RI tax policy should consider the distinction between being here and doing things here.

The Rhode Island Public Expenditures Council (RIPEC) notes that Rhode Island’s downward slide on the Tax Foundation Business Tax Climate Index continues, with the Ocean State exiting the 30-something range on the bad side for the first time since 2017, at 40.  The only saving graces are that Connecticut has been stuck at 47 forever and changes in corporate taxes, property taxes, and unemployment insurance taxes dropped Massachusetts dramatically in 2020, and it hasn’t recovered.

We should look at that as opportunity, though, not (in our decision makers’ usual practice) as a reason not to worry.

This is where I start to differ from RIPEC in my analysis.  Their recommendations lead with a call for addressing high property taxes in our state, but I’m not so sure that’s the right answer.  Rhode Island’s problem isn’t that it’s particularly bad in any particular area (although 49th in unemployment insurance taxes is obviously a downside for business), but that we’re not very good in any of them.

We should take a clinical look at the attributes of our state and determine what tax structure would be ideal.  In doing that, by the way, we must resist the urge to impose too much of our vision of what sort of economic activity we want to have.

Consider this:  multiple states in the top 10 have certain rankings toward the back of the pack.  New Hampshire (#6) is in the 40s for corporate taxes, property taxes, and unemployment insurance taxes.  Nevada (#7) is down there in sales taxes and unemployment insurance taxes.  Tennessee (#8) hits people hard on sales tax.  Note the contrast.  It depends where you are, what your geography is, and what your probable mix of industries and population is.

So what sort of state is Rhode Island?  This is the perfect question to transform into a massive public conversation.  Forget all those Rhode Island Foundation events that attempt to put everything about RI on a whiteboard and herd insiders toward left-wing conclusions.  Narrow the conversation down to the half-dozen main buckets of tax revenue and take a real look at our state in that context.

It’s a beautiful place in a great location, with a lot of cultural and tourist-drawing features with a scenically diverse character packed into a small area.  In short, Rhode Island is a great place to be.  So, where the government looks to collect its operating revenue should focus on where the value is:  being here.  That’s the property tax.

But if we’re going to settle ourselves in and be taxed for being here, we need to find ways to bring money from elsewhere into our state to keep our economy going.  That means we should be much lighter with the taxes on doing things, so the lightest touch should be on sales tax, followed by corporate tax, followed by income tax.  Regulation plays in, too, such that we should make it cheap and easy to do things here.

For a small state in a wealthy region where every town is near a border, this sets up a virtuous flow. A focus on justifying a high cost of being here will put emphasis on key attributes like property taxes.  Meanwhile, the incentive to do things here will lead people who live nearby to come here, bringing their money with them.  As it therefore becomes more valuable to be here, our property and our economic activity will make presence in the state more valuable.

This conversation could go in a whole lot of directions, from regulation to education to social policy, and I may not be right on any or all of it, but it’s the sort of conversation we should be having.  Frankly, I think Rhode Islanders are capable and eager to have such conversations and are being held back only by insiders’ reluctance to have real conversations that might put them in the position of defending their selfish interests.

 

Featured image by Justin Katz.

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3 months ago

[…] I’ve written before, when considering a state’s mix of all the different taxes, I’m not as bothered […]

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