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Rhode Island Weighs Zero Sales Tax Proposal

1 min readBy: Joseph Bishop-Henchman

Today’s big news out of Rhode Island is Gov. Lincoln Chafee’s decision to affiliate with the Democratic Party. Chafee, a former Republican U.S. Senator, won the governorship in 2010 as an independent in a four-way race.

Chafee’s taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. proposals have generally been positive reforms, for a state with many problematic tax policies, and hopefully his efforts won’t change in that regard. A pending reform proposal of his is to reduce the state’s corporate income tax rate from 7 percent to 5 percent while paring back some credits, a step in the right direction (to quote the Rhode Island Public Expenditure Council).

A separate tax reform idea is being heard in the state Senate Finance Committee today at 2pm: eliminating the state sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. . Rhode Island presently has the highest state sales tax in the country (7 percent), higher than neighboring Connecticut (6.35 percent) and Massachusetts (6.25 percent). If enacted, the proposal would add Rhode Island to the list of states with no state sales tax (currently Alaska, Delaware, Montana, New Hampshire, and Oregon). Estimates of the revenue loss range from $230 million to $800 million — a fairly big gulf due to different estimates of how eliminating the sales tax might boost economic activity and thus other tax revenues. (The Rhode Island Center for Freedom and Prosperity has championed much of this research.)

The zero sales tax proposal’s sponsor, Rep. Jan Malik (D), hopes it may spur at least a reduction in the sales tax. It’s a noble goal: Rhode Island’s taxes corporate AND sales taxes are high, uncompetitive, and badly structured. The revenue loss from the sales tax proposal is a big concern, certainly, but I hope Rhode Island won’t be afraid to do something dramatic with their tax system, or at least one of the component parts of it.

More on Rhode Island.