Study: 3% sales tax ‘best value’ for state on jobs, budget impact
IN A NEW STUDY released Monday, the Rhode Island Center for Freedom & Prosperity used economic modeling algorithms to project the impact of seven different sales tax reduction options. The study showed that a 3 percent sales tax rate would produce about 14,000 new jobs in the state, while costing $3,500 per job in state budget cuts, making the 3 percent sales tax a 'sweet spot.'
COURTESY RHODE ISLAND CENTER FOR FREEDOM & PROSPERITY
PROVIDENCE – According to a new study by the Rhode Island Center for Freedom & Prosperity, a state sales tax of 3 percent would provide the best value in terms of new jobs and state budget impact, compared with cutting the sales tax altogether.
The study, conducted at the request of the General Assembly commission currently evaluating repeal of the state sales tax, used the algorithms of the center’s Rhode Island State Tax Analysis and Modeling Program to analyze the impact of alternative sales tax reduction options compared with the proposed “Zero.Zero” plan to eliminate the sales tax.
Based on the assumption that lowering or eliminating the sales tax would boost sales volume at local businesses – and draw consumers and businesses into Rhode Island from nearby Massachusetts and Connecticut – the study showed that a 3 percent sales tax rate could produce as many as 14,000 new jobs in the state.
Eliminating the sales tax could create as many as 25,000 jobs, but having no sales tax would require $12,298 per job created to be cut from the state budget or sourced from other revenue streams. The 3 percent sales tax option would require $3,500 per job in cuts, the lowest state budget investment of the seven options examined, making the 3 percent sales tax a “sweet spot at which the state government benefits most from the competitive advantage of a reduced rate.”
“Because we need the jobs, our center is still recommending complete repeal. However, the 3 percent scenario may be a good compromise for those concerned with the state budget,” said Mike Stenhouse, CEO of the Center for Freedom & Prosperity, in a release. “Importantly, though, any partial sales tax cut scenario does not lower the cost of compliance for this unfunded mandate on the business sector.”
Compliance costs – which include the cost of calculating, charging, collecting and reporting sales tax revenue, as well as penalty and interest charges on businesses that owe past-due taxes to the state – would theoretically be the same with a 1 percent or a 7 percent sales tax, the center said, and would only be eliminated by having no sales tax.
However, while eliminating the sales tax would remove compliance costs, it would also get rid of the potential state revenue boost to be gained from a reduced sales tax charged on a higher volume of goods following the projected increase in economic activity.
The State Tax Analysis and Modeling Program algorithms projected that eliminating the sales tax would cost the state of Rhode Island $904 million in lost sales tax revenue. A reduction of the sales tax from 7 percent to 3 percent would cost the state $516 million in sales tax revenue, but would also bring in an estimated $79 million due to increased sales volume.
In terms of total state revenue, the Center for Freedom & Prosperity projects that no sales tax would mean $313 million in lost revenue annually, but an anticipated $149 million revenue gain from municipalities would bring that number down to a $163 million revenue loss.
A 3 percent sales tax would cost the state $48 million in total revenue annually, but the study projects a net revenue gain of $61 million including an anticipated $109 million in revenue from municipalities.
Stenhouse attributed the projected increase in municipality revenue to higher retail demand resulting from a lowered or repealed sales tax. As more businesses expand or open their doors in Rhode Island’s cities and towns to meet that demand, municipalities would see a dramatic increase in commercial property tax revenue, he said.
The General Assembly commission is scheduled to meet Tuesday to discuss the Center for Freedom & Prosperity report, and Stenhouse said he expects discussion to center on the validity of the center’s State Tax Analysis and Modeling Program. The state of Rhode Island uses a different economic modeling program to project the impact of tax reform.
“It’s clear to us that the state’s model is anti-business and anti-growth,” Stenhouse told Providence Business News. “I think the discussion today will be pointed – it will be professional, but it’s going to be very pointed.”