Surreal at the State House: Growth Bad for Business & Advantage Bad for RI Hospitality Members

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After a much-enjoyed hiatus away from the State House, offering testimony about the RI Center for Freedom & Prosperity’s complete 3% solution gave me a surreal sense of why the state is in the condition it’s in and how unlikely it is that things will change.

Awaiting the unknowable “rise of the House,” a scheduling mechanism that makes it more difficult for Rhode Islanders to plan for participation in committee hearings, I wandered every hall, watching lobbyists do the same.  From time to time, I’d pop my head into the House chamber and watch debate or no debate produce the same, predictable, unsurprising number of green “yea” marks on the vote board.

Entering the House Finance hearing room brought a chill — literally.  The air conditioning was cranked so high as to drive out people who arrived dressed for the season.  By the time I testified, I was literally shivering, as if the cold air were another part of the challenge on some civic participation reality TV game show. By contrast, the microphones were so low as to transform the audience into the deaf angels in Nick Cave’s devilish song, “God’s Hotel.”

It’s an open question (in other words) whether the General Assembly’s strategy to improve Rhode Island’s economy is to get Hell to freeze over first.

The most surreal thing, though, is the thinking that presumably drives the decision making behind state government, by legislators and those whose careers put them in the orbit of government.  Here’s Rep. John Carnevale (D, Johnston, Providence) putting forth the theory that lowering the sales tax and thereby bringing retail businesses a wave of new customers might be a wash, because they’ll have to hire more employees, thus increasing their costs, leading them to increase their prices.

Admittedly, as I sat there shivering, I didn’t muster much of a response, but I didn’t come prepared to address the implied proposition that the state shouldn’t take action on the sales tax because it might increase economic activity.*

Even worse, though, was the testimony from Terrance Martiesian, the lobbyist for Rhode Island Hospitality Association (among other groups):

Mr. Martiesian talks about the “very slim” margins for hotels and restaurants, which are so tight that Rhode Island Hospitality opposes legislation that would lower other types of businesses’ sales tax rate by 1% while keeping hospitality the same.  It would create a “relative” disadvantage, he said.  He also argues that doing so offers no help against Massachusetts competition, which already has a tax advantage.

Despite those beliefs, Rhode Island Hospitality also opposes legislation to reduce the sales tax for every single type of business in the state, including those in the hospitality industry.  House bill 8039 explicitly lowers the tax on hotel rooms and the regular sales tax on the other hospitality services that it covers.  That would clearly give a competitive advantage to Rhode Island Hospitality members versus Massachusetts, without reducing relative competitiveness with other industries in the Ocean State.

RI Hospitality’s reasoning is that the bill that rearranges sales taxes (H 8033) would somehow apply to the one that simply cuts them all.  Either its policy people are completely inept at reading legislation, or they have some other reason, some ulterior motive, for helping to kill a bill that is so clearly in their members’ interest.

So what gives — especially since RI Hospitality expended a good deal of effort two years ago to stop a proposed tax increase that would have harmed its members about half as much as a 3% sales tax would help?

Well, by way of its foundation, the association receives a significant amount of money from a government program that might be toward the top of the list if the state finds itself having to reduce spending.  In other words,  RI Hospitality’s surprising advocacy might be evidence that maintaining the Rhode Island status quo is more in the interest of the organization than helping its members gain advantage and profit.

That’s the surreal reality our little state.  It’s the people versus the government, and the groups that are supposed to help the people in that fight are really playing both sides.

 

* Some quick explanation for those who don’t see why I find Carnevale’s question so strange: In general, a business won’t increase its costs or its workforce until it expects to increase its profit by doing so (immediately or in the future).  They won’t hire until it increases their total profits — although obviously profit per employee might go down.

Of course, retailers may take some of the reduced sales tax as slack and increase prices to increase profits directly, but there are two additional considerations.  First, RI-STAMP projects that the 3% tax rate would increase sales by 20%; because it is the reduced tax that brings the added business, only a short-sighted retailer would forego a 20% increase in sales in order to take a direct 4% increase in profits.  Second, lowering the tax is not identical to lowering the price; broad knowledge that the tax rate is lower in Rhode Island than elsewhere will affect consumer behavior even if some of the actual savings from it are lost by increased prices.

 

Featured image: Screen capture of Terrance Martiesian from Capitol TV footage from the House Finance hearing.



  • John

    “You can’t fix stupid.”

    Ron White

  • Max D.

    Wow! I feel like I'm living in Bizarro World after watching that. Oh wait…I am.

  • Guest

    ALL PRICES ARE GOING TO INCREASE IN RI regardless of lower sales tax and nobody is going to come to RI. Deepwater Wind just got the RIDEM permit OK to build and next week it will be RICRMC permit. They are on a fast track to be operating by 2016.

    In case you forgot the first year Wall Street financed Deepwater Wind Block Island demonstration farm is operational the state of RI and all 39 cities and towns will see a collective electric rate increase of over $½ billion which will drive state, city and town tax rates up. On top of that each business will raise price of goods and services to make up for increased electric rates. Each year for 20 years thereafter a compounding 3% COLA will kick in adding to increasing taxes per purchase price agreement with National Grid.

    Also, Wall Street is driving Energy Capital Partners which is a private equity firm with over $13 billion in capital commitments spent hundreds of million dollars to purchased New England’s largest electric power plant, Brayton Point LLC (which had been retrofitted to burn coal, imported oil or natural gas) in Somerset, MA and is promptly shuttering the power plant by May 2017 indicating it is not financially feasible to continue operating the plant. Didn’t they do due diligence before spending hundreds of million dollars??

    Why would Wall Street investors spend hundreds of million dollars to shut something down when they are in the market to make money???? Think ENRON!

    Under the rules of the electricity markets, the best way to earn huge profits is by reducing the supply of power. That creates a shortage during peak demand periods, such as hot summer evenings and cold winter days, causing prices to rise. Under the rules of the electricity markets, even a tiny shortfall between the available supply of electricity and the demand from customers results in enormous price spikes.

    With Brayton Point closed, New England consumers and businesses will spend as much as $2.6 billion more per year for electricity, critics of the deal suggest in documents filed with the Federal Energy Regulatory Commission.

  • Guest

    Ask the short sighted Russ. It's for the children…

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