Facing billion dollar deficits and a drop in tax revenue, the state of Arizona is proposing a temporary 1% increase in their state sales tax, which would raise it to 6.6%. Of course, the usual arguments for supporting a tax increase are being made, it will prevent cuts to education, to hospitals, to police and fire, etc. You get the point. But I believe that an increase in the sales tax will have the same effect, and will not be temporary.
Back in 1991 the State of Rhode Island passed a similar 1% increase in their sales tax, increasing it from 6% to 7%. It too was supposed to be temporary. The reason for the increase was to pay back depositors who had placed money in Rhode Island state banks backed by RISDIC, Rhode Island Share and Depositors Insurance Corporation. RISDIC was going bankrupt, largely due to embezzlement by Joseph Mollicone. The citizens of the State, leery of any tax increase were assured that this increase was only going to be temporary. And the citizens of Rhode Island agreed to it. After all, this was about helping each other impacted by this event. And Rhode Island is a close nit state.
Well, as the saying goes it’s easier to raise taxes than to cut spending, so years later the temporary 7% sales tax was made permanent. The state saw all the revenue being pulled in, and decided they couldn’t lost that in the budget, so the sales tax was made permanent. The state really hasn’t recovered from the effects of that increase.
Massachusetts had a 5% sales tax which they increased to 6.25% in 2009, and Connecticut has a 6% sales tax. Since Rhode Island increased their sales tax Emerald Square Mall was built in North Attleboro, just over the Rhode Island border and twenty minutes away from the Lincoln Mall, and businesses along state route 6 in Seekonk have grown. A Super Walmart was built in Whitinsville MA. There is also the Shoppes at Blackstone Valley that went up, and Putnam, Connecticut has seen it’s share of growth as well. In comparison, Woonsocket’s retail business has declined and Providence has also suffered, though the construction of Providence Place Mall has reversed that decline somewhat. After Rhode Island increased it’s sales tax to a full 2% above Massachusetts it was like the state of Massachusetts put up a sign that said “Shop Here.”
Rhode Island is also known to have one of the highest tax burdens in the country and is routinely criticized for having the worst business climate in the country. The result is an unemployment rate right now of 12.6% and a state budge deficit of $220 million.
Arizona should be looking at Rhode Island right now as a lesson of what not to do. If the voters of Arizona increase that state sales tax, it’s my belief that when May 31, 2013 comes around, the government of Arizona will see the money they stand to lose by reducing the sales tax. They will be unwilling to make the cuts they would have to make by reducing the sales tax and will seek to either extend it another 3 years or make it permanent. After all, in 3 years I expect people will say that Arizona has grown accustomed to paying the higher tax and will try to keep it in place. People will say, “Look at what this money does for education, for hospitals, for police and fire. We can’t lose this money.” I think you get the argument that will be made.
Higher taxes are not the way to go. Responsible tax policy promotes economic growth by allowing people and businesses to keep more of what they earn which gets reinvested into the economy. I believe that when you increase economic activity you increase tax revenue. This has been shown to be the case, because economic activity means more people working and more businesses engaging in commerce which increases tax revenue. The more people who are working, the less are on government assistance, and the number of people on government assistance declines which decreases the cost to government. In that way the people who really need help can be helped and those who are able to work can find work. And those who want to start a business will have an easier time starting one.
Arizona needs to be smart. It needs to reject the increase in the sales tax and focus on tax policies and economic policies that will increase investment in the state and increase economic growth and employment. We’ll see if Arizona is smart enough to make the right decision on May 18.
Extremus
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