Gov. Daniel J. McKee's proposal to cut the state's sales tax from 7% to 6.85% is getting a tepid reception from policy analysts and others who say the economic benefits would be minuscule, but some in the business community assert that it's at least a step in the right direction.
McKee floated the tax cut in his $13.8 billion fiscal 2024 budget proposal submitted to the General Assembly on Jan. 19, saying it would make the state's tax rate more competitive with rates in Massachusetts (6.25%) and Connecticut (6.35%).
The budget plan – which estimates the tax cut would reduce state revenue by $35 million – acknowledges that it would only amount to $77 in savings on average for the typical taxpayer annually. McKee has said he'd like to see the rate reduced further in subsequent years.
Nonetheless, University of Rhode Island economist Leonard Lardaro isn't impressed by the numbers.
The short-term economic benefits would be minimal, given the state’s “noncompetitive business climate,” Lardaro said. “This will unfortunately limit the upside of any such change."
Lardaro called any proposal to cut a consumption tax while not addressing other issues one of many “ironies” in tax policymaking. In addition, he said, "to some extent, this fuels the demand for goods and services, potentially making local inflation ... a bit worse."
Katherine E. Loughead, a senior policy analyst at the Washington, D.C.-based Tax Foundation, sounded a bit underwhelmed by a tax cut of 0.15 percentage points.
“Rhode Island taxpayers will welcome permanent tax relief that allows them to keep more of their money,” she said. “But trimming the sales tax rate from 7 to 6.85% would provide only a modest amount of annual tax savings.”
Michael DiBiase, CEO and president of the Rhode Island Public Expenditure Council, says he would rather see, for example, the elimination of tangible property taxes, which are levied on businesses by municipalities for items such as equipment, furniture and fixtures. Such a plan would have "the state reimbursing cities and towns for the lost revenue, similar to the car tax," DiBiase said.
"Any tax relief is a positive development because it returns revenues to taxpayers," he added. “However, from a competitiveness perspective, cutting the sales tax would not be our preference.”
But many in the Rhode Island business community would welcome a sales tax cut of any size. Trina Beebe, manager at J&J Materials Corp. in Middletown said she “absolutely” supports McKee's plan.
The landscaping and building supply company has locations in Rhode Island and southeastern Massachusetts, so Beebe sees firsthand customer behavior if there's even a small savings to be had across the border.
During sales tax "holidays" in Massachusetts, Beebe says, customers who live in Rhode Island stop at J&J's Middletown location to “investigate” products and pricing before heading off to J&J's store in Rehoboth to make a purchase.
“People will cross state lines for larger purchases,” she said.
Local business advocates liked that McKee was thinking about improving interstate competitiveness, even if it seems small.
“We appreciate a budget that cuts taxes and improves our tax position relative to neighboring states,” said Laurie White, president of the Greater Providence Chamber of Commerce.
Some have argued that a cut in the sales tax rate is not so much a march forward, but a return to previous norms. Rhode Island has the second-highest sales tax rate in the nation. But this hasn’t always been the case.
In response to the credit union banking crisis in the early 1990s, lawmakers increased the rate from 6% to 7%, with a promised return to pre-crisis levels.
Since then, there have been failed efforts to reduce the rate, even as the list of items that could be taxed has expanded. The 7% rate also has played a factor in Rhode Island faring poorly in state rankings of business-friendly climate.
“It was meant to be temporary,” House Minority Leader Michael W. Chippendale, R-Foster, said of the 7% rate. “We made a promise to the people.”
Some lawmakers are already proposing to go further than McKee's proposal.
Rep. Joseph J. Solomon Jr., D-Warwick, recently introduced a bill to lower the rate to 6%.
Said Rep. William W. O’Brien, D-North Providence, a co-sponsor of the bill: “I believe that the governor’s plan does not do enough for the residents of Rhode Island who are seriously struggling in this current inflationary environment.”
Makes more sense to cut the personal income rather than the sales tax. People aren’t moving out of RI because of the sales tax.