Will Rhode Island be the next state to allow special interests to prevent it from bringing its sales tax into the 21st century?
Despite near-universal agreement among economists on the wisdom of broadening sales tax bases and dozens of state tax commissions recommending such a move, state lawmakers across the country have crumbled under the pressure from service providers who do not believe their products should have to compete on the same playing field as goods.
As a result, no state in recent years has succeeded in implementing a comprehensive sales tax base broadening plan. The political ramifications of taking on previously untaxed businesses may make some policymakers wary.
This must change. As states shift from manufacturing economies to service economies, it's essential that tax structures change too.
Rhode Island Governor Lincoln Chafee included an expansive sales tax modernization plan in his budget proposal this year which would broaden Rhode Island’s sales tax base to include dozens of services, lower the general state sales tax rate, add a one percent tax on most currently exempted goods, and raise additional revenue to help mitigate budget cuts.
Governor Chafee is one of only a handful of governors willing to protect vital public services by supporting new revenues as part of a balanced budget plan. He is also one of just two governors willing to consider making long-term and necessary improvements to his state’s sales tax rather than just simply raising the rate.
Rhode Island House and Senate Finance members took up the governor’s proposal this week. More than 90 individuals spoke against the plan at the House Finance Committee hearing on Wednesday with hundreds more on site to voice their opposition. As to be expected, everyone from the auto mechanics to landscapers to salon and bowling alley owners lined the halls to say, “Don’t tax me.”
ITEP submitted testimony to both committees in support of the modernization proposal.
Democratic Representative Jan Malik, who asked business owners during the hearing why they should not be taxed while other businesses are, said “I feel their pain… But I understand what the governor is trying to do here. Why is it fair for my business to get taxed [Malik owns a liquor store] but not your business? These are the questions that have to be answered. We all have to share the pain in this state.”
Kate Brock of Ocean State Action, one of the few to speak in favor of the governor’s plan, asked why the state taxes lawnmowers but not landscapers, and nail polish but not nail salons. She said, “It is illogical to tax a good but not a service that results in the same outcome.”
It looks like the special interests triumphed at least in the short term in Rhode Island. House Speaker Gordon Fox said that the majority of house members will not be supporting the governor’s plan in its current form, but will work with him to come up a viable alternative. Senate President M. Teresa Paiva Weed also announced that the Senate is working on alternative ways to address the state’s budget shortfall. Neither would say that changes to the sales tax are altogether off the table.
Governor Chafee said he was open to hearing suggestions from the House and Senate, but reasserted the need to update the sales tax to “stabilize the state’s revenues during downturns in the economy and to better align it with modern-day customer’s spending habits.”
Many lawmakers are not only rejecting the governor’s sales tax overhaul proposal, but are also objecting to the idea of raising revenue at all to address the state’s $300 million budget gap. One of the "alternatives" will likely be more cuts to education and other core services.
If there’s one valid criticism of the proposal, it’s that even though taxing services is generally less regressive than a sales tax rate increase, it remains a regressive tax no matter how broad the base. The governor’s plan therefore asks more of low-income households than of the wealthiest in the state.
Coupling the base expansion with a fully refundable state Earned Income Tax Credit would ensure low-income households are not disproportionately impacted by the governor’s (otherwise sensible) sales tax modernization proposal.
Rhode Island’s sales tax base is one of the narrowest in the country, largely limited to tangible goods and even many of those are exempted from taxation. As currently structured, Rhode Island’s general sales tax is unsustainable, inadequate, and unfair. Governor Chafee’s proposed reforms would take important steps towards repairing each of these problems, and in particular would help stabilize revenue.
If Rhode Island (or any state for that matter) wants to continue relying on a sales tax as a substantial and reliable revenue source, lawmakers are going to have to take a stand against the service industry sooner rather than later.