Now is the time for the press to check out why we have exemptions in the sales tax

Governor Chafee has proposed a "tax increase" in the way the sales tax is applied to attack the growing budget crisis facing Rhode Island and its 39 cities and towns. This has, as we might expect, drawn out all of the special interests in the State, as well as many of their Zoombies. These special interests are attacking the plan in order to defend their own special tax status and privileges they enjoy under the status quo. Of course that privilege, their exemption, is part of the problem. But they and the press won't admit it. It allows them to NOT pay for their fair share of the cost of government overhead services that they now enjoy for free.

A Typical Example??


In a lead article of the Providence Journal, "Chafee's proposed tax hikes add up for this Cranston family"  for example, we are given a list of added costs that a "typical" (whatever that means) middle class family these tax might mean. It assumes that they family did not have, and will not make choices about how they spend their money after the tax become applicable.

For example: Newspaper Subscriptions  $312  taxes $18.72.  The costs of the papers have been going up while the quality has been going down for quite some time. The outlets for public information have expanded significantly since the days when the newspaper was the only source of public information. So why do we still have an exemption for them today?

The imbalance of reporting in all media or "Why are newspapers excluded from the sales tax today anyway"

The article does not explain why these items were excluded in the first place. If we were to research each of these we might find that special interests lobbied the General Assembly at one time or another to get this special privilege. Once these privileges became law, everyone assumed it was a RIGHT. Nobody is going to question the right and the conditions that may have made it reasonable at the time it was passed into law.

 Those hidden exemption are subsidies

The general public is paying a hidden exemption to the sellers of those products and services  and to the buyers of those products and services .

The sales tax is called regressive by Liberals because it taxes the poor on the goods they buy while excluding the wealth for the services they buy. It is also made even more regressive by the special exemptions which, while intended to relieve some of the pain on the poor actually provide a higher dollar value relief to the wealth who purchase higher priced good in the same class. Take food for example:

A sales tax on a pound of bologna for example on sale for $1.50/lb would yield at a 2% sales tax an addition cost of $.03 cents for a pound that a poorer family might buy, while a pound of roast beef on sale at $5.00/lb would yield $.10 pound that a wealthier family might buy.   

The sales tax is called unfair by those small business sellers who have to charge a sales tax on the products and services they sell and by the buyers who buy those products. It imposes an administrative burden on the seller and gives an unfair advantage to their larger competitors who can spread the overhead cost over their  pricing of  larger volume and breath of their products. It also encourages those who can afford to drive to shop out of state for goods that are taxed at lower rate. This is seen every summer in the business from RI that goes to Massachusetts during Massachusetts' tax holiday sales.

Leveling the Playing Field

If all goods and services are taxed at a rate arrived at fairly AND removes the waste in the current tax system, then the tax payers would be better served.

First, because the tax cheats would be prosecuted or sued for their waste to the system ( lost revenue from the under the table deals), and  the tax avoiders would have a more difficult time finding true advantages in going out of state for minimal savings (price competition).

Second, removing the incentive to seek special exemption would  remove it as a political strategy (anti-competitive business practices) and the politicians in the General Assemble would have to publicly explain and justify why they are seeking such legislation and supporting such exemption (waste of public corruption).

Third, and Most important, is that spreading the total state debt and tax burden over the whole retail economy should result in a higher dollar return to the government for its services (distributing of government costs more fairly) and a lower competitive tax position for the state's tax payers relative to the two major competitors, Massachusetts and Connecticut (improving RI's competitive position in the region).

The Yes/BUT Media favors the Status-quo

While the newspapers are supposed to be balanced in their reporting, we can see in the discussion in the editorial pages and in the stories on the front pages that they are not. The full story is not being total, nor analyzed. Since the local TV media basically follows the newspaper story lines "how it is all unfair". This  makes the story line more believable to the public, even though its is incomplete and biased. Meanwhile, the other story line that the alleged cause for crisis blames the public worker and teacher unions and puts forth attacking these special interests is the solution to the problem.

Highlighting the Problem Does work


Don't get me wrong, the public workers and teachers union deserve the heat they are getting. They are being unfair to defend contracts that are unsustainable and unrealistic in the 21st century global economy. They are .being unfair to their members and the public who support them. Today's Projo also carried this story
 Providence union agrees to concessions. This shows that some  union leaders are beginning to see their responsibilities for the problem and are willing to take responsibility to become part of the solution.

