Mike Stenhouse and his team at the Rhode Island Center for Freedom and Prosperity are one step closer to seeing the sales tax rate in Rhode Island drop to zero.
A bill is scheduled for a vote on the House floor tonight that would create a 13-member special legislative commission to look at the state’s sales tax system, including the potential removal of a sales tax.
“We think it’s a major step forward,” said Stenhouse, CEO of the Center, a non-profit, non-partisan think tank dedicated to looking at public policy in Rhode Island. “We knew the General Assembly would be interested in more research from more sources, not just our report.”
Democratic Representatives Jan Malik (Barrington, Warren), Joseph McNamara (Cranston, Warwick) and Arthur Corvese (North Providence), and Republican representatives Samuel Azzinaro (Westerly) and House Minority Leader Brian Newberry (Burrillville, North Smithfield) are all sponsors of the bill.
McNamara said he believes the bill will pass tonight because Rhode Island needs to stay competitive when it comes to sales tax.
“I think we have to start a discussion,” said McNamara in a phone interview yesterday.
He said there is a corporate tax break in the governor’s proposed budget and another piece of legislation looking at property tax relief, but the key to staying competitive with surrounding states, especially Massachusetts and Connecticut, is the sales tax.
“Looking at towns like Warren and Pawtucket, retail people are being hammered by Massachusetts’ sales tax,” said McNamara, pointing out that consumers will often travel the additional 15 to 30 minutes to other states with lower sales tax.
The discussion on lowering Rhode Island’s sales tax and the Center’s proposal of removing it entirely escalated following Massachusetts Governor Deval Patrick’s proposal to lower his state’s sales tax to 4.5 percent in late March.
“If [Massachusetts] lowers theirs more, it will have a very negative impact on our economy,” said McNamara.
While Stenhouse, a Cranston resident, said no one from his four-person organization will be on the proposed commission, he expects they will remain a witness and third-party researcher. “We will be at every commission hearing, providing testimony,” said Stenhouse, adding he still believes the Center’s report, Zero.Zero, will be at the center of discussions.
McNamara believes the commission will take a serious look at zeroing out the sales tax, as well as the tax code and other areas that can be amended.
Stenhouse knows he will face a lot of questions from the proposed commission.
“We are pretty confident our report will hold up to scrutiny,” he said.
But how does the idea of making Rhode Island the first state to totally repeal sales tax hold up?
Stenhouse, a former entrepreneur and major league baseball player who went to the 1986 World Series with the Boston Red Sox, began promoting the idea of eliminating Rhode Island sales tax almost a year ago when the Center purchased the economic modeling tool, State Tax Analysis and Modeling Program (STAMP), from Beacon Hill Institute.
The Harvard alum explained that the program, which is used by a number of cities and states, including New York City, allows the user to plug in changes to taxes and project the results. Stenhouse said he was trying different changes to see which area would have the greatest effect on jobs in Rhode Island.
When he zeroed the sales tax, Stenhouse was surprised to see an increase of close to 25,000 jobs.
The Center created the 2013 Zero.Zero report to present their findings to not only the General Assembly, but also the public.
Stenhouse admits that when he first presents the idea to people, they often dismiss it. However, Stenhouse believes removing the sales tax will increase economic activity and growth.
“We know these things will happen, just not how much,” said Stenhouse.
According to Paul L. Dion, chief of the Office of Revenue Analysis, the proposed budget for FY2014 estimates that the state will receive $895 million from sales and use tax revenue.
If the sales tax were to be eliminated, Stenhouse said the state will be able to make up that amount from increased income taxes from new employees, increased economic activity throughout the state, including increased consumer spending and businesses coming to the state, savings in welfare and other public services because less individuals will be filing, and additional cuts to the budget.
The 25,000 new jobs would be in a variety of areas, including middle management, retail and construction, but Stenhouse said making Rhode Island a no sales tax state will also bring big business. During House Finance Committee hearings on the legislation, an economist spoke in support of removing the sales tax because many manufacturing and technology companies operate in states where they will not be charged sales tax on their expensive equipment. The example this economist gave was Facebook; the social media powerhouse put one of their newest computer farms in Oregon, a zero sales tax state.
“If Rhode Island wants to attract high-tech business, no sales tax will do it,” said Stenhouse. “And why would we not?”
There are two major reasons to support eliminating the sales tax, said Stenhouse. The first is that it is a regressive idea that will benefit the low-income individuals more than the high-income individuals. The second is that it will support businesses.
“When I own a business, I work for the state to collect revenue on the state’s behalf,” said Stenhouse, a former small business owner himself. He said removing the sales tax will remove the burden of collecting and reporting sales tax from business owners.
Dion said the Center’s proposal to eliminate the sales tax is broad.
“[Policies from] states without a sales tax aren’t as broad as that center’s,” said Dion.
According to Dion, the Center’s proposal would eliminate some forms of local revenue, including the 1 percent local food and beverage tax. In FY2012, Dion said cities and towns received $21 million from that source; specifically, Warwick received $2.3 million.
“It’s real money to a lot of communities,” said Dion.
Although he believes the Center’s proposal is broad, Dion admits aspects of the sales tax should be looked at to make the state more competitive.
“There are elements that have merit in terms of what we could do with lowering the cost of doing business here,” said Dion.
Overall, the Center’s report suggests the state will see a 10 percent increase in the state’s Gross Domestic Product, $470 million in capital investment because people will spend more here, and up to $150 million each year to municipalities.
“The state is always looking to get more money to municipalities,” said Stenhouse. “With more shoppers and increased business, companies will want to expand. You pay commercial property tax to the city.”
While their main project at this time is Zero.Zero, the Center is exploring many different areas of public policy.
“For too long, public policy [in Rhode Island] has been decided with only one side of the debate being argued. Our role is to provide the other side,” said Stenhouse.
According to Stenhouse, the Center, which was formed in August 2011 and received 501c3 status in January 2012, is also putting together a report on corporate taxes, looking into eliminating estate taxes, working on reports regarding health care and exploring the idea of school choice (allowing public funding to follow a student to the school of their choice instead of attending a school based on zip code).
Also, the Center released a scorecard of 551 bills currently in the General Assembly on June 13. Less than one-third of them received positive ratings. According to a press release, if all 551 bills were to pass, the Assembly would receive a rating of -285.
Currently, the Center operates on a budget of $500,000 and has four full-time employees. Stenhouse said they are looking to expand to seven employees and a budget of $1 million in the next few years.
Currently, Stenhouse said the Center keeps their investors private but estimates the number of investors to be in the hundreds.