Analysis: Budget tax, fee hikes to cost jobs

THE R.I. Center for Freedom and Prosperity asserted that the tax and fee hikes proposed by Gov. Lincoln D. Chafee on Jan. 31 will cost the state 1,400 private-sector jobs.
Posted 2/9/12

PROVIDENCE – The R.I. Center for Freedom and Prosperity asserted that the tax and fee hikes proposed by Gov. Lincoln D. Chafee on Jan. 31 would cost the state 1,400 private-sector jobs.

The conservative think tank, which formed from the ashes of the Ocean State Policy Research Institute, said Thursday that it bought a State Tax Analysis Modeling Program customized for Rhode Island in order to do an analysis of the state budget. It was developed by the Beacon Hill Institute at Suffolk University and is a five-year, dynamic, computable, general-equilibrium tax model.

Chafee unveiled a $7.94 billion state budget for fiscal 2013 last month that boosts spending on local schools by extending the reach of the state sales tax and cutting spending on other areas, including health care services.

“Because a sales tax increase would make Rhode Island even less competitive with its regional neighbors, and nationally overall, consumer and entrepreneurial behavior would be significantly altered, resulting in lower economic activity and actually worsening the state’s economic plight,” the Tax Plan Analysis outlined.

The center’s economist, J. Scott Moody, entered revenue targets from the budget. He asserted that since tax increases “depress overall economic activity,” the state’s expected $95 million revenue increase would be just $35 million.

He also contended that the state would lose 1,400 private-sector jobs. To compare, the 2011 R.I. Employment Trends and Workforce Issues brief, published by the state labor department, found that private-sector employment decreased by 819 jobs, or 0.2 percent, between 2009 and 2010, while increasing by 1,900 jobs from 2010 to 2011.

The center also claimed that municipalities would lose $9.75 million in revenue due to lower commercial property taxes, as a consequence of lower overall economic activity. In addition, Rhode Island would lose nearly 1 percent in overall gross state product, and “investment” – or new capital in the state – would drop by $27 million.

“Balancing the budget is the wrong goal; and tax increases are precisely the wrong solution!” the report said.

Center CEO Mike Stenhouse acknowledged that the algorithm was a “broader tool” than the specifications of the governor’s budget and the projections were rough estimates, based on revenue bumps from $69.7 million in sales tax; $13.6 million in motor vehicle registration fees; a $7 million increase in smoking products and $3.8 million in other miscellaneous taxes and fees that were not included in the projection, he said.

University of Rhode Island economist Leonard Lardaro made some preliminary observations on the analysis, noting:

“First, [the Tax Plan Analysis] does what the state of Rhode Island should have been doing all along but seldom does - due diligence,” he said. “Second, this analysis is not merely restricted to the very short-term (static) effects of proposed policy change, but extends the effects to what also occurs at later times in response to these changes. So, I very much like the methodology – perhaps someday in our lifetimes the state of Rhode Island will actually ‘evolve’ to this level of sophistication in its policymaking.”

Lardaro also noted that the model, like any other, makes assumptions on how the economic pieces fit together and that should be kept in mind when using it.

“I do have to say, however, that if we are to rely on numbers from other than our state, this is the type of model we should pay attention to,” adding that he would need more time to evaluate the specifics of the model before giving a definitive judgment.

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