The Budget That Lost Its Way

Given that his elective clock is rapidly running out and voters' inability to see the danger of their usual practices (as made clear by the latest election results), perhaps the most important thing that Governor Carcieri could have done with his budget proposal would have been to shine a stark light on a better direction. The General Assembly and other entrenched interests would beat him up no matter what. They'll pick and choose his proposals and substitute their own. As I've been saying, the governor should put forward a proposal and disavow any modifications to it as the property of legislators.

Instead, Carcieri enabled the Providence Journal's news-section editorialists to begin their coverage of the budget proposal thus:

It was supposed to be among the most difficult decisions in his political career. Facing a crippled state economy, Governor Carcieri was charged with crafting a plan to fill what may be the largest budget deficit in state history.

He gave Kate Brewster room to make a reasonable free-market point:

Kate Brewster, executive director of the Poverty Institute at the Rhode Island College School of Social Work, which analyzes tax and budget policies on behalf of low-income people, opposes Carcieri's plan.

"Reducing corporate income taxes without closing corporate tax loopholes is double jeopardy for small businesses in Rhode Island," she said.

Small businesses "will find themselves competing on an even more un-level playing field" than they do now, as they watch big businesses obtain tax relief, she said.

Some businesses would benefit through the eventual elimination of the corporate income tax, others would not. Of about 50,600 companies that do business in Rhode Island, about 3,500 pay the state's 9 percent corporate income tax, according to state figures based on the 2006 tax year.

The majority of companies — about 47,000 — do not, because they are organized as pass-through entities. Thus, their income is typically not taxed at the entity level, but instead passes through to the business's owners, who pay taxes on it on their individual Rhode Island returns.

He proposes to raise taxes on the group, what I've been calling "the productive class," that's actually fleeing the state, while increasing incentive for the push-me-pull-me groups at the high and low ends to immigrate and to stay, thus enhancing the mentality that we must take from the rich to give to the poor (even as we take less from the rich):

Meanwhile, on taxes, Carcieri is proposing a swath of tax cuts, including an expansion of the earned-income tax credit for the poor, a five-year phase-out of the 9 percent corporate income tax, and an increase in the estate tax exemption to $1 million.

While most will see a tax cut, others will not.

An estimated 110,179 filers will each pay an average of $1,261 more in income taxes, according to Carcieri's tax study commission. The vast majority of them are individuals and couples making less than $75,000 annually, as commonly used deductions for mortgage interest and local property tax payments are replaced with a new standard deduction.

We need fundamental change that will decrease the size of government (in large part by changing the state's various incentive structures) and increase the opportunities for individuals and businesses. I'm sure the details of Governor Carcieri's plan will flow forward for public scrutiny over the coming weeks, and I'm sure the General Assembly will find ways to make the budget worse, but the bold statement that we needed has not been made. Consequently, we'll continue to drift farther out to sea.