But they are only one part of the special interests in the the General Assembly. The politician in the General Assemble are catering to many others as well. The Press should be looking at these special interests as well
 The press should  look into these special interests today as well as into the broader context of public tax policy.

As it is the Press is cutting the amount of hard news, rather than promoting their Yes/BUT PR propaganda.on limited space of the editorial pages and in the news sections. Instead, lets see some hard news about how these special interest tax exemption can about and why they should be continued.

The Yes/BUT have begun to raise their heads from their little tax shelters warrens. Now is the time for the press to check out these tax rabbit warrens and see what they are hiding in there.

It is the Debt Stupid!

 In a recent oped piece entitled,  No compassion for you if you’re in R.I.’s private sector,  Projo columnist Edward Achorn bemoans the fact that Governor Chafee has asked the General Assembly to enact new taxes on a range of products, and some services, previously exempt. As has been the case in the past Mr. Achorn argues a popular point based on a flawed analysis of the problem.

The problem is not the budget or the taxes -- it is the State's debt.

 

We have had a party. We have borrowed big time from the future. We have borrowed to pay for the present without regard for the future. As a result, until we repay the future, there will be no future for Rhode Island.

 Government's job is to serve the public interest by providing the goods and services that the voters and public determine they need. It does this by generating income from taxes and related fees.

Cutting expenses diminishes the goods and services you can consume. Some of that  is waste; some luxuries that we can do without; and some is real belt tightening by forgoing things that are needed such as roads and bridges

and public health and safety.

 
How are Government finances any different from your finances?

Can you get rid of your debt by lowering your personal income? What happens if you lose your job?

Look at your own credit card behavior, for example. Waste would be buying your Big Mac with your credit card rather with the cash in your pocket or balance in checking/debit card account. A luxury would be to buy that sales item using your credit card rather than cash or debit card just because it was on sale, even through you did not need it. Belt tightening is like paying your mortgage with your credit card, borrowing more at a higher interest rate, to make a payment on a debt at a lower interest rate. In each case, your are increasing your borrowing simple to buy time and hoping to put off your eventual default.

Do tax cuts and budget cutting reduce debt?

Spending cuts do not effect the interest cost on the public debt. What cuts the interest cost is paying down the principle. And this can only be done by shifting the savings from cost cutting to principle payments. That means either no tax cuts, or raising additional income through tax increases (i.e. taking a second job). In either case, the proceeds from savings and/or the new job should be dedicated to pay down the debt.


Those, like Mr. Achorn, who complain about their taxes being too high, or the waste in government, should look to their own credit card debt. How good a job are you doing to manage your debt?

Who pays for drinks?


Rhode Islanders have been having a party. They have become drunk on quick fixes. It seems that those who would have us ignore the debt and focus only on taxes, really want us to look the other way. They want us to pay for the drinks while they can skip out of the state. They would leave the tab for the rest of us and our children to pay, or default on the debt.

Maybe it is time to stopping drinking single malt scotch and switch to beer

 Sharing the wealth also means sharing the risk and burden.


Everyone in the state has benefited in some way from the debt. Each of us shares responsibility for letting it happen. This includes the tax payers, the unions, and politicians who have created the debt arising from the unofficial borrowing caused by underfunding or postponing payments into the pension funds.


Everyone in the state should share in the cost of retiring this debt. Tax cuts for the wealthiest without demanding they pay their fair share on the principle first, is like letting them take you to lunch and then allowing them to leave you with the tab. In my experience they often will do this, if you let them.

The Hidden Cost of Debt

The same is true for politicians. Letting politicians postpone paying for current earned pension obligations and deferring them for the future, is like being treated to lunch and then be told that they left their wallet at home. They will promise,

"We can use your credit card to pay the bill. I promise to repay you when we get back to the office." Of course, when you get back to the office, they have disappeared.

What about all those businesses and union members who cash in their chips before paying their share of the debt, and then move to Florida? Aren't they doing the same thing?  

After all, aren't they feeding off of us, just to leave the rest of us with their share of the tab!

If you became Governor - what would you do?

A poll published online May 10, 2010 by The Providence Business News asks the question

What should be the new governor’s top priority upon taking office in January 2011?

Readers are asked to select from 5 options.

