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Breakdown of Rhode Island tax revenue by type.
Data from www.usgovernmentrevenue.com.
(Click on image to enlarge)
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In the previous installment, I discussed the large income tax cuts for the rich that hit Rhode Island in 2006, a major change to the economy that was followed by an early plunge into recession. Unlike the federal government, states can’t offset income tax cuts with debt. So they have to offset them by either cutting spending or raising other taxes. Rhode Island took both approaches.
A critical mechanism for financing the income tax cuts for the rich was slashing the aid that the state government sends to the cities and towns. These severe cuts resulted in a wave of municipal budget crises that we are all too familiar with. Cities and towns closed part of the gap through severe cuts, but they also responded with drastic property tax hikes. Property taxes are notorious for being unusually bad for the economy. Even the Tax Foundation, a very conservative think tank, agrees that property taxes have a bigger effect on business location decisions than any of the other major taxes. Simply put, property tax hikes are very hard on business. The pain is not distributed evenly; property taxes hit small businesses especially hard. The problem is especially severe because the aid cuts were worst in Providence and Woonsocket, where businesses are disproportionately located, so the property tax hikes were worst in areas with the most businesses.
Read the rest of this article on RIFuture.org, along with lively reader discussion, here.
You can see the entire series here.
