21 Aug 2014
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Bottling Economic Potential Energy

The tax reform strategies of RI's state and local politicians is counterproductive.

Bottling Economic Potential Energy

Maybe it was the comment that a socially liberal young professional with economically conservative tendencies left on AnchorRising.com that pushed me over the edge: "Yes, the end result [of Governor Chafee's proposed sales tax increase] will be $165 per-capita, per year," he wrote. "Still a drop in the bucket."

It's a worrisome statement for two reasons. First, such dollar amounts are a misleading sales pitch. At last year's Financial Town Meeting in Tiverton, the common declaration was that even a massive tax increase of around 8 percent would only amount to about $300 per year for the average property owner. But that's on top of a few hundred additional dollars the year before and the year before and, well, you get the picture.

With continual increases in property taxes, a possible increase in sales taxes, and increasing government fees as a regular budgetary solution, the supposedly small impositions begin to amount to real money. Of course, for families like mine, that struggle to find the resources to meet basic monthly necessities and bills, even a few extra hundred dollars is tough to find.

The reality that some households are already on the edge of financial solvency points to the second worrisome quality of the commenter's dismissive attitude:  Rhode Islanders aren't going to pay the $165 average equally. Indeed, the starting-point of the conversation in question was Director of Administration Richard Licht's spin that the proposed tax scheme would save Rhode Islanders money on large purchases. They'd "pay a little more for their haircut but they'll save on their car."

It isn't a recourse to class warfare to question the prudence of increasing taxes on families that have stripped their budgets bare in order to subsidize the shopping sprees of folks who can still afford to buy new cars. All while increasing the overall tax take, to boot. 

A pattern has begun to materialize in the process of supposed tax reforms in Rhode Island. Last year's statewide income-tax reform was ostensibly "revenue neutral," meaning that those who saw their taxes reduced were counterbalanced by others who experienced increases. Initial estimates were that 60 percent of in-state taxpayers would pay less in income taxes, while just under 20 percent would pay more. As the "revenue neutral" requirement made inevitable, the $226 decrease for each of the 60 percent compared with a $654 increase for each of the 20 percent.

The shift results from a reduction in exemptions and credits and the elimination of itemized deductions, with the standard deduction notched up. In other words, households engaged in activities that the government had previously thought worthy of tax incentives - investments in local real estate, career-related investments, and so on - took the hit.

The consequence, overall, is that Rhode Islanders who've invested in property have seen local taxes climb inexorably. Last year, the real cost of those investments increased courtesy of the income tax change. Meanwhile, the tax bite resulting from their efforts to improve their financial positions broadened, and now they'll be rewarded for modest spending habits with a new sales tax targeting essentials. The harm is exacerbated if they've had the audacity to reproduce, thus creating larger families requiring more of life's basics.

In short, with Rhode Island's economic recovery barely detectable, and scarcely felt, the state is turning the screws on home-buying parents who are striving to build their futures. The tendency may satisfy special interests, by protecting government handouts and special deals, and it may comfort politicians, inasmuch as busy families are less able to be politically active, but it is economic suicide.

The most common measure of the size of an economy, be it national, state, or local, is the gross domestic product (GDP), which calculates the total goods and services produced. With an eye toward economic change, though, that definition is a bit too simplistic. The total economy is better seen as consisting of the total capital (money as well as salable goods) plus all of the activity in which people engage as actors on the economic stage. Just as the total energy in a system includes the kinetic energy as well as the potential energy, the total economic power of a region includes both the measurable activity as well as the untapped potential.

Like heavy weights on the edge of a cliff, cash that is stored, assets that are held, hours that are not worked, and talents that are not employed all have the capacity to increase the calculable economy. It would seem to be most productive, therefore, to shape reform in such a way as to prod those segments of the population that are apt to unleash the most potential.

In that light, the government's taking an additional $600 from a resident who is inclined to use the money to invest in a career venture in order to give $200 each to three residents who are not so inclined probably reduces economic umph. Similarly, savings of $200 on a $20,000 car is unlikely to create new incentive for a purchase, but $1,200 in new taxes on business-related services will likely prevent money and time's being spent on other productive activities.

More broadly, if home-owning professionals with children find, year after year, that they cannot get ahead and that their investments in their homes, children and careers don't go as far as they've come to expect, they may determine that their potential is better withheld and translated as economically unproductive time simply enjoying life, despite their diminishing economic power.

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