Sales Tax and Government’s Break from the People

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Here’s one grouping of many interesting bits of information to arise from a conversation on In the Dugout (video below) between RI Center for Freedom & Prosperity CEO Mike Stenhouse and RI Office of Revenue Analysis Chief Paul Dion (in which I participated a little, as well): COVID-19 and the related shutdowns had very little effect on retail employment in Rhode Island, and the sales tax held up well compared with all state revenue.

State revenue from the sales and use tax are expected to be up from the past two years and only 4.5% less than the pre-COVID projection for the fiscal year that we’re currently in (FY21). In contrast, total general revenue is expected to be flat over the three years and down 7.3% from the projection.

One explanation for these numbers raises a troubling warning sign of a disconnect from state government.

On the employment side, stores that were only open here and there, with breaks in continuity, still had to keep employees despite reduced sales, which federal loans helped them to do, and employees who were on-again-off-again, between federal unemployment subsidies and working, may still have reported themselves as working.  As for small businesses that permanently shut down, one might expect their employees to look for work with retail establishments that remained alive, with an emphasis on large chains.

On the tax side, one factor that surely bolstered the returns was the state’s recent move to tax Internet sales.  With consumers stuck at home and flush with federal-gift cash, as well as having to reequip themselves for the new work-and-learn-from-home lifestyle, spending held up, but it shifted dramatically to online purchases.

Here’s the troubling part:  One could easily see this fact playing a role in government’s decisions.  Across the country, the public witnessed government officials favoring important sources of revenue, such as casinos, as they imposed shut-down policies.  Well, the sales and use tax is such a large part of all state revenue that a 30% drop in the tax would be equivalent to the complete loss of gambling revenue.  Taxing out-of-state online businesses largely insulated the state government from that sort of hit.  (Note that, according to Dion, we don’t know how the sales tax collections shifted from brick-and-mortar to online.)

This fact represents a big, new disconnect between the interests of the state government and the interests of businesses in the state.  When it comes down to the hard facts of budgets, increased reliance of the state government on the well-being of companies that have no real presence in Rhode Island means decreased interest in the well-being of companies in the state.

Elected officials have other reasons to be concerned with people in their state, of course, but in a representative democracy, it behooves us to keep a watchful eye on how the incentives of government change and shift over time.