STATE
HOUSE – More than $1.73 billion of state revenue was given up through tax
expenditures in 2009, according to the 2012 Tax Expenditures Report published
recently by the Office of Revenue Analysis, all without regular review to
determine the state’s benefit, said Rep. Teresa Tanzi.
“Tax
expenditures are just another way the state spends money,” said Representative
Tanzi (D-Dist. 34, Narragansett, Wakefield and Peace Dale), who has introduced
legislation that would help lawmakers begin to evaluate the effectiveness of
tax expenditures. “Every year state legislators are asked to approve a budget
that outlines how the state will spend its limited resources, but no one is
looking at the nearly $2 billion we are foregoing annually in tax
expenditures.”
The
report issued by the Department of
Revenue’s Office of Revenue Analysis on Aug. 16 attempts to estimate the cost
of each of the 235 tax expenditure programs in Rhode Island, although in 80
cases, the state could not calculate any cost, stating “no reliable data exists
from which to derive an estimate.” The information – and in some cases the lack
of information – should be of concern to citizens and state leaders, said
Representative Tanzi, because it represents a huge sum of money that the state
is spending through the tax code.
Once
a tax expenditure is added to the tax code, it can remain there indefinitely
without any scrutiny or evaluation of whether it is necessary or yielding a
positive return for the state’s economy or taxpayer.
For
the past two years Representative Tanzi has introduced legislation with strong
bipartisan support requiring any new tax break to include a statement about
what it is supposed to accomplish, ways to measure outcomes, and expiration
dates that would provide the General Assembly with an opportunity to positively
reaffirm its effectiveness on a systematic basis.
She
has also submitted and will continue to introduce legislation creating a
commission to review all existing tax expenditures and make recommendations
over time as to whether to maintain, strengthen or eliminate the 235 preferences that currently exist.
“We
need a formal process that will require state leaders to ‘prove it or lose it’
when it comes to the long list of tax expenditure that already exist,” said
Representative Tanzi.
The
term “tax expenditure” encompasses many forms of tax breaks, including credits,
deductions, exemptions, preferential rates and others. While some have obvious
value (like the sales tax exemptions for food and most clothing, which help
make those necessities more affordable) most are never evaluated by the state
to see whether the investment is paying dividends for the state or its
citizens.
Representative
Tanzi said her interest is not eliminating tax credits and exemptions, many of
which provide obvious benefits
that sustain citizens, workers and small businesses, but refining them and
making sure they are performing as effectively as possible for the benefit of
Rhode Islanders and the state’s economy.
“Some
of these expenditures were written 10 or 20 years ago and are in desperate
need of review. No company I know of would write a business plan and not change
it for a decade or even five years and expect to stay competitive in today’s
marketplace. Why would we expect our tax code to be any less nimble in times of
rapid changes in the business landscape?” she said. “It’s actually not a break
but a disservice to businesses that we do not respond more systematically and
comprehensively to the changing markets by updating the tax code more
thoroughly.”
That
lack of comprehensive evaluation also means that the state may have inaccurate
information on the cost of some expenditures, resulting in significant errors
and assumptions, Representative Tanzi said. For example, the 2012 report
revealed that the amount of revenue being forfeited for a tax exemption that
prevents elements of a product manufactured in the state from being subjected
to sales tax both as a component and as a finished product was $305 million in
the 2012 report. But it was significantly underestimated at only $27 million in
2010. While Representative Tanzi doesn’t deny the legitimacy and usefulness of
that particular exemption, she pointed to the lack of information about its
true cost that year as an example of why the state needs to thoroughly evaluate
each tax expenditure.
“Rhode
Islanders are rightfully upset about a poorly vetted $75 million loan guarantee
for 38 Studios, but in this case we essentially spent $305 million on a tax
exemption that modeling software projected would cost
$27 million. That’s a much bigger figure and a clear sign that these preferences need to be reviewed, evaluated and
updated often. It’s a good program, certainly, but the state needs to
plan accurately for its true cost, and should be positive it and all other tax
expenditure programs are working the way they were projected,” she said.
The
full report is available on the Department of Revenue’s website at http://www.tax.ri.gov/reports/.
