Return to First Principles

Help the poor by cutting the sales tax

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There are many in government with good intentions. Unfortunately, many times the well-intentioned public officials enact policies that have bad consequences. There is probably no area of public policy where this sad irony is more apparent than in addressing poverty. It is common knowledge that Rhode Island has liberal economic policies. For example, Rhode Island is ranked as having the 46th worst business tax climate in the nation, according to the Tax Foundation. However, what is not as well known is how high a tax burden Rhode Island places on the poorest. Recently, the liberal Institute on Taxation and Economic Policy issued a study, which showed that Rhode Island has the eighth highest tax burden on the poor in the country. This new study should be an opportunity to bring together both ends of the ideological spectrum to reduce the tax burden on the poorest and improve our business tax climate. This can be accomplished by reducing Rhode Island’s sales tax and excise taxes.

Although Rhode Island exempts groceries and many services, it has the second highest state sales tax rate in the country at 7 percent. Rhode Island also has high excise taxes such as 33 cents per gallon on gasoline and the second highest cigarette tax in the nation at $3.50 per pack. As a result, Rhode Island is ranked 25th in the nation by the Tax Foundation for its sales tax climate. Sales and excise taxes affect those with lower incomes more than other taxes. The Institute on Taxation and Economic Policy calculated that sales and excise taxes took 7.9 percent of the income of the poorest 20 percent of Rhode Island. As a result, the Institute on Taxation and Economic Policy ranked Rhode Island as having the 13th highest sales and excise tax burden on the poorest.

Based on these facts, conservatives and liberals could find common ground by reducing Rhode Island sales and excise taxes, so as to move Rhode Island into the top 10 of states for the best sales tax climate and to place Rhode Island among the 10 states with the lowest sales tax burden placed on the poorest. A majority of states that are in the top 10 for best sales tax climate and a majority of the states with the lowest sales tax burden on the poorest either have no sales tax or have a sales tax rate of 5 percent. Therefore, Rhode Island should reduce its sales tax rate from 7 percent to 5 percent. A 5 percent sales tax rate would be lower than Massachusetts’ 6.25 percent sales tax rate and Connecticut’s sales tax rate of 6.35 percent. Also, a 5 percent sales tax rate would tie Maine for the second lowest sales tax rate in New England.

In regards to excise taxes, Rhode Island’s excise taxes on alcohol are competitive with other low tax states. However, Rhode Island has high excise taxes on gasoline and cigarettes. For the gasoline excise tax, half of the states in the top 10 for best sales tax climate and half of the 10 states with the lowest sales tax burden on the poorest have a gasoline excise tax no higher than 20 cents a gallon. Therefore, Rhode Island should reduce its excise tax on gasoline from 33 cents a gallon to 20 cents a gallon. A gasoline excise tax of 20 cents a gallon would make Rhode Island’s sales tax rate lower than Massachusetts’ 23.5 cents gasoline tax and Connecticut’s 25 cents gasoline tax. Also, a gasoline tax of 20 cents a gallon would be competitive with New Hampshire’s 19.6 cents gasoline tax, which is the lowest gasoline tax rate in New England. For the cigarette excise tax, a clear majority of the states in the top 10 for best sales tax climate and a clear majority of the 10 states with the lowest sales tax burden on the poorest have a cigarette excise tax no higher than $1.70 per pack. Therefore, Rhode Island should reduce its excise tax on cigarettes from $3.50 per pack to $1.70 per pack. A cigarette excise tax of $1.70 per pack would make Rhode Island’s cigarette tax rate lower than Massachusetts’ $2.51 per pack and Connecticut’s $3.40 tax. Also, a cigarette tax of $1.70 per pack would be competitive with New Hampshire’s $1.68 tax per pack, which is the lowest cigarette tax rate in New England.

These tax rate reductions in the sales tax and in excise taxes may reduce government revenues. Assuming a completely static economy, a rough estimate of the reduction in government revenues from these tax reductions would be approximately $350 million. However, there should be little doubt that these tax reductions will generate tax revenues from increased sales as Rhode Islanders cease to shop in nearby states in order to avoid Rhode Island’s high sales and excise taxes while residents from other states will come to Rhode Island to shop because of its low taxes. Furthermore, reducing the sales tax will certainly increase employment in the retail sector and decrease the unemployment rate. This increase in employment should lead to a decrease in various social welfare expenditures.

Sadly, some liberals do not seem interested in policies that would grow the economy by reducing sales taxes. In response to the study showing Rhode Island’s high tax burden on the poor, one liberal poverty activist asserted that it will provide “ammunition” to “organized labor” to raise income taxes on the wealthy. Rather than develop proposals to reduce the tax burden on the poor, some would rather continue their old efforts to attack the wealthy and chase business out of Rhode Island. This is something economic liberals have been doing in Rhode Island for generations. They have forgotten the simple principle: higher taxes do not help anyone out of poverty; instead, higher taxes may help put more people into poverty. Taxing the wealthiest will not help the poorest out of poverty.

Liberals are usually quick to oppose tax cuts in general because they benefit the wealthy. Cutting the sales tax is one tax cut they know will certainly benefit the poorest and it is a tax cut they should join with conservatives in supporting.

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