Raise R.I. Sales Tax to Help Education

The Providence Journal Commentary Section
January 2009
 
by Leonard Lardaro

What a mess Rhode Island finds itself in! Things are so bad, that a number of our leaders have found it necessary to attempt to rewrite history, blaming all of our state’s current economic woes on national and global economic weakness.  Of course this is purely revisionism, as Rhode Island’s current recession began five months before the US recession, our employment peaked eleven months before national employment, and we were one of the first states to experience budget deficits. While there is no denying that national and global conditions have made a bad situation here worse, what appears to have disappeared from the current dialog is the long-term or secular performance and potential of Rhode Island’s economy.

Is there a fundamental weakness that is largely responsible for our state’s sub-par long-term economic performance? If I had to identify “the” single problem that drives most if not all of Rhode Island’s secular malaise, it would have to be the fact that we as a society (along with our leaders) are far too consumption oriented. Our state’s culture is driven largely by the here and now, which places a premium on current consumption. That’s not terribly surprising given how beautiful our state is and the quality of life here. The down side of this orientation, which has cost us dearly and may well be “the” underlying foundation of our state’s secular economic malaise, is that we have never focused enough of our attention and resources in any efficient and systematic way on investment-related activities, which by their nature entail sacrifice. In effect, Rhode Island has been seduced by and gotten along based on its good looks for far too long.

I do not mean to imply that we do no investment-oriented activity. Certainly spending on what the Governor and the legislature refer to as public education (K -12) continues to be substantial. And, based on numerous bond issues over the years, we have made investments in a number of needed areas, although our ability to continue doing this has become far more limited. If I had to generalize, our state has historically relied far too much on the “quick fix,” whether by bond issues or raising taxes and fees absent much consideration of “the big picture” over the long term. One needs to look no further than what we did with the tobacco money a few years ago to see this. And, unless things here change, expect this to be repeated if President Obama provides our state with additional funds over the next two years.

We know what a large part of our long-term problem centers on: Rhode Island does not have a competitive tax and cost structure. But the cost of doing business here is not merely inappropriate tax rates. It is related to fees, regulations, energy prices, and perhaps most importantly, problems with our state’s human capital infrastructure. The EDC has outlined a viable long-term goal: a far larger proportion of our state’s population needs to earn income above the national median (60% goal versus 40% currently). Here’s the puzzle we have found ourselves confronting: How can we expect to accomplish this goal with so much redundancy and continuing quality problems in public education (K – 12), while at the same time funding for public higher education continues its decade-long decimation, the fruits of its output are not being capably commercialized into our state’s private sector, and higher education continues to become increasingly unaffordable to our citizens? The answer is we haven’t been able to and we will never be able to resolve this puzzle. Our state’s approach to attaining long-term success is what was referred to in the 1980s as Voodoo Economics. Rhode Island’s current woes are a testimonial to the fact that Voodoo Economics doesn’t work.

How can Rhode Island end its reliance on Voodoo Economics while bridging the gap between our consumption-oriented ways and the clear need for investment orientation pertaining to our state’s human capital infrastructure?  I don’t love what I am about to propose because it entails a tax increase. But given our current crisis, I view this as unavoidable. I propose raising the state’s sales tax rate from 7 percent to 8 percent, not broadening its coverage to services (to help contain regressivity), and earmarking all of the resulting tax proceeds to public education (K-12) and public higher education. Should the legislature attempt to move any of the resulting revenues to the General Fund (the God of current consumption), I expect Governor Carcieri to veto this measure and take his case to the people of our state.

There are numerous benefits to this policy. First, it automatically links consumption-oriented activity, which we do too much of, with a critical investment-oriented activity, education, providing a sustainable basis with which our state can more effectively transform itself into a knowledge-based economy. Second, some of this money can be used to incentivize an orderly transition to fewer school districts, while helping to contain property taxes by treating the problem (educational costs) at long last. Such property tax containment can also be expected to benefit small business. Caps on property tax rate hikes can be meaningfully enforced in this type of environment, and the state might also consider imposing limits on allowable growth rates for local pay packages. Third, this is probably the only viable way for our state to stop decimating higher education funding, allowing higher education to sustain and increase its quality, the fruits of which can be channeled into private sector activities, while making higher education more accessible to our citizens. In other words, this can be the vehicle with which we finally end our state’s reliance on Voodoo Economics a major underpinning of its economic policy. Finally, this added investment will result in more economic growth than we would have experienced, producing greater future tax revenue than would have been generated. The benefits of this “fiscal dividend” will be fundamental in defining what will be affordable for our state in the future.

As the world continues to pass Rhode Island by, we must begin to rely far more on sound economic policy, shifting our underlying orientation away from consumption and towards investment in human capital. What is ultimately at stake here is not whether Rhode Island’s will survive. The real question is whether our state will ever be able to flourish in the information age.