1. Balancing state and local budgets 12 votes (33%)

2. Economic development/job creation 15 votes (42%)

3. Improving elementary, secondary and post-secondary education 3 votes (8%)

4. Improving the state's tax environment 5 votes (14%)

5. Implementing a robust energy and environmental protection policy 1 vote (3%)


These are very early and preliminary votes but it does suggest what the mind of the public expect from a governor. and their ignorance of what a governor in Rhode Island can be expected to do.

1. Balancing the budget

Given the Rhode Island Constitution and despite the long overdue separations of powers act, balancing the state budget is a legislative function. The most the Governor can be expected to do is:

a. to recommend a balanced budget to the legislature,
b. to manage, after the fact, a budget that the legislature approves, and
c. to do so as effectively and efficiently as circumstances and the law allow.

As for the local budgets, these are up to the local legislative bodies (town councils, boards of education, etc.)to determine and beyond the Governor's control.

So while it might be desirable to have strong leadership in the Governor's office, institutionally there is little real power here to achieve this goal without a commitment of cooperation from the General Assembly.


2. Economic development/job creation

Rhode Island is a small state that tries to behave like a big state. Localities compete as aggressively with one another for new businesses and jobs as Rhode Island does with other states. The Governor can lead here by setting some clear priorities and goals for development and by promoting the state to out of state employers. But the governor can only sell what the state has to offer and what the General Assembly will fund. These two are not always in synch.

In "Meeting the Challenge of the New Economy", the 1997 Annual report from the Rhode Island Economic Development Council, the Council listed 8 myths about Rhode Island's economy. Myth # 5 is

"by creating jobs, state and local government employment helps the economy."

The report continues,

"The Reality: The right number of state and local employees allows government to accomplish the tasks it needs to ( e.g. maintain the roads, police protection). More than we need, however, eliminates even more jobs in the moderate term by removing purchasing power from consumers and raising taxes."

This is even truer today than back in 1997, yet little has changed in terms of the Governor's ability to change labor contracts and renegotiate the long term commitments to public employees. Management, the Governor's Office, requires the legal tools to enable it to make the management decisions that creates and maintains the right number of highly trained, skilled and experience government workers to do the tasks it needs to do.

The governor does not create jobs, nor should he/she. Instead, the Governor should help create a climate that fosters private sector employment opportunities. Here again, cooperation between the GA and the Governor will be required.

3. Improving elementary, secondary and post-post secondary education.

The Governor is the public's elected CEO. Here is where the Governor can have a real impact and where real change can be brought about. Education is the most critical step in an economic and social policy. Economic development does not occur overnight, anymore than educating a child to become a productive worker does. Both are long term processes. Changing the educational environment is a leadership and policy issue. Setting that policy, especially strategic policy, is the job of even a weak Governor.

a. The first step in building and supporting a viable and adaptable system to meet the needs of students, parents, communities and employers would be to set middle and long range goals and objectives for the state's educational system. These would be based on realistic assessments of the changing workforce needs, regional and global economic trends and local and state capacity to respond to these needs would be.

b. Next would be to create and carry through a realistic plan to achieve such goals. For the next Governor it would be follow through on the work done by Dr. Gist and those involved in planning and seeking federal support through the Race to the Top grant competition.

c. Next is to build on our strengths beginning with the best talent we have. The new Governor should avoid the temptation to replace the team now in place solely to reward friends and cronies. We have seen enough of this in recent years and even recent days in the state.

d. Support for individual teachers efforts to use and share their best practices even when these are contrary to arbitrary and/or out-modded contractual work rules or administrative policies is critical. By promoting and rewarding professionalism through public recognition and professional advancement for outstanding performance would demonstrate to all the state's commitment to quality education and a quality workforce.

e. Support for the state's post secondary institutions including the technical as well as professional post secondary education at a level competitive with the rest of the region and the world would put action behind the claim that we have the well trained workforce employers are seeking

f. The Governor should also push for full funding for the plan at all levels and through all available means and would re-enforce that commitment.

4. Improving the State's Tax environment.

I realize this may go against a lot of people's gut reaction but here goes. The State's tax environment is not, nor should it be, based simple on "pricing" considerations. By this I mean, it should be based on the true cost/benefit to me to live and work here, not on my tax bill. It should be based on the real or "true" value I receive for the taxes I pay.

