, I was distracted when I wrote that and got careless. the 3.2% annual increase is REVENUE, not expenditures. ($2,011.9 to $2,543.6 increase 2001-2008)
2. I didn't say that inflation caused the increase in revenues, just that it was consistant with that. (Again, revenues...I didn't mean to say anything about expenditures). But that's a moot point anyway, as I granted Marc that revenues had not declined.
Thomas, I understand the reasoning behind your question and it's really kind of a chicken or egg thing.
The basic point is that revenue itself does not decrease just because tax rates are reduced. There is an ever-moving, somewhat mystical sweet-spot in there where maximum tax revenue X is gained at specific tax rate Y (at a specific time Z?) such that the maximum number of businesses continue to operate in-state...etc. Basically, it is simply unknowable.
Thus, we can't know how much tax revenue was "lost" due to a rate reduction, but we also won't know how much tax revenue we would gain if we raised rates or even kept them the same. The buying and spending habits of people and businesses are an important variable that can't be neatly defined.
If rates go too high, who will move out? If they go even lower, who will move in? We don't know for sure, but conservatives think that, because most people like to keep more of what they earn, they will go to places where the can do so. Now, to be sure, that is a rather materialistic way of looking at it and there are other factors (family, tradition, "quality of life," old habits) that go into determining where a person chooses to live or do business. But I've rambled enough for now.
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That study is flawed. I'm sure Pat Crowley will provide some of his patented "Analyze-ation" and have all sorts of examples of how you're wrong.
Posted by: Greg at October 16, 2007 11:19 AM"Business revenue ... is predicted to dip in 2008, from $376.4 million to $354.9 million. I guess it is around $20 million less...but that certainly bucks the trend that has resulted in about a 50% increase in business tax revenue from 2001 to 2008."
Huh. I wonder what could it have been if the state hadn't been dead last for business tax climate and near the bottom for overall business climate?
Posted by: Monique at October 16, 2007 4:03 PMMarc,
Kudos to you! Hope you realize how much your (and the entire AR crew) fact based commentary is appreciated. This blog fills the huge information void left by our superfluous lazy and unprofessional 'mainstream' Rhode Island media.
Posted by: Tim at October 16, 2007 5:03 PMMuch thanks!
Don't expect to hear one bit of intelligent discussion from a union whore or a poverty pimp. It just ain't gonna happen!
Posted by: Kevin Molloy at October 16, 2007 6:00 PMI fully agree with Tim. Keep up the good work, Marc. It's good stuff and makes us all smarter.
Greg and Kevin- Way to raise the level of conversation, boys.
But I can't resist a challenge….
Marc says, "Ah yes, the money that is "lost" to tax cuts. That means we're not getting as much tax revenue as before, right?' Marc's argument is that, as long as tax revenues go up, we can't have lost money to tax cuts.
I disagree.
First, Marc reports revenues and expenditures in dollars, which is fine, but it has some consequences. First, the rate of increase in expenditures is 3.2% per year, 2001-2008. That's probably a little better than inflation, yes? So, in constant dollars spending hasn't much but (credit where credit is due!), Marc's right- spending hasn't gone down.
But, we don't know, and can't know, from Marc's chart, whether or not we've lost money to tax cuts. It may be (almost certainly is) the case that, without the tax cuts, revenues would be higher than they are. This would happen, for instance, if business revenues went up and the business tax rate stayed the same so that business tax revenues went up, while at the same time capital gains tax went down.
In that case, we might then have more revenue than we had before, but less than we would have had without the tax cuts. Thus, we lost money to the tax cuts.
I feel compelled to say, just to forestall the typical responses, that I have made no claims that taxes are too low or should be higher, that expenditures are too low or should be higher, that any particular tax should be raised, etc.
Reasonable counter-arguments are welcome. Childish name-calling and attempts to blame the world's woes on liberals will be ignored.
Posted by: Thomas at October 16, 2007 9:36 PMThomas,
1. Where are you getting the 3.2% figure from? To start in 2001 at $5,000 and get to $7,000 by 2008, you need a 4.9% "inflation" rate.
2. If inflation is the primary factor explaining the spending increases, then how come the sales tax figures, which should also be tied to inflation, grow only 1.5% between 2001 and 2005, and are basically flat afterwards? Why should inflation have a substantially bigger impact on government spending than on other spending?
Posted by: Andrew at October 16, 2007 11:42 PMAndrew,
1. Sorry, I was distracted when I wrote that and got careless. the 3.2% annual increase is REVENUE, not expenditures. ($2,011.9 to $2,543.6 increase 2001-2008)
2. I didn't say that inflation caused the increase in revenues, just that it was consistant with that. (Again, revenues...I didn't mean to say anything about expenditures). But that's a moot point anyway, as I granted Marc that revenues had not declined.
Posted by: Thomas at October 17, 2007 9:31 AMThomas, I understand the reasoning behind your question and it's really kind of a chicken or egg thing.
The basic point is that revenue itself does not decrease just because tax rates are reduced. There is an ever-moving, somewhat mystical sweet-spot in there where maximum tax revenue X is gained at specific tax rate Y (at a specific time Z?) such that the maximum number of businesses continue to operate in-state...etc. Basically, it is simply unknowable.
Thus, we can't know how much tax revenue was "lost" due to a rate reduction, but we also won't know how much tax revenue we would gain if we raised rates or even kept them the same. The buying and spending habits of people and businesses are an important variable that can't be neatly defined.
If rates go too high, who will move out? If they go even lower, who will move in? We don't know for sure, but conservatives think that, because most people like to keep more of what they earn, they will go to places where the can do so. Now, to be sure, that is a rather materialistic way of looking at it and there are other factors (family, tradition, "quality of life," old habits) that go into determining where a person chooses to live or do business. But I've rambled enough for now.
Posted by: Marc Comtois at October 17, 2007 1:42 PM