Tax Foundation & RI-STAMP on Tax Reform Differences

By way of Bob Plain’s Twitter feed, I see that the Tax Foundation has scored the Rhode Island House budget tax reforms.  The upshot is that the changes in the corporate tax and the estate tax will move Rhode Island up the Tax Foundation’s ranking one place — from 46 to 45.  Another way to put that is that we’ll move from having the fifth worst tax structure to the sixth worst.

By comparison, when the RI Center for Freedom & Prosperity recently asked the Foundation to rank a couple of sales tax proposals, we learned that a drop to a 6% sales tax rate would have moved us the same amount, but a 3% sales tax rate would have moved us to number 40, or out of the bottom 10.

Of course, all of these tax policies have different costs and different effects on the economy.

Corporate Tax

The effects of the corporate tax change are difficult to model, because RI-STAMP adjusts for rate changes or money taken in, and the House’s reform cuts the rate but increases revenue.  By itself, reducing the corporate income tax rate from 9% to 7% would reduce state government revenue by $46-53 million, after accounting for economic growth, and would lead to about 95-135 new private-sector jobs.

On the other hand, using combined reporting to increase the corporate tax by the estimated $2.7 million (an effective rate increase to 9.1%) will actually produce only $2.4 million in new revenue and cost about a half-dozen private-sector jobs.

In the long-term, the restructuring might help smaller local companies, but the state actually loses one area of advantage that it has over Massachusetts for large companies.

Estate Tax

The estate tax is more interesting.  Reducing the tax revenue by the projected amount has a very modest beneficial effect on sales tax collections (about $50,000 per year), because the heirs have more discretionary income to spend.  But as the reform comes out of the big mixing pot of our state economy, RI-STAMP actually predicts an even larger reduction in personal income taxes (about $300,000).

Private sector jobs will increase by a couple of dozen, but it appears that the estate tax change brings about some harmony between RI-STAMP and the REMI model that the state uses, in that they agree that there are circumstances when shifting some millions of dollars from government spending to private spending shifts jobs from higher-paying industries (like professional and technical services) to lower-paying ones (like retail).

This could be an example of the challenges of modeling, in that the projections might not be capturing the activity of people who would have left Rhode Island but decided to stay (and continue paying income, property, and sales taxes here).  Still, it’s interesting to note.

Sales Tax

On the sales tax front, a one-percentage-point reduction of the rate, to 6%, although costing the state $25-33 million in annual tax revenue, after dynamic effects are considered, would facilitate around 2,500 in new private-sector jobs, increasing personal income tax revenue by about $45 million per year.  (Otherwise the cost to the state would be that much higher.)

A 3% sales tax rate would cost the state $47-75 million per year (after a $200-300 million total increase in all of the other taxes) and bring Rhode Islanders 12,000-13,500 new private sector jobs.

In summary, then, it looks like the General Assembly’s insistence on “moving the needle” — and only “moving the needle” — might game some rankings and shift wealth around a little bit, but legislators still are still not willing to make any real, substantive changes.

 

The featured image at the top of this post is a stock illustration of the effects of different policies, not an illustration of this data.

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