For example, policies which focus on "lowering my tax bill" by not fixing the bridges and roads that support my business; or provide me with workers who can not read, write, do math or think critically; or impose inconsistent and onerous laws, regulations, processes that impede my ability to conduct my business competitively; or make it impossible for me respond to a new business opportunity in a timely and competitive manner, are the hidden taxes which really create a bad tax environment.

By the same token, the value of a reliable and efficient public works department, a dependable and accessible government permitting service, a clean and safe water supply, etc. should be considered when evaluating the value you receive from paying your tax bill. For example, what is the value of the state's response during the recent floods worth to you? Or, What is the value of the life that fireman saved? These are examples of the positive value we receive for the tax bills we pay. They would be sorely missed if they weren't there.

Here is where the Governor can have a impact. He should direct the administration's efforts to address the hidden taxes imposed by the General Assembly, especially when they fail to address these issues. One way to attack this problem is to change the dialogue from "government waste" to "government value." Former seeks only to cut costs without reference to quality. The latter exposes the "hidden taxes" of government uneffectiveness and inefficiency and shifts the focus to discovering the potential the value of government services deliver by those taxes.

A policy of greater transparency, i.e. "the good, the bad, and the ugly" should be the Governor's position. The new governor should use the bully pulpit of the office to expose the smoke and mirrors of backroom deals and magical thinking that we find in the GA.

The goal is to address Myth #4 from the 1997 report.

"If it is good for business (or labor) it has to be bad for labor (or business)."

The adversarial period of 20th century business/labor relations must end. If we are to improve the tax environment for everyone in the state and compete in a 21st century global economy, we need to change the way we think about who We and They are. Here the moral leadership of the Governor's Office must come into play.


5. Implementing a robust energy and environmental protection policy

In order to implement such policies, they must be sustainable and realistic in terms of overall needs and resources available to the State and localities. The Governor can provide guidance in balancing the state's economic, and social needs as reflected in the state's energy production and consumption practices weighed against the long term hidden tax of poor or inadequate environmental regulation and enforcement. Here the Governor can provide leadership to bring competing interests together for find solutions that serve the best interests of all and not the best interest of "favored" interests.

The job of the next Governor is to create a political climate where all parties feel that they have been dealt with in fairness. This will go a long way in creating a physical, economic, social and political environment that supports the public's and State's immediate and long terms interests.

Rhode Island's "Amazon tax" , does it make sense?

As Rhode Island and Rhode Islanders struggle through the economic depression, State and local budget and debt crises, and high unemployment, local elected official are reaching out for all possible sources of new revenue and cost cutting. The crisis can be treated as a threat or an opportunity. How the public and the politicians respond to the crises will have a profound impact on small business in the post crisis period.

For example, one step that the RI General Assembly and Governor have taken is the "Amazon Law", is also known as an "Ad tax." This is potentially one of the most costly short term solutions to the long term future welfare of small business, entrepreneurship and competitiveness in this state.

An excellent argument pointing out the potential impact of the law can be found at affiliates-make-money-online.

Key points:
(1) This "Ad Tax" is going to impose excessive bookkeeping requirements on small businesses selling out of state through affiliates as the small business becomes responsible to knowing, recording and collecting the appropriate tax on each individual sale into each jurisdiction which has imposed an "Ad Tax"

(2) Affiliate programs are fairly inexpensive to set up and run, making them attractive for the entrepreneurial unemployed and underemployed to start their own business. If successful they become tax payers instead of tax beneficiaries. If Rhode Island wants to claim the title, "The Small Business State," it should be breaking down the barriers of entry, not erecting new ones.

(3) Tax avoidance is a major problem in Rhode Island and its legacy of under the table transactions, its long list of special interest sales tax exemptions and Florida auto license plates. The state should be considering closing some of these loopholes.

One way to bring about change is to change the culture of tax avoidance. It could begin by using publicity to educate consumers about their legal responsibilities for use tax payments, and the cost of tax avoidance on the community and the state. Maybe even trying collections as a voluntary contribution to the state at tax return time rather than trying to collect it from thousands of residents by legal means.

The Rhode Island General Assembly should revisit the "Amazon Tax" and commission a professional third party study and analysis of the true cost and benefits of the Amazon tax to the state and to small business. Such a study could be commissioned by the RIEDC or RIPEC.