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Rhode Island: Something Bold is Needed

  • Nov 22, 2013 | Gail Cole

 Rhode Island: something bold is needed.

Rhode Island needs to do “something bold” to improve its fiscal situation. So says Joseph Henchman of the Tax Foundation, a non-partisan tax research group with a mission to educate taxpayers about sensible tax policy. Some in the state think that eliminating sales tax is the bold move that’s needed. Mr. Henchman spoke to that issue yesterday, when addressing the Rhode Island Joint Legislative Commission to Study the Sales Tax Repeal.

Not crazy

Mr. Henchman began by saying that the Tax Foundation often heard from people “with crazy tax ideas.” However, he said, “A state doing without a sales tax is not crazy.”  He pointed to the origins of state sales tax, which came into being during the Great Depression. Sales tax was not “a well-thought-out, well-designed tax,” he said, and if you were to fill a room with tax and public finance experts, the sales tax they designed “would look very different from the sales tax that many states, including Rhode Island, have today.”

According to Mr. Henchman, Rhode Island’s sales tax does the opposite of what it should. It taxes some items multiple times, while most services and many goods are exempt from sales tax altogether. Indeed, he called Rhode Island’s sales tax base one of the narrowest in the country: only “25% of what people buy is subject to Rhode Island’s sales tax.” That means 75% of the state’s economy is exempt. More exemptions are coming on December 1, when Rhode Island's art's exemption takes effect.

“Taxes affect behavior”

Rhode Island currently brings in approximately $887 million from sales tax annually. Mr. Henchman believes Rhode Island would not lose $887 million if it abolished sales tax. However, he won’t say how much it stands to gain from such a move. Instead, he notes that it’s “difficult to model the decisions of a million people in Rhode Island, and millions more in surrounding states, and estimate how their behavior will change with a bold tax change.” People do drive to avoid sales tax, he notes. And when they get someplace without sales tax, they buy.

46th out of 50th

Rhode Island is ranked 46th by the Tax Foundation, meaning it is less business friendly than 45 states. Only Minnesota, California, New Jersey and New York are less hospitable to business. Were Rhode Island to do nothing more than abolish sales tax, it would jump to 31st position.

The Tax Foundation recommends states have “a well-structured tax system with broad bases and low rates.” Mr. Henchman does not say that Rhode Island should eliminate sales tax and he does not say that it shouldn’t. He does say this: the proposal to eliminate Rhode Island’s sales tax is “bold, difficult, but feasible.”

The next step

The discussion continues on December 2, when the commission meets next. The panel needs to review “new and competing forecasts on how much revenue the state would lose after increased economic activity is taken into account.”

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Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.