According to a bill being heard today (H7723/H7724) introduced by Rep. Teresa Tanzi (D–Narragansett, South Kingstown), Rhode Island spends over $1.6 billion on tax incentives. These are the various credits, deductions, exclusions and exemptions that most citizens enjoy. They range all over the place, but tax incentives usually tend to favor the well-off rather than those at the bottom of the social ladder.
They’ve also been referred to as an “invisible” “middle-class welfare state” by Ezra Klein. It’s also a major reason why the top income earners in Rhode Island pay half what the majority of Rhode Islanders do in taxes. In many ways, most tax incentives work as redistribution of wealth from the bottom to the top.
Rep. Tanzi’s bill essentially makes it so that the state has to review what tax incentives it gives out. What? Doesn’t it already? No. In fact, in a recent study by the Pew Center for the States, Rhode Island was one of 26 states ranked “trailing behind” on the issue of evaluating tax incentives on their effectiveness. Rhode Island was unable to provide a single document that matched the evaluation criteria that Pew used for the study.
The problem is widespread across the nation. State legislators put in tax incentives ostensibly to promote economic activity, but rarely do they give a goal for such an incentive, nor do they provide processes for review. Data is often unreported, which further complicates the picture as competing groups attempt to sway decisions about the incentive via competing studies showing opposite results.
No surprise then that Louisiana found that a tax credit it said created more than 9,000 jobs in fact only created 3,000 when it looked closer. Some employers were even claiming the credit for creating new jobs when they bought already existing companies and took on existing workers. On the end of Highway 61, Minnesota found that its tax incentive program wasn’t creating jobs at $5,000 a pop, but at the much steeper cost of roughly $26,000-$30,000. Even Massachusetts, so often hailed as a model for Rhode Island, has unaccountable tax incentives and no method for review.
A study released in 2011 by the Economic Progress Institute (then the Poverty Institute) referred to Rhode Island’s tax incentives as “hidden spending”. Using data collected from the 2010 Tax Expenditures Report from the Rhode Island Department of Revenue, the Economic Progress Institute found that of 319 different available tax breaks, the Tax Expenditures Report was unable to account the lost revenue for 121 of them; suggesting that the total amount of revenue lost through tax expenditures was higher than their estimated $1.67 billion. Kate Brewster, the EPI’s Executive Director, says that Rep. Tanzi’s bills “are a critical step to ensuring we can balance the state budget now and in the future, without sacrificing the services that are necessary for the health of our people and our economy.”
We hear so much these days about the need for tax reform, and for “simplification” of the tax system. Rep. Tanzi’s bill would create a mechanism for ensuring that when the state puts money down, it actually gets something for it.