11/19/13 – Sales Tax Commission
And it’s State House room 35 again, but this time it isn’t freezing. I could have left the coat in the car. Today, Joe Henchman from the Tax Foundation is testifying before the commission to study the elimination of the sales tax. I also hear that the tax administrator wants a go at addressing some of the testimony about compliance that was spoken and played on video last time.
Attendance called. First up is David Sullivan from the Division of Taxation.
He’s going over the basic stats of his office… how many returns, how much money they collect… and tells the commission that they’re upgrading their system.
A little over 30,000 active sales tax permits. He says that, in fiscal 2013, they collected $8 million in sales tax penalties, up from $7.8 million.
About 2/3 of the department’s audits are of the sales tax, which audits are “the highest generating in revenue.”
“Before the sales tax permit expires, they will receive at least four notices from the division of taxation,” if businesses are delinquent, before they start the process of removing the permit. About 75% of delinquent businesses resolve the problem by July.
[I should note that the subject of the video shown last meeting, Don Russell, actually went to the tax office on his own initiative.]
Sullivan is talking about federal legislation that would lower the sales tax rate to 6.5%, on a trigger, if Internet and other remote sales become taxable via federal legislation.
Commission member Lenette Boiselle asked how many full-time equivalent positions in his office would be eliminated if the sales tax were ended.
Sullivan doesn’t seem to want to say; he’s suggesting that they’d really be able to transfer most of their employees’ time to other tasks. “There would be some reduction in our FTE count.”
Commission member George Tamer asks what Sullivan thought when he heard that the General Assembly was considering this.
“Every idea should be vetted.” But the first thing he thought of was what would happen if the revenue disappeared.
“Drastic changes start the conversation.” He says people might take another look at Rhode Island, but he also thinks there might be skepticism, “at first,” wondering what the state is up to and whether it is going to increase some other tax to make up the revenue.
Another commission member whom I can’t see around the corner asked how much the sales tax went up for the credit union crisis. Commission member and Director of Revenue Analysis Paul Dion said it went from 6% to 7%, supposedly for one year. It never went away.
Chairman Jan Malik asked how many of those thousand businesses with outstanding delinquencies in July actually close down.
Sullivan says he doesn’t know. He phrases it, though, as an unfair advantage for a business that doesn’t pay its sales tax. [Of course, if there is no sales tax, that goes away.]
Rep. Patricia Morgan [on the right in the image at the top of this post] asks what portion of sales taxes are paid business-to-business. Dion responds it’s about 35%, but that wouldn’t necessarily include every category of purchase that a business might make.
Sen. David Bates asks if the department has tried to lower the 18% interest that’s charged on delinquent taxes. Sullivan says the increase was part of a tax amnesty, last decade, as the stick to encourage people to pay off their bills. Before that, it was 12%.
Dion asks if, in Sullivan’s opinion, businesses go out of business because of the sales tax penalties or a problem with the underlying business model. Sullivan says, “They owe us the tax, and it may be the straw that broke the camel’s back.” However, he says the department looks at their books, and there are often underlying issues.
[It’s kind of a strange question. Businesses aren’t going to not pay sales tax when things are going swimmingly. The point of the topic isn’t that the sales tax and delinquency fees are arrows shooting down otherwise healthy businesses; the point is that all businesses go through good times and bad times, and it ought to be the priority of the state not to add to that burden. Can you imagine if the government — at any level — had to operate under the ruler that the assumptions of Dion’s question apply to private businesses? Talk about underlying problems!]
Responding to a question from the commission on whether the department does any enforcement of the use tax, Sullivan says, “yes,” on the business end during audits. While they’re investigating a business’s finances, they look for outside purchases and for evidence of state taxes having been paid on them. They also exchange information with federal customs and other states.
Joe Henchman, of the Tax Foundation is up: “A state doing without a sales tax is not one of those crazy suggestions,” like others that come across his desk. He says the sales tax wasn’t well considered, but rather begun in the middle of a crisis, the Great Depression, with other states following suit over the ensuing decades.
He says RI exempts 75% of the economy and then imposes a high tax on the part that remains.
He says that, when he first heard of the Zero.Zero proposal, he wondered how the state would do without the revenue, although Rhode Island’s reliance on the sales tax is lower than some other states.
He says that absolutely no economist will say that the state would take the full hit of the lost sales tax. There will be some economic benefit.
