New report highlights
necessity of tax expenditure evaluation, Tanzi says
by the Legislative Press and Public Information Bureau
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.”
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| Rep. Teresa Tanzi |
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 modeling software significantly underestimated it 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/.