REMI and the 14% Solution

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As I noted this morning, the RI Center for Freedom & Prosperity and the Beacon Hill Institute met, in late 2013, with REMI and the state Office of Revenue Analysis to see if there was any consensus to be found while comparing REMI’s economic modeling tool and Beacon Hill’s RI-STAMP economic modeling tool.  When a representative from REMI stated that their model would likely find an economic benefit to doubling the state sales tax rate to 14%, the sense of the room quickly became that no consensus would be possible.

Director of Revenue Analysis Paul Dion subsequently said he didn’t recall that statement from REMI, and when he later used a version of REMI’s model to estimate the economic effects of a reduction of the sales tax rate to 3%, his office also ran the 14% scenario.  (Full presentation here.)

As the table on slide #17 shows, the Office of Revenue Analysis did find a negative effect to a 14% sales tax by year 5, contradicting the REMI rep’s suggestion, but in the earlier years, it shows a substantial increase in the state’s economy.  That’s because, as I pointed out this morning, their assumption is that government spending is “more locally impactful.”  Looking at the other charts in the presentation illustrates the thinking.

Slide #6 shows the job gains and losses by industry for an elimination of the sales tax.  Retail sees large gains, but healthcare sees large losses because of government cuts.  Since healthcare tends to pay better than does retail, those jobs are better for the economy.  (Another contentious argument at the meeting was REMI’s assumption that people who get income or service from the government would not find a way to do the same through the private sector.  A high-paid doctor losing a government job, in other words, would go into retail or leave the state, not find or create a comparable job.)

Returning to the 14% scenario, one might wonder how its $633 million increase in the gross state product could coincide with a loss of 381 private sector jobs in the first year.  The answer is on slide #20, which shows that state and local government jobs would increase by 8,345.  With hundreds of millions of new dollars from the sales tax to spend, the government would just hire more people to do more of what government does.

This is what Rhode Islanders will have to watch when Governor Gina Raimondo announces REMI’s findings on her toll-and-borrow infrastructure scheme.  If the government were to double the sales tax and, rather than just finding things to spend the money on instead used it for work that would grow the economy, REMI might not find that harm to the economy in later years.  Recall President Obama’s “you didn’t build that” commentary on the debt that businesses owe to the government.

The fact that Raimondo proposes to use the permanent new toll to grab a big influx of borrowed money up front guarantees that REMI will find positive effects short and long term.  The inevitable conclusion — surprise, surprise — is that the best thing government can do for the economy is to find more money and spend it in ways that the really smart people at progressive think tanks and investment firms think will grow the economy.

That’s not how the world works.  The revenue will come in low.  The government and its contractors will waste unthinkable amounts of money.  The think tanks’ schemes will prove to be much better at growing government and limiting freedom than expanding the economy.  And the effects of the projects will underwhelm, particularly compared with what people would be doing with their money if they were permitted to keep it in the first place.



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