Beware Tax Tinkering

Efforts to "update," or otherwise change, Rhode Island's taxation regime give the unmistakable impression of tinkering. That impression is solidified under one insidious phrase, which I've italicized in the following paragraph:

"It may be in the '10 [fiscal year budget], not in the supplemental," Carcieri said [of a plan to broaden the sales tax]. "I think we need to bring the nominal rate down. And I would be supportive of that. It's a matter of how you do it so it's revenue neutral."

That misguided phrase, reformers will note, is much less often applied in the form of expenditure neutral, when spending programs are broadened. Moreover, the reality is that there's no such thing as "neutrality" when it comes to adjusting tax code. Consider:

The tax-policy workgroup found the state could generate more than $200 million by taxing goods and services that are currently exempt. They include non-prescription drugs, car washes, spectator sports, theater, dry cleaning, business-support services and travel arrangements.

The net impact of the sales tax expansion and rate reduction, according to the tax-policy workgroup, would be a $4.3-million increase in sales tax revenue for the state’s coffers. ...

Indeed, the tax policy workgroup determined that a sales-tax expansion could create a new burden for some taxpayers, but the vast majority of households would actually pay less sales tax over the course of the year because of the across-the-board reduction to 5 percent.

In other words, taxes would increase by $200 million, by these estimates, but decrease by $195.7 million. The question is who — excluded from "the vast majority of households" — would be contributing to that first number? If Greater Providence Chamber of Commerce President Laurie White intends to make the state "more tax competitive," even as total revenue remains statistically the same, for which taxpayers' inclusion are we competing, and to which are we going to hand the bill?

A look at the partial list of new sales/service taxes begins to create a picture. The various "repair" items are indicative of ownership. The self-improvement and leisure activities bespeak those who are progressing beyond subsistence and beginning to have financial room to focus on quality of life. And amazingly, such services as tax-return preparation, classified ads, and employment-agency fees will affect those seeking to generate economic activity (but without internal departments to handle such things). That is, precisely the critical group between the working and upper-middle classes that has been fleeing from the state for several years, now, will disproportionately bear the burden of this "neutrality."

One can expect many service providers to follow them across state lines.