Rhode Island may be facing a sales tax crisis. The governor of Massachusetts is proposing a sales tax reduction from its present 6.25 percent to 4.5 percent. While the idea must be vetted by the commonwealth’s legislature, the potential harm to Rhode Island lurks in the shadows. The Rhode Island General Assembly and the governor better come up with contingency plans to regain an economic advantage if the Bay State adopts the plan.
Massachusetts is already cleaning Rhode Island’s clock on gasoline taxes. With so many pumps within a mile of the border and conveniently located en route to many in-state destinations, our neighbor is a magnet for Rhode Island cars. Rep. Jan Malik, a Warren legislator, recently told the Providence Journal that he’s at an economic disadvantage in charging a 7 percent tax in his liquor store while a stone’s throw away, Massachusetts charges zero. Noting that Seekonk is home to big-box stores, he opined that it isn’t difficult to see why they aren’t in East Providence. Lowering sales tax across the board will harm many more businesses in the Ocean State.
Rhode Island Republican legislators are arguing for the elimination of the sales tax. Forty-plus years ago a legislative commission argued for its reduction, if not, its outright elimination. The predicate in its report was that volume sales offset the lowering of the percentage.
Some of its conclusions also supported the idea that the elimination of the sales tax was a good idea since the economic boon to business would create more jobs and therefore, more income tax revenue or generation of more business tax or regulatory license revenue. On the other hand, if Rhode Island businesses are hurt by the Massachusetts competition, then these revenue sources also will lag.
Of course, there is now a different configuration of taxes here and in our neighboring states, so it’s impossible to conclude that these ideas are still viable. Some serious study, therefore, should be undertaken to examine both the reduction and elimination of sales taxes. Perhaps one of the think tanks like the Rhode Island Public Expenditure Council or a university business class could examine the issue. It’s time to revisit the assumptions that support sales tax.
Gov. Lincoln Chafee needs to keep an open mind about this issue. He pushed for an expansion last year, far in excess of what was finally passed by the legislature. He continues to opine that it’s a fairer tax which some analysts dispute when they counter-argue that it disproportionately affects low-income and minimum-wage job-earners. Any dispassionate study should cut through all the rhetoric surrounding the sales tax and cite data for its conclusions.
It seems that Rhode Island is always being stampeded into action because of another state. Years ago when the Narragansett Tribe (a former client of mine) wanted to run a full-blown casino with Harrah’s, it was blown out of the water. Query whether its establishment back then would have dented Massachusetts’ quest for casinos. Instead, Rhode Island is playing catch-up because the neighboring state approved three casinos to compete with Twin River.
It’s time to get beyond an “oops” moment and use resources to study anew the entire issue of sales taxes and the interface with other taxes.