Expanding the Sales Tax: Possibilities

Neil Downing reports that Governor Chafee's proposed new 1% tax on various items would violate a multi-state agreement and could result in the loss of $1.8 million in revenue. However, since the new tax would generate $89 million (or $121 million, depends on who you ask), it's no surprise that the Governor is still going full speed ahead with the idea. Right now, according to this Taxadmin.org (PDF), Illinois is the only state with such a sales tax structure (Illinois has a sales tax of 6.25% and taxes food, prescription and non-prescription drugs at 1%).

Listening to WHJJ's Helen Glover this morning, I heard her speculate that perhaps this would open the door for the "flatten and expand" idea as a compromise (ie; drop the sales tax to 5% and apply it to everything). So, is Rhode Island going to follow the "Illinois model" (which Governor Chafee's plan seems most like)? Or will we end up with the flatten and expand approach> What do other states do ?

Well, we know there's no chance that Rhode Island will join the 5 States (Alaska, Delaware, Montana, New Hampshire and Oregon) that have NO state sales tax. Right now Rhode Island is one of ten states and Washington, D.C. that have a sales tax that excludes food and both prescription and non-prescription drugs. Setting the amount of the rate aside, this is actually a positive.

*No state income tax

It's worth noting that, even though Rhode Island is currently amongst a "good" group, its higher rate as compared to the rates of all other states is what gives RI such bad publicity when it comes to snapshot analysis that doesn't focus on exemptions, just the overall "big" number.

To continue, several states don't tax food but tax non-prescription drugs at the regular sales tax rate:

*Tax can be adjusted annually depending on various budgetary calculations.
**No state income tax

The following states tax non-prescription drugs at the regular rate and tax food, though at a different rate:

*local taxes on food
~includes statewide 1% local tax
**No state income tax

Finally, the following states tax everything (except prescription drugs) at the same rate. These might be the models for a potential flatten and expand by Rhode Island:

*State has rebates or tax credits to compensate poor households.
~No state income tax

As was noted, Illinois is the only state that taxes prescription drugs at 1% along with food and non-prescription drugs. This is the model that Governor Chafee's proposal most seems to mimic. However, my guess is that the states in the last table offer a model that would be very attractive to many in the General Assembly and to the various advocates who walk the halls.