“People will drive out of their way, often to an absurd level, to avoid paying the sales tax.”
A spurious argument you might hear is the three-legged stool argument,” according to Henchman, namely that you need every major tax in order to have different revenue sources for reasons of stability of revenue.
“There is no academic evidence of this urban myth.” In reality, what’s needed is a well-structured tax system, with low rates and broad bases. He says the most stable state is South Dakota, with only a sales tax, while the most volatile is California, which has every tax. [Personally, I don’t know why the government should be the only entity with ensured stability of revenue.]
“I cannot understate how intense the competition between states” is becoming.
“States need to increasingly thinking about: ‘Why my state’?”… meaning why would people choose to live and pay taxes, here?
“New York has an awful tax system, but they have the legacy of when they had a good tax system.”
RI’s choice, according to Henchman: Do you keep the awful tax system and try to compensate with something else to attract and keep people, or do you try something bold?
Eliminating RI’s sales tax would move RI up to 31st on the Tax Foundation’s nationwide ranking. Eliminating it and combining that with corporate tax reform could get RI in the top half of states.
“It’s bold; it’s difficult; but it’s feasible.”
Asked by Rep. Morgan what other options there might be for tax reforms, he says that states are increasingly trying to differentiate themselves. [That’s a point we’ve been making; it’s Rhode Island’s specific position geographically and economically that makes the sales tax especially attractive for elimination.]
Responding to a question by Sen. Ryan Pearson, he says that the state really won’t benefit from a small reduction in the sales tax rate.
Dion took some time pointing out that Oregon makes up for its lack of sales tax in other tax areas, like income. That’s a questionable claim. The RI Center for Freedom & Prosperity gave a document to the commission at an earlier hearing that showed the numbers per capita. In total taxes, Oregon collects $2, 097 per person while RI collects $2,620. All told, Oregon makes up most of the differential (and winds up with a little more total money per capita) through insurance trusts.
The point, though, is that you can’t really say that Oregon makes up for tax X with tax Y, because you might as well say that the higher tax Y is actually making up for the money from tax Z, which is also higher in RI.
Back to the testimony: Henchman is saying that RI has “a lot of problems,” in terms of employment and people leaving, meaning that a bold move would be preferable to baby steps.
Tamer asks what the correlation is between sales tax and jobs. Henchman says there’s a strong correlation, but it depends on geography and the sales tax rates around you.
Commission member John Simmons, of RIPEC, mentions another Tax Foundation study that creates seven hypothetical businesses and places them in each state to report on the tax effect. He says that RI is all over the place depending on industry and whether the business is new or old.
That corresponds with a complaint that Rep. Malik made earlier in the hearing… that RI picks and chooses leaders and suckers to a high degree.
Malik renews the question about the effect of sales tax on jobs. Henchman says something familiar-sounding about Illinois, which (he says) chooses to do economic development by “ladling out” favors to connected interests. He continues that Michigan used to do that and bankrupted the state.
Malik says that, in Rhode Island, “we don’t have an identity except high taxes.”
Henchman: “I think that’s true.”
Now up is the first resident testimony, from Gary Whitney.
He says he lived in Massachusetts when it was called “Taxachusetts,” and he can’t believe RI has now taken that title away.
He says that eliminating the sales tax would do much to stop him and his wife from doubting how serious the state is about changing in order to make life easier for residents.
Next is Peter Hewitt, who says that “nothing is to be gained” for Rhode Island “by maintaining the status quo.” His wife is “getting jaded that nothing ever seems to change in this state.”
Both men mentioned the lure of New Hampshire.
Bill Perry, of Cumberland, harkens back to something that Malik said to Sullivan, earlier, when the chairman said he wasn’t blaming the administrator for tax issues, because he doesn’t make the law. Perry says that the people in this building do make the laws.
I was going to note that Dion had made a joke to the commissioner next to him when Perry admitted to doing all of his shopping in Massachusetts… as if he were writing down his name to report him for violating the use tax.
But to open his testimony, Mike Rollins asked for a show of hands of how many commission members actually save their receipts and pay “the stupid use tax” at the end of the year. Malik said (jokingly) that he wouldn’t allow the question because “it’d be incriminating.” Paul Dion said he wanted to go on record as saying that he absolutely pays the use tax.